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Grasim: All goes up!

Oct 28, 2004

Performance Summary
Grasim, one of the key cement players in the country, has reported good numbers for 2QFY05. Backed by strong improvement in margins of the cement division, the overall margins of the company have shown an improvement. With crude prices increasing sharply, the prices of PSF (polyester staple fibre) have increased. VSF (viscose staple fibre), being a substitute, has therefore, witnessed increased demand. Excluding the extra-ordinary adjustments, net profit for 2QFY05 has increased by 23% YoY.

(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Net sales 11,847 15,282 29.0% 23,481 30,452 29.7%
Expenditure 9,154 11,312 23.6% 18,133 22,182 22.3%
Operating profit (EBDITA) 2,693 3,970 47.4% 5,348 8,271 54.7%
Operating profit margin (%)22.7%26.0% 22.8%27.2% 
Other income 665 276 -58.6% 876 438 -50.0%
Interest 403 367 -9.0% 794 696 -12.3%
Depreciation 684 706 3.2% 1,354 1,404 3.7%
Profit before tax 2,271 3,172 39.7% 4,076 6,609 62.2%
Extraordinary items 289 52 -82.0% 289 52 -
Tax 530 1,025 93.4% 1,030 2,270 120.4%
Profit after tax/(loss) 2,030 2,199 8.4% 3,335 4,391 31.7%
Net profit margin (%)17.1%14.4% 14.2%14.4% 
No. of shares (m) 91.7 91.7   91.7 91.7  
Diluted earnings per share (Rs)* 88.6 95.9   72.7 95.8  
P/E ratio (x)     11.7  
(* annualised)      

What is the company's business?
Grasim is one of the Aditya Birla Group company and has leadership position in four of its five businesses. The company has presence in viscose staple fiber or VSF (33% of sales in FY04), cement (45%), sponge iron (12%), chemicals (6%) and textiles (4%). While the company is a world leader in VSF with a 24% market share, it is also the seventh largest producer of cement in the world with a total capacity of 31 MT (nearly 22% of the country's capacity). It achieved the latter distinction only recently, when it acquired L&T's cement capacity for a net investment of Rs 22 bn.

What has driven performance in 2QFY05?
VSF and cement drives growth: As compared to a sales volume growth of 11% in 2QFY05, net price realisation of the VSF division has improved by 11% resulting in a faster revenue growth in 2QFY05. In the case of the cement division, as compared to a sales volume growth 5%, cement revenues are higher by 22%, led by better prices. While cement demand has increased only by 5% in 1HFY05 for the industry, lack of any significant capacity addition has resulted in cement realisations improving noticeably in 2QFY05. Grasim has also been able to fully capitalise on the upturn in steel cycle, which is reflected by the 85% jump in sponge iron sales in 2QFY05. We believe that both VSF and cement sales are likely to be robust for the rest of the fiscal.

Segmental snapshot…
(Rs m)2QFY04(% sales)2QFY05(% sales)Change
VSF 4,057 33.3% 5,104 32.7%25.8%
Cement 5,447 44.7% 6,652 42.6%22.1%
Sponge iron 1,229 10.1% 2,275 14.6%85.2%
Chemicals 782 6.4% 814 5.2%4.1%
Textiles 669 5.5% 777 5.0%16.2%

Sponge iron margins decline: While operating margins have increased by 320 basis points in 2QFY05, this was led by better cement and VSF margins on a YoY basis (graph below). Sponge iron margins are lower as compared to 1QFY05, which partly explains the fact that steel cycle may be reversing. However, it has to be remembered that 2QFY04 was exceptionally poor for cement manufacturers and to that extent, the rise in cement margins is magnified.

What to expect?
The stock currently trades at Rs 1,116 implying a price to earnings multiple of 11.7 times annualised 1HFY05 earnings. We will put up a detailed analysis on the company post the analyst meet to be held today.

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