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Grasim: Topline grows, but profit tumbles - Views on News from Equitymaster
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Grasim: Topline grows, but profit tumbles
Aug 4, 2014

Grasim Industries has announced its financial results for the quarter ended June 2014. During the quarter, while the company's standalone sales increased by 23.9% YoY, net profit declined by 53.2% YoY. Here is our analysis of the results:

Performance summary
  • Standalone revenues increase by 23.9% YoY during 1QFY15 driven by strong growth in the chemical segment.
  • Operating profits decline by 37.9% YoY; operating margins contract from 17.6% in 1QFY14 to 8.8% in 1QFY15.
  • Other income falls by 26.6% YoY during the quarter.
  • Effective tax rate increases from 6.6% in 1QFY14 to 23% in 1QFY15.
  • Net profits decline by 53.2% YoY during the quarter. Net profit margins decline from 19.7% in 1QFY14 to 7.4% in 1QFY15.

Standalone Financial Performance
(Rs m) 1QFY14 1QFY15 Change
Net sales 11,489 14,236 23.9%
Expenditure 9,464 12,980 37.1%
Operating profit (EBITDA) 2,025 1,257 -37.9%
EBITDA margin 17.6% 8.8%  
Other income 958 703 -26.6%
Depreciation 484 529 9.2%
Interest 78 56 -28.1%
Profit before tax 2,420 1,374 -43.2%
Tax 159 316 98.6%
Effective tax rate 6.6% 23.0%  
Profit after tax 2,261 1,058 -53.2%
Net margin 19.7% 7.4%  
No of shares (m) 91.8 91.8  
Diluted EPS (Rs)*   84.5  
P/E (times)*   38.1  
*trailing twelve month earnings

What has driven performance in 1QFY15?
  • Grasim's standalone topline witnessed a robust rise of 23.9% YoY during the quarter ended June 2014. Viscose Staple Fibre (VSF) sales volumes were higher by 11% YoY at 86,389 metric tonnes during the quarter as compared to 77,518 metric tonnes during the corresponding quarter of the previous financial year. VSF realisations were under pressure on account of excess global VSF capacity. However, the impact on the company was neutralized on account of 7% depreciation in the Indian rupee. The chemical business reported 84% YoY increase in sales. Sales volumes grew by 33% YoY at 96,093 metric tonnes in 1QFY15.

  • During the quarter, operating profits declined by 37.9% YoY owing to lower VSF realizations as well as sharp increase in input costs, mainly pulp and caustic soda. Operating profit margins contracted from 17.6% in 1QFY14 to 8.8% in 1QFY15.

  • Owing to the poor operating performance and the sharp jump in the effective tax rate during the quarter, the company's standalone net profits witnessed a decline of 53.2% YoY. Net profit margins contracted sharply from 19.7% in 1QFY14 to 7.4% in 1QFY15.
What to expect?
Excess VSF and pulp capacity continue to pose a challenge to the profitability of Grasim's VSF business. A major development has been China's decision to change its policy of procuring cotton at high prices and building cotton inventory. Instead, the dragon nation plans to switch to direct subsidies to farmers and expects to gradually reduce its huge cotton reserve as well as significant cut down on cotton imports. This has resulted in a rapid fall in cotton prices. Since cotton and VSF prices are interlinked, the move is likely to keep VSF prices under pressure.

On the demand front, slowdown in China and the change in its cotton policy that we highlighted above are likely to impede VSF growth. Overtime, as new capacity additions slow down, the utilization levels could be expected to improve.

Currently, a total capital expenditure of Rs 30.4 bn is under implementation for the standalone business. Notwithstanding the medium term concerns, Grasim's well-integrated operations and its leadership position in the VSF market are likely to hold the company in good stead over the long term. The long term outlook for VSF continues to be favourable in comparison to other fibres.

At the current prices of Rs 3,218 the stock is trading at 38.1 times its trailing twelve month standalone earnings. We are currently in the process of revising our estimates and target for the company. We will share our latest view and target price for the stock in the forthcoming Performance Review of StockSelect.

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