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Grasim: Tepid performance - Views on News from Equitymaster
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Grasim: Tepid performance
Oct 30, 2013

Grasim Industries has announced its financial results for the quarter ended September 2013. During the quarter, the company's standalone sales and net profits increased by 4.5% YoY and 8% YoY respectively. Here is our analysis of the results:

Performance summary
  • Standalone revenues increased by 4.5% YoY during 2QFY14 driven by higher VSF sales volumes.
  • Operating profits decline by 9.8%; operating margins contract from 21.5% in 2QFY13 to 18.6% in 2QFY14.
  • While other income rises by 5.1% YoY, depreciation charges and interest expenses increase by 37.2% YoY and 21.3% YoY respectively.
  • Effective tax rate falls sharply during the quarter from 15.7% in 2QFY13 to 1.6% in 2QFY14.
  • Net profits increase by 8% YoY during the quarter. Net profit margins increase from 28.5% in 2QFY13 to 29.4% in 2QFY14.
  • During the first half of the financial year 2013-14 (1HFY14), sales and net profits decline by 1.3% YoY and 2.4% YoY respectively.

Standalone Financial Performance
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 13,453 14,055 4.5% 25,892 25,544 -1.3%
Expenditure 10,555 11,443 8.4% 20,042 20,907 4.3%
Operating profit (EBITDA) 2,898 2,613 -9.8% 5,851 4,638 -20.7%
EBITDA margin 21.5% 18.6%   22.6% 18.2%  
Other income 2,106 2,213 5.1% 2,950 3,171 7.5%
Depreciation 386 530 37.2% 746 1,014 36.0%
Interest 78 95 21.3% 139 173 24.3%
Profit before tax 4,540 4,201 -7.5% 7,916 6,621 -16.4%
Tax 712 66 -90.7% 1,359 225 -83.4%
Effective tax rate 15.7% 1.6%   17.2% 3.4%  
Profit after tax 3,827 4,135 8.0% 6,557 6,396 -2.4%
Net margin 28.5% 29.4%   25.3% 25.0%  
No of shares (m)       91.7 91.8  
Diluted EPS (Rs)*         131.8  
P/E (times)*         21.3  
*trailing twelve month earnings

What has driven performance in 2QFY14?
  • Grasim's standalone topline witnessed a modest rise of 4.5% YoY during the quarter ended September 2013. VSF sales volumes were higher by 9% YoY at 93,025 metric tonnes during the quarter as compared to 85,312 metric tonnes during the corresponding quarter of the previous financial year. VSF realisations were under pressure on account of excessive viscose staple fibre (VSF) capacity in China. While VSF prices in the international markets fell by around 16% YoY, the impact on the company was about 4.6% owing to the rupee depreciation.

  • The chemical business reported 7.5% YoY increase in sales. While sales volumes were higher by 19.6% YoY to 78,356 metric tonnes in 2QFY14, realisations declined by 10.1% YoY.

  • During the quarter, operating profits declined by 9.8% YoY as most major cost heads witnessed an increase. Power & fuel expenses (14.4% of net sales), employee expenses (7.4% of net sales) and other expenses (7.5% of net sales) increased by 1% YoY, 0.8% YoY and 0.9% YoY respectively (as a percentage of net sales). Operating margins contracted from 21.5% in 2QFY13 to 18.6% in 2QFY14.

    Operating cost break-up
    (Rs m) 2QFY13 2QFY14 Change
    Raw materials consumed 6,269 7,184  
    Purchase of stock-in-trade 10 21  
    Change in inventory 504 (114)  
    Total raw materials cost 6,783 7,092 4.6%
    % of net sales 50.4% 50.5%  
    Employee expenses 893 1,044 16.9%
    % of net sales 6.6% 7.4%  
    Power & fuel cost 1,797 2,024 12.6%
    % of net sales 13.4% 14.4%  
    Freight & handling expenses 194 234 21.0%
    % of net sales 1.4% 1.7%  
    Other expenses 889 1,050 18.0%
    % of net sales 6.6% 7.5%  
    Total operating expenditure 10,555 11,443 8.4%
    % of net sales 78.5% 81.4%  

  • Other income increased by 5.1% YoY during the quarter. Depreciation charges and interest expenses increased by 37.2% YoY and 21.3% YoY respectively. As a result, profit before tax dropped by7.5% YoY during the quarter.

  • Tax expenses, however, declined sharply by 90.7% YoY during the quarter on account of write back of provisions worth Rs 1,836 m relating to prior years. The effective tax rate declined from 15.7% in 2QFY13 to 1.6% in 2QFY14.

  • As a result, the company's standalone net profits witnessed an increase of 8% YoY. Net profit margins improved from 28.5% in 2QFY13 to 29.4% in 2QFY14.

What to expect?

VSF sales volumes grew at a steady rate during the quarter driven by strong export growth. Higher production levels were aided by capacity augmentation due to the Harihar brownfield expansion. In addition, construction of new water reservoir by the company resulted in uninterrupted operations at its Nagda plant. It must be noted that there was an 11-day plant shutdown in the corresponding quarter of the previous fiscal owing to water shortage.

VSF realisations continued to remain under pressure owing to the overcapacity situation in China. However, the depreciation in the rupee limited the decline in VSF realisations for the company. Grasim's new capacities will further add to the oversupply situation. As such, the pressure on VSF prices is likely to persist.

Notwithstanding 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. The long term outlook for VSF continues to be favourable in comparison to other fibres.

As far as the company's expansion plans are concerns, unexpected floods in Gujarat impacted power plant under trial run as well as commissioning of VSF and Epoxy projects. These projects are now scheduled to be commissioned in a phased manner. During 1HFY14, the company incurred a capex of Rs 5.33 bn for the standalone business. Currently, a total capital expenditure of Rs 42.32 bn is under implementation for the standalone business.

At the current prices of Rs 2,802 the stock is trading at 21.3 times its trailing twelve month standalone earnings. Given the overall slowdown in the domestic and global economy as well as the overcapacity situation in VSF, we reiterate our ‘Hold' view on the stock from a 2-3 year perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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