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Grasim: Good show

Oct 19, 2006

Performance summary
Grasim, the diversified major of the Aditya Birla Group, reported strong numbers for the quarter ended March 2006, wherein the bottomline grew by a strong 80% YoY on the back of a 22% growth in topline, aided primarily by its cement and VSF business. The highlight of the quarter, which is common for all cement majors, is the dramatic increase in realisations.

(Rs m) 2QFY06 2QFY07 Change 1HY06 1HY07 Change
Net sales 16,391 20,108 22.7% 31,924 38,878 21.8%
Expenditure 13,173 14,787 12.3% 24,962 28,424 13.9%
Operating profit (EBITDA) 3,218 5,322 65.4% 6,962 10,454 50.2%
EBITDA margin 19.6% 26.5%   15.0% 26.9%  
Other income 308 502 62.9% 963 877 -9.0%
Interest 237 241 1.4% 503 476 -5.4%
Depreciation 720 756 5.0% 1,424 1,497 5.1%
Profit before tax/(loss) 2,570 4,827 - 5,998 9,358 -
Tax 693 1,449 - 1,612 2,861 -
Profit after tax/(loss) 1,877 3,378 80.0% 4,386 6,497 48.1%
Net margin 11.4% 16.8%   13.7% 16.7%  
No of shares (m) 91.7 91.7   91.7 91.7  
Diluted EPS (Rs)*         116.5  
P/E (times)         22.5  
*trailing twelve month earnings            

What is the company's business?
Grasim, an Aditya Birla Group company, has presence in various businesses. It has presence in viscose staple fiber or, cement, sponge iron, chemicals and textiles. While the company is a world leader in VSF with a 24% market share, it is also the eleventh largest producer of cement in the world with a total consolidated capacity of 31 MT (nearly 20% of the country's capacity).

What has driven performance in 4QFY06?
Cement shows the way: Segmental revenue break gives us the idea that, it is cement and VSF that made a difference to the company's topline and bottomline performance in 2QFY07. Considering the increasing contribution of the VSF business to the overall sales of the company, it would be incorrect to state that Grasim is all about cement. On a consolidated basis, revenues have increased by 36% YoY and PBIDT have gone up by 94% YoY. On a standalone basis too, results have been encouraging. Revenue growth was 22% YoY and net profit recorded impressive growth of 80% YoY.

Cement business has posted outstanding results during the quarter with capacity utilisation at 101% and a revenue growth of 47% YoY. Further, the share of the blended cement has increased from 51% to 63%. While freight costs increased, its impact was mitigated to some extent due to higher dispatches by rail. The movement of goods by rail has increased from 34% to 49% on quarter on quarter basis. The three main reasons for an impressive performance by the company are growth in volumes, higher realisations (on account of narrowed demand supply gap) and savings in operating costs resulting from ongoing modernisation efforts, up-gradation of plants and energy optimization.

As far as Grasim's other businesses during the quarter were concerned, the VSF business registered a growth of 13% YoY, primarily led by higher volumes sales and liquidating inventory. The chemicals division sales were lower by 28% and revenues declined by 26% YoY, due to the shut down of the captive power plant attached to the chemical division for repairs and maintenance purpose. The performance of the sponge Iron business was also constrained due to high production cost and inadequate availability of natural gas. The textile division posted decent results (revenues were up by 15% YoY) and the division was able to curtail losses on account of increasing demand for ready-made garments.

Not just cement, VSF too: Thanks to the excellent performance of the cement business whose topline has grown by 47% YoY and bottomline by 26% YoY, the company posted 80% YoY growth in profit. EBDITA margins of the cement business have grown by 65% YoY, but at the PAT level, growth was higher at 80% on account of lower interest cost and higher other income. The subsidiary cement companies have also performed well during the quarter. UltraTech posted a notable performance of Rs 1,290 m as against a loss of Rs 30 m during the same period last year. Also, Shree Digvijay Cement, another subsidiary, has reported satisfactory performance.

VSF business contributes to the extent of 24% of the total company's business. The PBIT margins of the VSF segment have increased by 620 basis points (6.2%). Driven by strong demand, both in domestic and export markets, realisations were higher by 15% YoY. In sales volume terms, the business grew by just 1%. Going forward, the company expects to post outstanding numbers in volume terms with the rising demand for the product.

Chemical and sponge iron businesses - The laggards: Though company has posted impressive results, it could have been better but for the dismal show by the chemical and sponge iron divisions. Though operating margin of sponge iron business did record some improvement, it continued to remain under pressure due to high input costs and lower sales volume (volumes increased marginally by 3% YoY). The operating margin of chemical business did improve, as realisations of caustic soda recorded a growth of 5% YoY, the overall realisations were lower due to fall in chlorine prices.

What to expect?
At the current price of Rs 2620.35, the stock is trading at a price to earnings multiple of 22.5 times trailing twelve month earnings. In the medium term, we expect the company to perform well on account of robustness in cement prices and stable outlook for its VSF business. However, given the fact that crude prices have softened, VSF could witness substitution pressure from PSF (polyester staple fibre). In the medium term, cement realisations will continue to be on higher side, as the majority of the capacity additions announced by the players will come up in 2008. Till then, there will be a favourable demand-supply scenario.

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