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Grasim Industries: Betting on cement

Jul 28, 2003

Grasim, the third largest cement producer in the country, has reported a modest 3% rise in revenues while the net profits of the company increased by a healthy 24%. Improvement in bottomline has been mainly due to better operational efficiencies as well as reduced interest expenses.

Rs m1QFY031QFY04Change
Net Sales 11,355 11,747 3.5%
Other Income 93 211 127.2%
Expenditure 8,901 9,065 1.8%
Operating Profit (EBDIT) 2,455 2,683 9.3%
Operating Profit Margin (%)21.6%22.8% 
Interest 442 391 -11.5%
Depreciation 624 670 7.4%
Profit before Tax1,4811,83223.7%
Extraordinary items-17-27 
Tax 410 500 22.0%
Profit after Tax/(Loss) 1,054 1,305 23.8%
Net profit margin (%)9.3%11.1% 
No. of Shares 92.0 92.0  
Diluted Earnings per share*45.856.7 
P/E Ratio  9  
(* annualised)   

A 15% decline in sales of the VSF division has resulted in poor contribution to the topline. Poor capacity utilisation has taken a toll on the sales volumes of the company. Realisation of this division, however continue to improve. The company’s cement division managed a 5% increase in sales but was not able to contribute much to the topline, as the realizations remained stagnant. The sponge iron division however reported a stellar performance with realizations increasing by 32% on account of strong demand from the western markets. The company’s chemical division also bore the brunt of water shortage as its capacity utilization went down to 57% and its sales also declining by 7%.

As far as the operating margins are concerned, they have gone up marginally to 23% from 22% mainly on account of efficient use of power and reduced freight costs. The operating margin of the VSF division was down to 28% mainly on account of reduced economies of scale and higher input costs. The cement division however recorded improved operating performance as its operating margin of 18.5% bettered last year’s margin of 17.6% on account of lower power consumption and 4% decrease in fuel costs. The sponge iron division and the chemical division left their higher ranked peers behind as their operating margins (21% for chemical and 36% for sponge iron) improved substantially on the basis of higher price realizations.

The huge increase of 127% in the other income and an 11% reduction in interest outgo helped bolster the bottomline performance of the company. However, the tax outgo of Rs 500 m was substantially higher as compared to the corresponding period in the previous year. The depreciation of Rs 670 m was also marginally higher by 6.7%. As far as the future plans of the company are concerned, the company has planned a capital outlay of Rs 2.9 bn in the FY04 & FY05 for the cement division. The modernization of the cement plants and the de-bottlenecking is likely to raise the production capacity to 13.7 m tonnes.

At Rs 499, the stock is trading at a P/E multiple of 9x its annualised 1QFY04 earnings. The stock's performance in the recent past has been mainly led by the developments regarding acquisition of L&T's cement division. There has been a decision finally in this regard and Grasim is likely to acquire a controlling stake in the soon to be demerged cement company. Grasim is going to emerge as the largest cement producer in the country post this acquisition. Better economies of scale will be the most apparent benefit of this acquisition. However the full benefits of this acquisition will only occur in the long term. Grasim is likely to spend nearly Rs 21 bn on this deal.

The acquisition fits well in to Grasim's long-term vision of emerging as the biggest player in the domestic cement market. Thus in the long term, with strong prospects of the cement sector, Grasim stands to gain a lot. Its VSF business is seemingly witnessing a cyclical downturn and even in the long term this division is only going to remain a cash cow for the company. While Grasim has done well enough to increase the acceptability of VSF in the international markets, Grasim's fortunes in the long term will be governed to a large extent by its performance in the cement business.

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