Grasim: Higher OPM boosts bottomline

Grasim, the AV Birla group flagship, has announced its Seprtember quarter results reporting an 8% fall in topline, while its net profits are up 308%. A YoY comparison of the bottomline is not justified as in 2QFY02 the company had incurred an extraordinary expense of Rs 525 m. Not accounting for the extraordinary expense, the bottomline has grown by 53%.

(Rs m)	2QFY02	2QFY03	Change	1HFY02	1HFY03	Change
Net Sales	11,080	11,129	0.4%	22,252	22,484	1.0%
Other Income	197	366	85.8%	342	459	34.2%
Expenditure	9,164	8,628	-5.9%	18,004	17,529	-2.6%
Operating Profit (EBDIT)	1,916	2,501	30.5%	4,248	4,955	16.6%
Operating Profit Margin (%)	17.3%	22.5%		19.1%	22.0%
Interest	479	432	-9.8%	954	874
Depreciation	619	628	1.4%	1,245	1252	0.5%
Profit before Tax	1,015	1,808	78.1%	2,391	3,289	37.5%
Extraordinary items	(525)	(16)		(549)	(33)
Tax	(175)	(505)	189.4%	505	915	81.2%
Profit after Tax/(Loss)	316	1,287	307.6%	1,337	2,341	75.0%
Net profit margin (%)	2.8%	11.6%		6.0%	10.4%
No. of Shares	72.3	73.0		73.0	73.0
Diluted Earnings per share*	17.5	70.6		36.7	64.2
P/E Ratio		4.3			3.2
(* annualised)

Topline growth has been subdued mainly on account of pricing pressure on its cement business. While cement volumes have grown 20% YoY, realisations have de-grown by 15%. The company's presence in oversupply markets like the western and southern regions of the country have led to a significant fall in realisations. The VSF division's performance has however been robust, with a 38% jump in volmues. Realisations have however fallen by 4%.

Operating expenses 2QFY02 2QFY03 Change Raw materials 3,153 2,797 -11% Employee 836 787 -6% Power 1,810 2,098 16% Freight 1,330 1,188 -11% Finished goods 574 21 -96% Other costs 1,659 1,749 5% Total 9,362 8,640 -8%

Growth Volumes Realisations Cement 20% -15% VSF 38% -4% Sponge iron 33% 2% Caustic soda 13% 9%

Grasim has performed excessively well on the operational front. The company has improved operating margins by nearly 500 basis points. Significant reduction in major cost heads like raw material, employees, and freight has led to this improvement in operational performance. Also a significant reduction in trading activity has led to lower expenses on purchase of finished goods. This has further reduced operational expenses.

The company has been able to reduce its interest costs by nearly 10%. Lower interest rates have enabled the company to retire and restructure high cost debt. There has however been a significant jump in tax expenses. In the September quarter of FY02 the company had incurred extraordinary expenses relating to VRS, sale of assets and employee retrenchment costs (Rs 525 m). During 2QFY03, these extraordinary expenses realte only to VRS (Rs 16 m), which has reduced considerably.

The stock is currently trading at Rs 300 a P/E of 4x its annualised 2QFY03 earnings. Grasim has improved operating margins considerably despite a difficult cement industry environment. Overall operating margins have improved inspite of falling realisations. The company's commitment to the cement business is apparent as it has already announced an open offer for cement major L&T. However benefits from this move may not be apparent in the near term. Performance of the VSF business has highlighted the fact that the company's initiative to target exports is paying off. Upturn in the steel indutry has helped its sponge iron business.

Going forward the cement business fortunes are hinged on realisations. Due to overcapacity in the cement markets, realisations have taken a beating and are not expected to improve in the next 4-5 months. Hence the cement business may continue to exhibit weakness in the near term. In the long term however, the cement business holds good prospects for Grasim. Though exports have helped the VSF business, but a weak international economic scenario may see volumes tapering further during the rest of the year. Having said that, expansion of the market by the company is likely to help in the long run. Valuations look attractive at current levels but the stock may be subdued due to poor over all market sentiment.