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Grasim: Driven by core businesses - Views on News from Equitymaster

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Grasim: Driven by core businesses
Oct 29, 2009

Performance summary
  • Standalone revenues grow by 11% YoY during 2QFY10 led by growth in two core businesses viz. VSF and cement.
  • Lower cost of operation led to 75% YoY growth in operating profits.
  • At the profit before tax (PBT) level, growth in profits stands at 79% YoY, while at the net level profits growth stands at nearly 61% YoY.
  • The company’s subsidiary - UltraTech reported a 10% YoY growth in topline during 2QFY10 while net profits reported a growth of 53% YoY.
  • Results are not strictly comparable with the corresponding quarter of the last year owing to the sale of sponge iron business in FY09.


Financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 26,875 29,838 11.0% 52,694 60,378 14.6%
Expenditure 21,081 19,677 -6.7% 39,524 41,363 4.7%
Operating profit (EBITDA) 5,794 10,161 75.4% 13,170 19,014 44.4%
EBITDA margin 21.6% 34.1%   25.0% 31.5%  
Other income 990 1,432 44.7% 1,953 2,051 5.0%
Interest 284 505 78.0% 586 980 67.3%
Depreciation 1,069 1,359 27.2% 2,119 2,729 28.8%
Profit before tax/(loss) 5,431 9,728 79.1% 12,419 17,357 39.8%
Extraordinary Item -   -     -   3,361  
Tax 1,236 2,986 141.6% 3,082 5,309 72.2%
Net profit 4,195 6,742 60.7% 9,337 15,409 65.0%
Net margin 15.6% 22.6%   17.7% 25.5%  
No of shares (m)       91.7 91.7  
Diluted EPS (Rs)*         246.0  
P/E (times)         8.7  
*trailing twelve month earnings

What has driven performance in 2QFY10?
  • Grasim has reported 11% growth in revenues led by growth in two core businesses. Further, the lower cost of operation enabled the company to report robust 75% YoY growth in operating profits. Decline in input costs resulted in margin expansion of 12.5% during 2QFY09. Depreciation and interest cost were on higher side on account of expansion plans. Despite this and increase in tax charges, the company has reported nearly 61% YoY growth in bottomline.

  • VSF contributed 20% to the Grasim’s topline. In the beginning of 3QFY10, the company announced its plans to concentrate on VSF and cement business separately. In this regard, Grasim de-merged cement assets and consolidated it to create pure play cement company under Aditya Birla group. So going forward, Grasim’s standalone performance would be driven by VSF business only.

  • In 2QFY10, VSF reported 23% YoY growth in revenues backed by 18% YoY growth in sales volumes and marginal improvement in realisations. The company was able to cater to the demand for manmade fibers on account of 22% YoY growth in production. In 2QFY10 the company achieved capacity utilisation of 92% despite the fact that Nagda plant was shut nearly for a week owing to water shortage. Apart from strong domestic demand, increased penetration in export markets supported volume growth. Shortage of cotton boosted VSF business. However, in view of the growing price differential with other textile fibers like cotton and polyester, the current realisations are less likely to be sustained. In 2QFY10, the 21% expansion in profit before interest and taxes (PBIT) was supported by lower input costs such as pulp, caustic soda and sulphur. There are signs of revival, however, margins are likely to come under pressure going forward owing to rising input costs, pulp prices. VSF remains Grasim’s mainstay business and has planned to scale up the assets of this business by 80,000 tonnes at an investment outlay of Rs 10 bn over the next three years.

  • The cement segment revenues grew by nearly 30% YoY mainly led by growth in volumes. While the company has reported 27% YoY growth n production, sales volumes increased by 23% YoY. Expansion in capacity (commissioned 2.9 m tonnes on capacity in 1HFY10) enabled the company to cater to the strong demand for the commodity, particularly in northern and eastern regions. The ready mix concrete business was impacted on account of slowdown in real estate business. The segment has reported 8.4% expansion in PBIT margins led by growth in volumes, firm prices and softening of fuel prices. The enhanced share of captive power also supported the margin expansion. The margins are likely to come under pressure as industry wide planned capacities become operational resulting into surplus scenario. However, long term outlook is promising on account of government initiatives (to boost rural, housing and infrastructural development) and owing to signs of economic revival the industry is expected to sustain 9% growth in demand.

  • Grasim plans to invest approximately Rs 21 bn towards modernisation and upgradation of cement assets and on logistics framework (evacuation facility, bulk terminal etc), setting up waste heat recovery system.

  • The chemical segment revenues declined by nearly 10% YoY during 2QFY10. This is on account of steep fall in realisations as on volumes front, the segment has reported 11% YoY growth. Decline in prices of caustics and by-product prices led to fall in electro-chemical unit (ECU) realisations. The segment’s PBIT margins declined by 9.7% to 21.2% in 2QFY10. Thus, lower profitability is emanating from lower realisations. In the medium term realisations are expected to remain under pressure owing to creation of new capacities and cheap imports. However, recovery in the economy is expected to improve business prospects going forward.

What to expect?
The stock currently trades at Rs 2,180, implying a price to earnings (P/E) multiple of 11 times our FY12 estimated standalone earnings. Considering the asset valuation method, which we apply to value the diversified major on a sum of the parts basis, we believe that the stock leaves limited upside potential at the current juncture. We advise investors to practice caution.

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