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Grasim: Volumes grow, input costs surge

Oct 30, 2012

Grasim Industries has announced its financial results for the quarter ended September 2012. During the quarter, the company has reported a rise of 10% YoY and 11% YoY in standalone net sales and net profits respectively. Here is our analysis of the results:

Performance summary
  • Standalone revenues rise by 10% YoY during 2QFY13 aided by 8% growth in VSF sales volume.
  • Operating margins decline from 25.1% in 2QFY12 to 21.7% in 2QFY13 on account of higher input costs.
  • At the bottomline level, net profits increase by 11% YoY on account of lower interest expenses and declined in effective tax rate.
  • Net margins improve marginally from 28.3% in 2QFY12 to 28.7% in 2QFY13.

Unaudited Standalone Financial Performance
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 12,175 13,344.8 9.6% 22,411 25,735 14.8%
Expenditure 9,115 10,447 14.6% 15,822 19,884 25.7%
Operating profit (EBITDA) 3,060 2,898 -5.3% 6,589 5,851 -11.2%
EBITDA margin 25.1% 21.7%   29.4% 22.7%  
Other income 2,002 2,106 5.2% 3,012 2,950 -2.1%
Depreciation 356 386 8.4% 707 746 5.5%
Interest 107 78 -27.1% 213 139 -34.7%
Profit before tax/(loss) 4,599 4,540 -1.3% 8,681 7,916 -8.8%
Tax 1,150 712 -38.1% 2,091 1,359 -35.0%
Effective tax rate 25.0% 15.7%   24.1% 17.2%  
Profit after tax/(loss) 3,448 3,827 11.0% 6,590 6,557 -0.5%
Net margin 28.3% 28.7%   29.4% 25.5%  
No of shares (m)       91.7 91.7  
Diluted EPS (Rs)*         127.9  
P/E (times)*         26.2  
*trailing twelve month earnings

What has driven performance in 2QFY13?
  • Grasim's standalone topline witnessed a rise of 9.6% YoY during the quarter ended September 2012. The lacklustre growth was on account of the slowdown in the global textile industry, mainly the slowdown in the major economic centers such as the US, Eurozone and China.

  • The viscose staple fibre (VSF) business which accounts for nearly 90% of the company's standalone sales grew by 7.9% YoY during the quarter. The volume sales during the quarter stood at 85,312 metric tonnes (mt) against 78,959 mt in the corresponding quarter of the previous financial year, reporting a growth of 8%. This was despite Nagda plant stoppage for 11 days due to water shortage. The company has constructed an additional reservoir to deal with water shortage in the future. VSF realisations remained stagnant during the quarter compared to 2QFY12. It is worth noting that while international VSF prices were under pressure, the company's realisations were maintained on account of rupee depreciation.

  • The chemical business reported 16% YoY rise in sales. While production and sales declined by 3% YoY on account of water shortage, better caustic realisations resulted in positive revenue growth.

  • During the quarter, operating profits declined by 5.3% YoY. This was on account of a significant jump in input costs. Total raw material costs (including change in inventories and purchase of stock-in-trade) surged by about 5% (as a percentage of net sales) during the period. Owing to this, operating margins contracted from 25.1% in 2QFY12 to 21.7% in 2QFY13.

  • While other income increased by 5.2% YoY during the quarter, interest expenses declined by 27.1% YoY on account of interest subsidy from state government of Rajasthan. Moreover, tax expenses declined by 38.1% as the effective tax rate declined from 25% in 2QFY12 to 15.7% in 2QFY13.

  • Despite weak operating performance, improvement in non-operating items resulted in a growth of 11% at the bottomline level. Net profit margins improved marginally from 28.3% in 2QFY12 to 28.7% in 2QFY13.

  • The company has commissioned the first phase (18,250 TPA) of the VSF brownfield expansion at Harihar, Karnataka during the quarter. The balance 18,250 TPA is progressing as per schedule and is expected to be commissioned by 4QFY13.

  • The greenfield projects at Vilayat, Gujarat, namely VSF (120,000 TPA) and chemicals (182,500 TPA) are progressing as per schedule and the commissioning is expected to start in 4QFY13. By 1QFY14, all four lines are expected to be commissioned.

  • During the quarter, the capacity at Domsjo, the 33.33% pulp joint venture (JV) in Sweden, has been ramped up to 45,000 TPA.

  • During the same period, the company also acquired the assets of Terrace Bay Pulp Inc, a paper grade pulp mill in Canada, through AV Terrace Bay Inc (Canada) which is a 40% JV. The operations at the mill have been restarted in October 2012. Through the JV, the company plans to convert the mill to produce rayon grade pulp which the basic raw material used in producing VSF.

  • Grasim plans to set up an Epoxy plant at Vilayat with a capacity of 51,500 TPA. This project, which would entail an investment of Rs 2.2 bn is expected to be commissioned by 3QFY14. In addition, the company also plans to initiate technological upgradation at its Nagda plant starting next fiscal. The upgradation is estimated to cost about Rs 3 bn.

  • Currently, a total capital expenditure of Rs 40.02 bn is under implementation for the standalone business and is expected to be incurred over the current fiscal and the next (FY14). Of this, Rs 12.29 bn has been already expended in 1HFY13.

What to expect?
Factors such as the slowdown in the global textile industry and the overcapacity in China are likely to affect the VSF business. Despite the medium term concerns, Grasim's well-integrated operations and its leadership position in the VSF market are likely to hold the company in good stead over the long term.

At the current prices of Rs 3,346 the stock is trading at 26.2 times its trailing twelve month standalone earnings. We recommend a 'Hold' on the stock from a 2-3 year perspective.

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