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Grasim: Higher volumes, lower input costs aid EBITDA - Views on News from Equitymaster
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  • Aug 11, 2015 - Grasim: Higher volumes, lower input costs aid EBITDA

Grasim: Higher volumes, lower input costs aid EBITDA
Aug 11, 2015

Grasim Industries has announced its financial results for the quarter ended June 2015. During the quarter, while the company's standalone sales increased by 14.8% YoY, net profit growth remained flat. Here is our analysis of the results:

Performance summary
  • Standalone revenues increase by 14.8% YoY during 1QFY16 driven by higher volume growth in the VSF and chemical segment.
  • Operating profits increase by 53.7% YoY; operating margins expand from 8.8% in 1QFY15 to 11.8% in 1QFY16.
  • Lower other income and higher non-operating expenses result in flat bottomline growth during the quarter.

Financial Performance Snapshot
(Rs m) 1QFY15 1QFY16 Change
Net sales 14,243 16,347 14.8%
Expenditure 12,987 14,416 11.0%
Operating profit (EBITDA) 1,257 1,931 53.7%
EBITDA margin 8.8% 11.8%  
Other income 703 444 -36.8%
Depreciation 529 787 48.8%
Finance costs 56 137 144.1%
Profit before tax & exceptional items 1,374 1,451 5.6%
Exceptional gain/ (loss)  -    -    
Profit before tax 1,374 1,451 5.6%
Tax 316 393 24.5%
Effective tax rate 23.0% 27.1%  
Profit after tax 1,058 1,058 -0.1%
Net margin 7.4% 6.5%  
No of shares (m) 91.8 91.9  
Diluted EPS (Rs)*   57.7  
P/E (times)*   66.0  
*trailing twelve month earnings

What has driven performance in 1QFY16?
  • Grasim's standalone topline witnessed a rise of 14.8% YoY during the quarter ended June 2015. Viscose Staple Fibre (VSF) sales volumes were higher by 19% YoY at 102,737 metric tonnes during the quarter as compared to 86,389 metric tonnes during the corresponding quarter of the previous financial year. However, the rise in the segment revenue (14.6% YoY) was lower than the volume growth as VSF realizations remained lower on a YoY basis. The chemical business reported 17.1% YoY increase in sales as Epoxy volumes nearly doubled during the quarter. Caustic soda sales volumes remained flat at about 98,000 tonnes.

  • During the quarter, operating profits increased by 53.7% YoY owing to lower Raw Materials costs and Power & Fuel expenses. Operating profit margins expanded from 8.8% in 1QFY15 to 11.8% in 1QFY16.

    Operating Cost Break-up
    (Rs m) 1QFY15 1QFY16 Change
    Raw materials consumed 8,536 8,497  
    Purchase of stock-in-trade 12 36  
    Change in inventory (266) 541  
    Total raw materials cost 8,282 9,073 9.6%
    % of net sales 58.1% 55.5%  
    Employee expenses 1,082 1,225 13.2%
    % of net sales 7.6% 7.5%  
    Power & fuel cost 2,429 2,474 1.8%
    % of net sales 17.1% 15.1%  
    Freight & handling expenses 218 340 55.7%
    % of net sales 1.5% 2.1%  
    Other expenses 975 1,305 33.8%
    % of net sales 6.8% 8.0%  
    Total operating expenditure 12,987 14,416 11.0%
    % of net sales 91.2% 88.2%  

  • While other income declined by 36.8% YoY, depreciation and interest expenses shot up by 48.8% YoY and 144.1% YoY. The effective tax rate was also higher on a YoY basis.

  • Despite the margin expansion at the operating level, lower other income and higher non-operating expenses led the net profit to remain flat on a YoY basis. Net profit margins contracted from 7.4% in 1QFY15 to 6.5% in 1QFY16.
What to expect?
During the quarter gone by, the company reported good volume growth in the VSF segment aided by the ramping up of the newly commissioned Vilayat plant. However, the volume growth was restricted as the Nagda plant remained shut for 2 months during the quarter. On the price front, VSF prices saw some uptick after a prolonged period of decline. This was on account of uptick in Polyester Staple Fibre (PSF) and cotton prices as well as increase in raw material prices in China. Nonetheless, compared to a year ago, prices are still lower.

The chemical segment, too, witnessed higher volumes as Epoxy volumes nearly doubled. Caustic soda prices revived on a sequential basis but still remained lower than a year ago.

As far as the merger with Aditya Birla Chemicals (India) Ltd is concerned, Grasim has received approval from shareholders and creditors of both companies. The merger process is expected to be completed by 3QFY16.

During the quarter ended June 2015, the company incurred a capex of about Rs 800 m. For the standalone business, the company has chalked out a capex of Rs 7.2 bn. Of this, Rs 4.6 bn is slated to be incurred in FY16 and the remaining Rs 2.6 bsn in FY17.

At the current price level, the stock is trading at 66 times its trailing twelve month standalone earnings. We are currently in the process of reviewing and updating our forecasts for FY18. We will soon be able to share our latest view and target price on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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