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Grasim: Seasonal woes - Views on News from Equitymaster

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Grasim: Seasonal woes
Aug 12, 2010

Grasim Industries announced its 1QFY11 results. The company has reported marginal decline in consolidated sales and nearly 37% YoY fall in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated revenues grow by 15% YoY during FY10 led by growth across its core businesses i.e. cement and VSF.
  • Operating margins decline by 5% YoY due to lower realizations in cement and chemical businesses.
  • Despite higher other income, absence of extraordinary gains seen in the corresponding quarter of FY10 leads to the 37% YoY decline in net profits. Excluding the extraordinary gains, the decline in bottomline is 14% YoY.
  • The company's subsidiary - UltraTech reported 8% YoY decline in sales and 39% YoY decline in operating profits this quarter.


Consolidated financial performance
(Rs m) 1QFY10 1QFY11 Change
Net sales 50,832 50,552 -0.6%
Expenditure 35,056 37,513 7.0%
Operating profit (EBITDA) 15,776 13,039 -17.3%
EBITDA margin 31.0% 25.8%  
Other income 1,030 1,597 55.0%
Interest 823 912 10.8%
Depreciation 2,399 2,672 11.4%
Profit before tax/(loss) 13,584 11,052 -18.6%
Extraordinary Item 3,360 -  
Tax 4,408 3,198 -27.5%
Net profit 12,536 7,854 -37.3%
Net margin 24.7% 15.5%  
No of shares (m)   91.7  
Diluted EPS (Rs)*   282.4  
P/E (times)   6.7  
*trailing twelve month earnings
Extraordinary item refers to profit on sale of sponge iron business

What has driven performance in 1QFY11?
  • Grasim's performance in the first quarter of FY11 was shadowed by the lower cement dispatches due to monsoon and lower realizations. The company's cement capacity was up 7% YoY. While the sales for Samruddhi were up 8% YoY, in line with the industry, UltraTech reported just 2% YoY growth due to disruptions in West Bengal grinding unit and shortage of wagons. While the company is seeing pricing pressure due to new supplies coming on stream throughout the country, the pressure is particularly intense in the south.
    Segmental performance...
    Segment 1QFY10 1QFY11 Change
    Cement (Grasim / Samruddhi)      
    Revenues         19,880         19,993 0.6%
    % of total 39% 40%  
    Realsation (Rs / ton)            3,664            3,457 -5.6%
    VSF      
    Revenues            7,162            8,561 19.5%
    % of total 14% 17%  
    Realsation         97,543       117,910 20.9%
    Chemicals      
    Revenues            1,202            1,187 -1.2%
    % of total 2% 2%  
    Realsation (Rs / ton)         20,753         18,455 -11.1%

  • The VSF segment has reported 20% YoY growth in revenues on the back of higher volumes and realisations. During the same period last year, global economic downturn had impacted the company's business. Owing to higher economies of scale and improved realisations the segment witnessed expansion in margins. The segmental operating margin expanded from 27% in 1QFY10 to 35% in 1QFY11.

  • In the chemical business, despite lower capacity utilisation due to water shortage, production was up by 5%. Although sales volumes were up by 9% YoY, realizations were down by 11% YoY due to lower pricing power.

What to expect?
Owing to the demerger of cement business, Grasim's standalone balance sheet would not include cement assets FY11 onwards. VSF remains Grasim's mainstay business and the company has planned to scale up the assets of this business by 80,000 tonnes at an investment outlay of Rs 10 bn over the next three years. Over the medium term, the demand is likely to sustain at current levels, however margins may come under pressure on account of an upward trend in pulp and sulphur prices. As far as sulphur business is concerned, prices are expected to remain under pressure due to commissioning of new capacities and cheap imports.

Grasim's VSF business continues to do better than our expectations. The stock is currently trading at 6.7 times trailing 12 month earnings. We retain our view on the stock.

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