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Grasim: Show goes on… - Views on News from Equitymaster
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Grasim: Show goes on…
Jul 30, 2007

Performance summary
  • Company reports 29% YoY growth in topline during 1QFY08, led by marked improvement in performance of all the segments.

  • Operating margins expands by 530 basis points (5.3%) on the back of improved realizations, led by continued robust demand for cement and VSF as also increased capacity utilisation and the company's efforts to curtail costs by setting up captive power plants.

  • Improved EBITDA margins and higher other income leads to the company reporting 440 basis points expansion in net margins.

  • On a consolidated basis too, results have been encouraging during 1QFY08. Revenues grew by 26% YoY and net profit recorded a notable growth of 54% YoY.

Financial performance snapshot
(Rs m) 1QFY07 1QFY08 Change
Net sales 18,917 24,448 29.2%
Expenditure 13,782 16,527 19.9%
Operating profit (EBITDA) 5,135 7,921 54.3%
EBITDA margin 27.1% 32.4%  
Other income 375 677 80.8%
Interest 238 285 19.8%
Depreciation 741 850 14.7%
Profit before tax/(loss) 4,532 7,464 64.7%
Tax 1,413 2,347 66.2%
Profit after tax/(loss) 3,119 5,117 64.0%
Net margin 16.5% 20.9%  
No of shares (m) 92 92  
Diluted EPS (Rs)*   189  
P/E (times)   15.6  
*trailing twelve month earnings

What is the company's business?
Grasim, an Aditya Birla Group company, has presence in various businesses. It has presence in viscose staple fiber, cement, sponge iron, chemicals and textiles. While the company is a world leader in VSF with a 23% market share, it is also the eleventh largest producer of cement in the world with a total consolidated capacity of 31 MT (nearly 20% of the country's capacity).

What has driven performance in 1QFY08?
Robustness continues: The company continues to report robust numbers, driven by its two strong pillars –cement and VSF.

Cement business that contributed almost 57% to the total revenues of the company reported 25% YoY growth in revenues during 1QFY08, backed by higher capacity utilisation and continued robust demand for the commodity that led to improved realisations. The company’s sales volumes increased by 12% YoY outpacing industry growth of 9% YoY. During the quarter, fuel costs, which increased by 28% YoY (on account of increase in imported coal and pet coke prices) and freight costs, which were higher by 8% YoY continued to exert pressure on the margins. However, higher despatches by rail helped partially offset the impact along with firm prices.

VSF business too continued to report excellent set of numbers. During the quarter the capacity utilisation of this segment stood at 102% as compared to 70% (company suspended its operations for 48 days on account of water shortage) during the same quarter last year. Improved performance helped the company achieve highest ever volumes (production grew by 52% YoY at 68,755 MT). 34% higher sales volumes, firm prices (realisations improved by 20% YoY) led by strong global demand and the company’s increased dependence on the captive pulp helped it expand its EBIDT margins by 1060 basis points (10.6%). The strengthening of the rupee too resulted in healthier margins.

Good show by other segments: The performance of the chemical business was constrained in the last few quarters due to breakdown of a captive power unit and during 1QFY07 water shortage impacted the segment’s performance. However, on account of normal operations during the quarter, production went up by 39% YoY. Though realisations were lower by almost 10% YoY, normalised operations, better sales volume (increased by 40% YoY) and reduction in power costs led to 57% YoY growth in operating profits.

The sponge iron business was back on track during 3QFY07 and since then the segment continued to report marked improvement in performance. During the quarter, despite witnessing higher operating costs, operating margins expanded by almost 790 basis points (7.9%) on the back of improved realisations (increased by 22% YoY) that led to 25% YoY growth in revenues.

The company at its Board meeting has approved sale/transfer of textile unit at Bhiwani (Haryana) on a going concern basis. The company had earlier exited from un-remunerative export market to focus on supply to global and domestic brands. These moves will enable the company to focus on the development of the textile business and pursue emerging growth opportunities.

During the quarter, while the textile segment reported 5% YoY growth in revenues, operating profits remained flat. The impact of higher operating cost was offset by increased realisations. The company is setting up 8 MW thermal power plant to be completed by the end FY08 to improve profitability.

What to expect?
The stock currently trades at Rs 2,945, implying a price to earnings (P/E) multiple of 16 times our FY10E consolidated earnings. Though from a medium term perspective, we continue to remain positive on the company’s performance and growth prospects of the two pillars- cement and VSF, at the current valuation, the stock is trading higher than its fair value. As valuations still remain a concern, we maintain our negative outlook on the stock.

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Feb 23, 2018 (Close)


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