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Grasim: Extraordinary push - Views on News from Equitymaster
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Grasim: Extraordinary push
Jul 28, 2009

Performance summary
  • On a standalone basis, topline grows by 17.6% YoY during 1QFY10 led by growth in two of its core businesses viz. VSF and cement.
  • Operating profits of the company report a growth of 18.1% YoY as costs grow at a slightly lower rate as compared to topline.
  • At the profit before tax (PBT) level, growth in profits stands at 9.1% YoY. Lower other income and higher depreciation and interest costs exert pressure.
  • Excluding other income, PBT grows by 14.3% YoY.
  • Net profits grow by a whopping 68.5% YoY led by extraordinary income that includes profit on sale of sponge iron business. Excluding the same, bottomline grows by 3.2% YoY.
  • The company’s subsidiary - UltraTech reports a 30.6% YoY growth in topline during 1QFY10 while net profits report a growth of 57.6% YoY.

Financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 26,183 30,787 17.6%
Expenditure 18,406 21,601 17.4%
Operating profit (EBITDA) 7,777 9,187 18.1%
EBITDA margin 29.7% 29.8%  
Other income 563 286 -49.3%
Interest 302 475 57.4%
Depreciation 1,050 1,370 30.5%
Profit before tax/(loss) 6,988 7,627 9.1%
Extraordinary Item - 3,361  
Tax 1,846 2,322 25.8%
Net profit 5,142 8,666 68.5%
Net margin 19.6% 28.1%  
No of shares (m) 92 92  
Diluted EPS (Rs)*   218.2  
P/E (times)   13.2  
*trailing twelve month earnings

Note: 1QFY10 results are not strictly comparable with the corresponding quarter of the last year owing to the sale of sponge iron business in FY09.

What has driven performance in 1QFY10?
  • Cement and VSF are the two major pillars of the company that make up 85% to 90% of the company’s total revenues. The company’s 1QFY10 performance was largely supported by growth in its cement business. The company has reported a 17.6% YoY growth in topline, while net profits have reported a robust growth of 68.5% YoY on account of extraordinary income that includes profit on sale of sponge iron business. Depreciation and interest costs were on a higher side owing to the creation of new capacity. The benefit of these capacities will accrue in the subsequent quarters as normally new plants take full year to stabilize. New cement capacities aggregating to 2.9 m tonnes were commissioned during the quarter. Going forward, the company will continue to strengthen its leadership position in the cement and VSF businesses.

  • VSF, which contributes over 20% to the topline, reported an 11% YoY growth in revenues as the business witnessed a resurgence of demand and prices. The marginal improvement in macro economic conditions due to the stimulus packages announced by various countries and restocking of inventory led to 19% YoY growth in volumes. However, realisations were lower by 4% YoY and this exerted pressure on profitability. The segment witnessed 2.7% contraction in PBIT margins. Mixed signals from end-consumer off take globally and increase in excise duty from 4% to 8% in India is likely to impact volumes adversely in the medium term. Going forward, to sustain profitability and also to improve the same, the company is focusing on cost reduction measures and improvement of product mix.

  • The cement segment reported a 31.8% YoY growth in sales led by 23% YoY growth in volumes. The volume growth has largely been boosted by growth in northern region that is witnessing continued infrastructural activity. In terms of volumes, the company has outperformed the sector growth of 13% YoY. The segment has also witnessed expansion in PBIT margins of 3.9%. The profitability of the segment was supported by softening of imported coal prices and pet coke prices and increased share of captive power. The company has expanded capacity by 2.9 m tonnes during the quarter, taking the total installed capacity to 22.5 m tonnes. The industry has lined up huge capacity expansion plans and they are at various stages of commissioning. Upon commissioning, these capacities are likely to result in excess supply, which will exert downward pressure on realisations. The company’s initiative to increase capacity to maintain market share and initiative of setting up thermal power plants to contain energy costs is likely to partially offset the adverse impact on margins.

  • The chemical segment revenues were lower by 5% YoY during 1QFY10. The company has not reported volume numbers. However, it had earlier indicated that the production will be impacted from June, 2009 till onset of monsoon due to water shortage problem. The same must have impacted volumes, while the steep fall in prices of chlorine and hydrochloric acid led to 7% YoY fall in electro-chemical unit (ECU) realisations. All of this has resulted in segment reporting subdued performance for the quarter ended 1QFY10. The chemical segment reported 18% YoY fall in profit before tax and witnessed 3.8% contraction in PBIT margins. The demand for caustic soda is likely to be depressed in medium term owing to slowdown in growth of alumina segment in international markets. The segment prospects do not seem improving in near to medium term.

  • The sale of the sponge iron business was completed on 22nd May, 2009. The move is in line with the company’s strategy to focus on its core business, viz. Cement and VSF. The company had divested sponge iron business by way of slump sale for a consideration of Rs 10.3 bn that resulted in net gain of Rs 3.4 bn. During the quarter, till the time transaction was completed, the segment had reported 55.5% YoY fall in revenues and loss before taxes of Rs 439 m as against profit of Rs 654 m during 1QFY09. While net gain on sale of the business boosted bottomline, growth in revenues was capped owing to dismal performance of this segment.

  • Excluding the sponge iron business, on a comparable basis, the company has reported 25% YoY growth in topline and little over 30% YoY growth in profit before taxes.

What to expect?
Considering the fact that the company is the only player in the 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 for the company. However, in the near to medium term, softening of prices of both the commodities would arrest the overall growth of the company.

The stock currently trades at Rs 2,874, implying a price to earnings (P/E) multiple of 16.5 times our FY12 estimated standalone earnings. Considering the asset valuation method, which we apply to value the diversified major on a sum of the parts basis, the stock has breached our target price. We advise investors to practice caution. We shall soon update our research report on the company.

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