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Grasim: Healthy volumes, stable prices aid profits - Views on News from Equitymaster

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  • Oct 25, 2011 - Grasim: Healthy volumes, stable prices aid profits

Grasim: Healthy volumes, stable prices aid profits
Oct 25, 2011

Grasim Industries has announced its financial results for the quarter and half year ended September 2011. The company has reported a rise of 29% YoY and 23% YoY in standalone sales and net profits for the quarter ended September 2011. Here is our analysis of the results.

Performance summary
  • Standalone revenues increase by 29% YoY during 2QFY12 led by improved volume growth and better realisations.
  • Operating margins decline from 28.3% in 2QFY11 to 24.1% in 2QFY12 on account of high costs.
  • At the bottomline level, net profits increase by 23% YoY on account of higher other income and lower depreciation charges. Net margins decline from 30% in 2QFY11 to 28.7% in 2QFY12.
  • During 1HFY12, sales and profits grow by 19% YoY 31% YoY respectively.

Standalone Financial Performance
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 9,326 12,035 29.0% 18,776 22,269 18.6%
Expenditure 6,689 9,130 36.5% 13,126 15,835 20.6%
Operating profit (EBITDA) 2,638 2,905 10.1% 5,650 6,434 13.9%
EBITDA margin 28.3% 24.1%   30.1% 28.9%  
Other income 1,623 2,157 32.9% 2,216 3,167 42.9%
Interest 103 107 3.9% 205 213 3.8%
Depreciation 453 356 -21.4% 898 707 -21.3%
Profit before tax/(loss) 3,705 4,599 24.1% 6,763 8,681 28.4%
Tax 908 1,150 26.7% 1,728 2,091 21.0%
Profit after tax/(loss) 2,796 3,448 23.3% 5,035 6,590 30.9%
Net margin 30.0% 28.7%   26.8% 29.6%  
No of shares (m)       91.7 91.7  
Diluted EPS (Rs)*         145.8  
P/E (times)*         16.9  
*trailing twelve month earnings

What has driven performance in 2QFY12?
  • Grasim's standalone topline grew by 29% YoY during the quarter ended September 2011 on the back of 17% YoY growth in sales volumes and 7% YoY growth in realisations in the Viscose Staple Fibre segment.

  • Operating costs were high during the period on account of significant increase in costs of raw materials, power and freight. As a result, operating margins declined from 28.3% in 2QFY11 to 24.1% in 2QFY12.

  • However, higher other income and lower depreciation charges helped the bottomline to rise by 23.3% YoY. Net profit margins declined from 30% in 2QFY11 to 28.7% in 2QFY12.

  • The company's expansion plans are progressing as per schedule. VSF capacity is set to increase by 50% to 490,000 tonnes per annum by the end of financial year 2012-13 (FY13).

What to expect?

The global fibre market witnessed significant volatility during the first quarter of the financial year 2011-12 as cotton prices registered a decline of over 40% from their peaks. As a result, dealers across the value chain had cut down on their VSF inventory. The situation seems to have stabilised for the time being as is evident from the buoyancy in volumes and realisations. In the near to medium term, the uncertainty in the global economy could have a bearing on the prospects of VSF. However, Grasim Industries is a well-integrated player in the VSF market, commanding a leadership position.

At the current price of about Rs 2,458 the stock is trading at 16.9 times trailing 12 month earnings. We maintain our "Buy" view on the stock from a 3 year perspective.

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