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Grasim: Drop in VSF realisations - Views on News from Equitymaster

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Grasim: Drop in VSF realisations
Aug 14, 2013

Grasim Industries has announced its financial results for the quarter ended June 2013. During the quarter, the company's standalone sales and net profits declined by 7.6% YoY and 17.2% YoY respectively. Here is our analysis of the results:

Performance summary
  • Standalone revenues decline by 7.6% YoY during 1QFY14 on account of 9% YoY drop in VSF prices.
  • Operating profits decline by 31.5%; operating margins contract from 23.7% in 1QFY13 to 17.6% in 1QFY14.
  • While other income rises by 13.6% YoY, depreciation charges and interest expenses increase by 34.7% YoY and 28.2% YoY respectively.
  • Effective tax rate falls sharply during the quarter from 19.2% in 1QFY13 to 6.6% in 1QFY14.
  • Net profits decline by 17.2% YoY during the quarter owing to weak operating performance. Net profit margins decline from 21.9% in 1QFY13 to 19.7% in 1QFY14.

Standalone Financial Performance
(Rs m) 1QFY13 1QFY14 Change
Net sales 12,439 11,489 -7.6%
Expenditure 9,487 9,465 -0.2%
Operating profit (EBITDA) 2,953 2,024 -31.5%
EBITDA margin 23.7% 17.6%  
Other income 844 959 13.6%
Depreciation 360 484 34.7%
Interest 61 78 28.2%
Profit before tax 3,376 2,420 -28.3%
Tax 647 159 -75.4%
Effective tax rate 19.2% 6.6%  
Profit after tax 2,729 2,261 -17.2%
Net margin 21.9% 19.7%  
No of shares (m) 91.7 91.8  
Diluted EPS (Rs)*   128.5  
P/E (times)*   18.8  
*trailing twelve month earnings
What has driven performance in 1QFY14?
  • Grasim's standalone topline witnessed a decline of 7.6% YoY during the quarter ended June 2013. VSF volume sales were higher by merely 0.7% at 77,518 metric tonnes during the quarter as compared to 77,013 metric tonnes during the corresponding quarter of the previous financial year. VSF realisations were under pressure on account of excessive viscose staple fibre (VSF) capacity in China and significantly high cotton inventory. While global VSF prices fell by around 14% YoY, the impact on the company was about 9% owing to the rupee depreciation.

  • The chemical business reported 6.3% YoY decline in sales. While sales volumes were higher by 3.7% YoY to 72,028 metric tonnes in 1QFY14, realisations declined from the high levels witnessed in FY13.

  • During the quarter, operating profits declined by 31.5% YoY as most major cost heads witnessed an increase. Raw materials cost (48.5% of net sales) and power & fuel expenses (16.5% of net sales) increased by 2.1% YoY each (as a percentage of net sales). Employee expenses (8.4% of net sales) and other expenses (7.5% of net sales) also increased by 1.3% and 0.8% respectively (as a percentage of net sales). Operating margins contracted from 23.7% in 1QFY13 to 17.6% in 1QFY14.
    Operating cost break-up
    (Rs m) 1QFY13 1QFY14 Change
    Raw materials consumed 6,406 6,469  
    Purchase of stock-in-trade 39 10  
    Change in inventory (679) (906)  
    Total raw materials cost 5,766 5,572 -3.4%
    % of net sales 46.4% 48.5%  
    Employee expenses 885 962 8.7%
    % of net sales 7.1% 8.4%  
    Power & fuel cost 1,793 1,894 5.6%
    % of net sales 14.4% 16.5%  
    Freight & handling expenses 206 173 -16.3%
    % of net sales 1.7% 1.5%  
    Other expenses 836 865 3.4%
    % of net sales 6.7% 7.5%  
    Total operating expenditure 9,487 9,465 -0.2%
    % of net sales 76.3% 82.4%  

  • Other income increased by 13.6% YoY during the quarter. Depreciation charges and interest expenses increased by 34.7% YoY and 28.2% YoY respectively. As a result, profit before tax dropped by 28.3% YoY during the quarter.

  • Tax expenses dropped sharply by 75.4% YoY during the quarter as the effective tax rate declined from 19.2% in 1QFY13 to 6.6% in 1QFY14.

  • At the bottomline level, the company's standalone net profits declined by 17.2% YoY. Net profit margins declined from 21.9% in 1QFY13 to 19.7% in 1QFY14.

  • The caustic soda plant of 182,500 TPA at Vilayat has been commissioned.

  • With the commissioning of 20 MW captive power plant, the brownfield expansion of VSF at Harihar (Karnataka) is fully operational at 36,500 TPA.

  • The company incurred a capex of Rs 280 m during 1QFY14 for the standalone business. Currently, a total capital expenditure of Rs 42.23 bn is under implementation for the standalone business. Of this, Rs 26.88 bn is under work-in-progress. The balance net capex of Rs 15.35 bn will be spent over FY14 (Rs 13.06 bn) and FY15 (Rs 2.29 bn).

What to expect?
Factors such as the slowdown in the global economy, the overcapacity situation in China and high cotton inventory have impacted the VSF business. Grasim's new capacities will further add to the oversupply situation. As such, the pressure on VSF prices is likely to persist.

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. The rupee depreciation is also likely to improvement the competitiveness of the Indian textile industry.

At the current prices of Rs 2,410 the stock is trading at 18.8 times its trailing twelve month standalone earnings. Given the medium term growth and profitability concerns, we reiterate our 'Hold' view on the stock from a 2-year perspective.

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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