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Grasim: Detailed result analysis

Oct 24, 2003

Grasim, which announced its results yesterday, held an analyst meet immediately after that and in this article we try to review the companyís 2QFY04 results in detail based on the meet. The company has reported a 6% growth in its topline for the September quarter, over the previous year. While the operating profits of the company have improved by 5%, the bottomline of the company has grown by nearly 58% on the back of improved operating performance and also a robust 82% increase in other income.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Net Sales 11,129 11,772 5.8% 22,484 23,519 4.6%
Other Income 366 665 81.8% 459 876 90.8%
Expenditure 8,628 9,066 5.1% 17,529 18,131 3.4%
Operating Profit (EBDIT) 2,501 2,706 8.2% 4,955 5,388 8.7%
Operating Profit Margin (%) 22.5% 23.0%   22.0% 22.9%  
Interest 432 403 -6.7% 874 794 -9.2%
Depreciation 628 684 8.9% 1,252 1,354 8.2%
Profit before Tax 1,808 2,284 26.3% 3,288 4,116 25.2%
Extraordinary items (16) 275   (33) 248  
Tax (505) (530) 5.0% 915 1,030 12.6%
Profit after Tax/(Loss) 1,287 2,030 57.7% 2,340 3,334 42.5%
Net profit margin (%) 11.6% 17.2%   10.4% 14.2%  
No. of Shares 91.7 91.7   91.7 91.7  
Diluted Earnings per share* 56.1 88.5   51.0 72.7  
P/E Ratio   8.1     9.8  
(* annualised)            

Let us have a look at the performance of each division and also the outlook for the same.

Growth (2QFY04 YoY) Volumes Realisations
Cement 8% -4%
VSF -9% 6%
Sponge iron -3% 36%
Caustic soda 6% 14%

VSF:  The VSF division continued to remain a cash generator for the company, accounting for 33% of topline and 45% of the total PBIT of the company during 2QFY04. The revenues of the division suffered a fall of around 4% mainly on account lower demand from yarn exporters which saw its volumes decline by 9%. However, a simultaneous 6% rise in sales realisations helped to arrest the decline in sales. As far as the operating performance is concerned, the division was able to maintain its operating margins of around 38%, despite a rise in the cost of inputs such as pulp (8%) and caustic soda (21%).

Going forward, while the exports from the division are expected to remain stable, companyís increasing efforts to further the usage of VSF in the domestic markets might help spur the domestic demand. The company has also set up R&D facilities to develop novel applications for the fiber and it is expected to be up and running by 2005. The margins, however, might come under pressure on account of higher input costs and lower realisations in the global markets.

Operating expenses 2QFY03 2QFY04 Change
Raw materials 2,783 2,907 4%
% of sales 25.0% 24.7%  
Employee 788 851 8%
% of sales 7.1% 7.2%  
Power 2,099 2,207 5%
% of sales 18.9% 18.8%  
Freight 1,188 1,209 2%
% of sales 10.7% 10.3%  
Finished goods 21 144 580%
% of sales 0.2% 1.2%  
Other costs 1,749 1,749 0%
% of sales 15.7% 14.9%  
Total 8,628 9,066 5%

Cement:  The other major division of the company, cement, registered improved performance for 2QFY04 as compared to previous year. The revenues from this division grew by 7% on the back of strong dispatches, which improved by 8%. Had it not been for the 4% fall in realisations, the increase in revenues would have been even better. The division also performed well on the operating front as its operating margins improved by almost 150 basis on the back of reduced power consumption and increase in captive power consumption from 25% to 35%.

As far as the outlook for the division is concerned, the cement industry is expected to grow at around 8% in the medium to long term on account of robust housing sector demand and the governmentís thrust on infrastructure. Moreover, Grasimís acquisition of L&Tís cement division will help Grasim to leverage on the economies of scale both in procurement as well as production and also help it to reduce freight costs. This would mean increased efficiencies for Grasim and hence improved profitability. Thus going forward, we expect the cement division to emerge as the growth driver for Grasim.

Sponge Iron:  The sponge iron division continued to deliver the goods for the company registering an impressive 35% growth in revenues and a huge 145% increase in PBIT in 2QFY04 as compared to the previous year. The improved demand from the steel industry and firm global scrap prices helped the realisations to improve by 36% and this was enough to improve the operating margins by almost 800 basis points despite a 3% fall in realisations and a rise in input costs.

Although the outlook for the sponge iron division continues to remain positive, the poor availability of natural gas and its pricing might remain a cause for concern for the company.

The chemical division of the company witnessed an 18% rise in revenues on account of 6% better volumes and 14% higher realisations. However, PBIT dropped by 6% due to higher power costs in comparison to 2QFY03. The textile division of the company however saw a turnaround in fortunes and contributed 1% to the total PBIT of the company in 2QFY04 as compared to Ė2%, a year ago. The turnaround is mainly attributed to robust 31% increase in sales volume and benefits from restructuring.

* Before employee separation cost

Stock is currently trading at Rs 714, implying a P/E of 9.8x of its annualised 1HFY04 earnings. Considering the run up the stock markets have seen in recent times, the valuation seems to be on the lower side. However, the company is going through a transition phase from a VSF driven company to a cement driven one. Also, since operationally, L&Tís cement division has not yet come under Grasimís management, investors seem to be playing it safe. Therefore, although on a short term basis there is still some uncertainty, the long term looks promising for the company.

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