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Grasim: Better prices aid profitability - Views on News from Equitymaster

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Grasim: Better prices aid profitability

Aug 10, 2011

Grasim Industries has announced its financial results for the quarter ended June 2011. The company has reported a rise of 16% YoY and 31% YoY in consolidated sales and net profits for the quarter ended June 2011. Here is our analysis of the results.

Performance summary
  • Consolidated revenues increase by 16% YoY during 1QFY12 led by improved year-on-year growth across major segments.
  • Operating margins improve marginally from 25.8% in 1QFY11 to 26.8% in 1QFY12.
  • At the bottomline level, net profits increase by 31% YoY on account of better operating performance. Net margins improve from 11.4% in 1QFY11 to 12.8% in 1QFY12.

Consolidated Financial Performance
(Rs m) 1QFY11 1QFY12 Change
Net sales 50,552 58,721 16.2%
Expenditure 37,512 42,967 14.5%
Operating profit (EBITDA) 13,040 15,754 20.8%
EBITDA margin 25.8% 26.8%  
Other income 1,596 1,730 8.4%
Interest 912 942 3.2%
Depreciation 2,672 2,815 5.4%
Profit before tax/(loss) 11,053 13,728 24.2%
Tax 3,199 3,726 16.5%
(+) Share in profit of associates 112 141  
(-) Minority Share 2,215 2,627 18.6%
Profit after tax/(loss)** 5,751 7,517 30.7%
Net margin 11.4% 12.8%  
No of shares (m)   91.7  
Diluted EPS (Rs)*   267.8  
P/E (times)   7.9  

What has driven performance in 1QFY12?
  • Grasim's consolidated topline grew by 16.2% YoY during the quarter ended June 2011. Its cement subsidiary reported a 16.2% YoY rise in net sales during the quarter mainly on the back of improvement in cement realisations.

  • The VSF and wood pulp segment registered a robust rise of 13.9 YoY during 1QFY12 on the back of higher realisations. However, volumes witnessed a decline during the quarter.

  • The chemical segment also registered a significant improvement in realisations as revenues from this segment rose by 29.3% YoY during 1QFY12.

  • Operating costs were high during the period on account of significant increase in coal prices. Lower increases in depreciation and interest charges helped the bottomline to rise by 30.7% YoY. Net profit margins improved from 11.4% in 1QFY11 to 12.8% in 1QFY12.

  • In the VSF segment, the company's expansion projects at Vilayat, Gujarat (120,000 TPA) and Harihar, Karnataka (36,000 TPA) are progressing as per schedule. Both these projects are expected to be commissioned in FY13. Of the total Rs 24.5 bn capex for these projects, Rs 21 bn will be expended for the expansion projects and Rs 3.5 bn will be utilised for modernisation.

  • The caustic soda project at Vilayat, Gujarat (182,500 TPA) is also progressing well.

  • The cement subsidiary (UltraTech Cement) has also earmarked a total capex of Rs 110 bn. Brownfield expansions aggregating to 9.2 mtpa additional cement capacity are expected to be commissioned by the first quarter of FY14.

What to expect?
Despite the improved year-on-year performance during the quarter, the company is facing challenging times in both its main businesses - cement and VSF. In the cement business, overcapacity and the monsoons have put severe pressure on realisations and volume growth. In the VSF business, realisations have fallen significantly after reaching their peaks as cotton prices witnessed steep declines. Weak demand conditions in China have also affected the VSF market. So, pressure is expected to be on both prices and volumes.

At the current price of about Rs 2,109 the stock is trading at 7.9 times trailing 12 month earnings. We maintain our positive view on the stock from a 3 year perspective.

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