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Grasim: Margins still under pressure
Nov 5, 2014 | Updated on Nov 6, 2014

Grasim Industries has announced its financial results for the quarter ended September 2014. During the quarter, while the company's standalone sales increased by 12.6% YoY, net profit declined by 27.6% YoY. Here is our analysis of the results:

Performance summary
  • Standalone revenues increase by 12.6% YoY during 2QFY15 driven by strong growth in the chemical segment.
  • Operating profits decline by 24.8% YoY; operating margins contract from 18.6% in 2QFY14 to 12.4% in 2QFY15.
  • Effective tax rate increases from 1.6% in 2QFY14 to 15.4% in 2QFY15.
  • Net profits decline by 27.6% YoY during the quarter. Net profit margins decline from 29.4% in 2QFY14 to 18.9% in 2QFY15.

Standalone Financial Performance
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 14,055 15,823 12.6% 25,544 30,059 17.7%
Expenditure 11,443 13,859 21.1% 20,907 26,838 28.4%
Operating profit (EBITDA) 2,613 1,964 -24.8% 4,638 3,221 -30.6%
EBITDA margin 18.6% 12.4%   18.2% 10.7%  
Other income 2,213 2,290 3.5% 3,171 2,992 -5.6%
Depreciation 530 624 17.9% 1,014 1,154 13.7%
Interest 95 90 -4.7% 173  146 -15.3%
Profit before tax 4,201 3,539 -15.8% 6,621 4,913 -25.8%
Tax 66 545 725.9% 225  861 282.6%
Effective tax rate 1.6% 15.4%   3.4% 17.5%  
Profit after tax 4,135 2,994 -27.6% 6,396 4,053 -36.6%
Net margin 29.4% 18.9%   25.0% 13.5%  
No of shares (m)       91.8 91.8  
Diluted EPS (Rs)*         72.0  
P/E (times)*         49.0  

What has driven performance in 2QFY15?
  • Grasim's standalone topline witnessed a modest rise of 12.6% YoY during the quarter ended September 2014. Viscose Staple Fibre (VSF) sales volumes were higher by 8% YoY at 100,927 metric tonnes during the quarter as compared to 93,025 metric tonnes during the corresponding quarter of the previous financial year. VSF realisations continued to remain under pressure on account of excess global VSF capacity and were down 10% YoY. The chemical business reported 64% YoY increase in sales. Sales volumes grew by 28% YoY to 100,052 metric tonnes in 2QFY15.

  • During the quarter, operating profits declined by 24.8% YoY owing to lower VSF realizations as well higher input costs, mainly sulphur and coal. Operating profit margins contracted from 18.6% in 2QFY14 to 12.4% in 2QFY15.

  • Owing to the poor operating performance and the sharp jump in the effective tax rate during the quarter, the company's standalone net profits witnessed a decline of 27.6% YoY. Net profit margins contracted sharply from 29.4% in 2QFY14 to 18.9% in 2QFY15.
What to expect?
Excess global VSF capacity continues pose a challenge to the profitability of Grasim's VSF business. Since fibre prices tend to be interlinked the sharp fall in cotton prices due to record high inventory and change in China's cotton policy has further worsened matters for VSF.

On the demand front, slowdown in China and the change in its cotton policy that we highlighted above are likely to impede VSF growth. Overtime, as new capacity additions slow down, the utilization levels could be expected to improve.

Currently, a total capital expenditure of Rs 30.99 bn is under implementation for the standalone business. 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.

At the current prices of Rs 3,531 the stock is trading at 49 times its trailing twelve month standalone earnings. Based on our FY17 target price of Rs 4,245 for Grasim, you can expect returns of about 8% CAGR. We maintain our HOLD view on the stock.

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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