Grasim: Cementing the road ahead - Views on News from Equitymaster

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Grasim: Cementing the road ahead

Jul 28, 2008

Performance summary
  • Standalone revenues grow by 6.4% YoY in 1QFY09, led by growth across segments except VSF. Rising cost of operation exerts pressure on EBITDA margins (contract by 3.5% YoY in 1QFY09).

  • Net profit remains flat (growth of 0.5% YoY) over 1QFY08. If one excludes other income, net profits decline by 2.7% YoY.

  • Consolidated topline grows by 9% YoY growth in 1QFY09.

  • The company’s subsidiary - Ultratech reported 10% YoY growth in topline and staid 2% YoY growth in bottomline.

  • Ultratech, the subsidiary of the company reported 10% YoY growth in topline and staid 2% YoY growth in bottomline.

Financial performance snapshot
  Standalone Consolidated
(Rs m) 1QFY08 1QFY09 Change 1QFY08 1QFY09 Change
Net sales 24,355 25,923 6.4% 40,599 44,295 9.1%
Expenditure 16,433 18,403 12.0% 27,763 31,662 14.0%
Operating profit (EBITDA) 7,921 7,520 -5.1% 12,836 12,633 -1.6%
EBITDA margin 32.5% 29.0%   31.6% 28.5%  
Other income 677 822 21.4% 876 949 8.3%
Interest 285 305 7.0% 580 685 18.0%
Depreciation 850 1,050 23.5% 1,587 1,996 25.8%
Profit before tax/(loss) 7,464 6,988 -6.4% 11,546 10,902 -5.6%
Tax 2,347 1,846 -21.4% 3,557 2,988 -16.0%
Profit after tax/(loss) 5,117 5,142 0.5% 7,989 7,914 -0.9%
Minority share - -   1,296 1,198 -7.5%
Share in profit / (loss) of associates - -   4 3 -30.2%
Net profit 5,117 5,142 0.5% 6,697 6,719 0.3%
Net margin 21.0% 19.8%   19.7% 17.9%  
No of shares (m) 92 92        
Diluted EPS (Rs)*   243.1        
P/E (times)   7.3        
*trailing twelve month earnings

What has driven performance in 1QFY09?
  • On the standalone basis, the topline grew by 6.4% YoY on the back of growth across its segments except VSF and textiles. The muted growth in topline is the result of slack performance of the VSF segment that contributes nearly 25% to the total revenues.

  • The VSF business continues to arrest the overall growth of the company. The segment has reported 11% YoY decline in revenues on account of lower offtake in volumes. The company’s sales volumes were lower by 18% YoY. The deceleration in demand continues primarily on account of a general slowdown in the economy, liquidation of inventory in the value chain and substitution of VSF with other fibers on account of higher VSF prices. Though realisations grew by 8% YoY, lower volumes and high operational costs have resulted in 6% YoY drop in segment’s PBIT (profit before earnings and taxes) margins in 1QFY09. The record sulphur prices and higher other input costs such as pulp prices have exerted pressure on margins. Going forward too the margins of this segment are expected to remain depressed, as escalating cost of operation seems unabating. Further, the demand is expected to remain subdued in the near term till the inventory in the pipeline gets liquidated and re-substitution sets in. However, from a long-term perspective, the outlook for the segment remains positive given the growing preference for comfort fabrics due to global warming.

  • Cement business grew by 15% YoY aided by higher RMC (ready mix concrete) sales (up 61% YoY) and realisations (up 8% YoY). The growth in RMC business has come in on account of commissioning of new plants. On the other hand, the cement production growth stood at 3% YoY, while sales volumes remained flat. Cement segment contributes nearly 60% to the total revenues and earnings before interest and taxes (PBIT). The segmental PBIT margins have contracted owing to relentless rise in coal prices, one of the key inputs, apart from increase in freight, employee and packaging costs. Having said that, as announced capacities start coming on stream and rising operational costs show no signs of cooling off, margins are likely to be remain subdued going forward.

  • The chemical and sponge iron business segments, which were considered as the weak links, have infact supported the overall moderate performance reported by the company. The chemical segment reported impressive 37% YoY growth in revenues in 1QFY09. This was mainly backed by 11% YoY growth in sales volumes of caustic soda and 30% YoY growth in realisations. The PBIT margins have expanded by 3% YoY in 1QFY09, despite substantial increase in input costs. In the near future too, the volumes and realisations both are expected to be on a higher side given the higher demand form the user industry.

  • The sponge iron business that reported 27% YoY decline in volumes have clocked 13% YoY growth in revenues on account of substantial improvement in realisations led by surge in global scrap prices. The earnings before interest and taxes have more than doubled on account of robust 62% YoY growth in realisations. The sponge iron business is being hived off by way of slump sales for a purchase consideration of Rs 10.3 bn into a special purpose vehicle (SPV) to be formed as a subsidiary of Grasim industries during FY09.

What to expect?
The stock currently trades at Rs 1,785, implying a price to earnings (P/E) multiple of 10.7 times our FY11 estimated standalone earnings. Considering the fact that the company is the only player in VSF business domestically and the outlook of VSF and the cement sector from a long-term point of view remains positive, we believe that these two divisions will continue to be the growth drivers of the company. However, in the near to medium term softening of prices of the both the commodities would arrest the overall growth of the company.

Grasim has outlined huge capex plans to augment consolidated capacity of cement to 48.7 MTPA. The company has also plans to increase VSF capacity at Harihar (Karnataka) by 31,000 tonnes, which is expected to be operational in 3QFY10 and modernisation and upgradation of existing plants. The total investment outlined by the company out to Rs 39 bn over the next two years towards building up capacity and rationalisation of costs by improving operational efficiency.

Apart from improving its performance, the company has exited textile and sponge iron businesses to improve shareholder’s value in the long run. The decision to hive off these weak links would enable the company to utilise capital efficiently and focus on pursuing growth opportunities in its core businesses.

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