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Grasim: Volumes boost growth as Vilayat plant achieves 100% capacity utilisation - Views on News from Equitymaster
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  • Nov 20, 2015 - Grasim: Volumes boost growth as Vilayat plant achieves 100% capacity utilisation

Grasim: Volumes boost growth as Vilayat plant achieves 100% capacity utilisation
Nov 20, 2015 | Updated on Nov 23, 2015

Grasim Industries has announced its financial results for the quarter ended September 2015. During the quarter, the company's standalone sales and net profit increased by 14.9% YoY and 13% YoY respectively. Here is our analysis of the results:

Performance summary

  • Standalone revenues increase by 14.9% YoY during 2QFY16 driven by higher volume growth as well as improvement in VSF prices.
  • Operating profits increase by 34.3% YoY; operating margins expand from 12.4% in 2QFY15 to 14.5% in 2QFY16.
  • Lower other income and higher non-operating expenses restrict bottomline growth at 13% YoY during the quarter.

Standalone Financial Performance

(Rs m) 2QFY15 2QFY16 Change 1HFY15 1HFY16 Change
Net sales 15,823 18,181 14.9% 30,066 34,528 14.8%
Expenditure 13,859 15,543 12.2% 26,845 29,960 11.6%
Operating profit (EBITDA) 1,964 2,638 34.3% 3,221 4,569 41.8%
EBITDA margin 12.4% 14.5%   10.7% 13.2%  
Other income 2,290 2,267 -1.0% 2,992 2,711 -9.4%
Depreciation 624 841 34.6% 1,154 1,628 41.1%
Finance costs 90 138 52.9% 146 275 88.0%
Profit before tax & exceptional items 3,539 3,926 10.9% 4,913 5,377 9.4%
Exceptional gain/ (loss) - -   - -  
Profit before tax 3,539 3,926 10.9% 4,913 5,377 9.4%
Tax 545 544 -0.2% 861 937 8.8%
Effective tax rate 15.4% 13.9%   17.5% 17.4%  
Profit after tax 2,994 3,382 13.0% 4,053 4,440 9.6%
PAT margin 18.9% 18.6%   13.5% 12.9%  
Add: Share in Profit of Associates na na   na na  
Less: Minority Interest na na   na na  
Net Profit 2,994 3,382   4,053 4,440  
Net profit margin 18.9% 18.6%   13.5% 12.9%  
No of shares (m)         91.9  
Diluted EPS (Rs)*         61.9  
P/E (times)*         59.4  

*trailing twelve month earnings

What has driven performance in 2QFY16?
  • Grasim's standalone topline witnessed a rise of 14.9% YoY during the quarter ended September 2015. Viscose Staple Fibre (VSF) sales volumes were higher by 13% YoY at 113,756 metric tonnes during the quarter, in line with the growth in VSF segment revenue (79% of net sales in 2QFY16). The company achieved 100% capacity utilization at its Vilayat plant. It also benefitted from a sequential rise in global VSF prices driven by higher raw materials prices and stoppage of few VSF plants in China for environmental issues and maintenance. The chemical business (29% of net sales in 2QFY16, including inter-segment sales) reported 25.7% YoY increase in sales as caustic sales volumes increased 20% YoY during the quarter.
  • During the quarter, operating profits increased by 34.3% YoY owing to lower Raw Materials costs and Power & Fuel expenses. Operating profit margins expanded from 12.4% in 2QFY15 to 14.5% in 2QFY16.
  • Operating Cost Break-up for Standalone Business

    (Rs m) 2QFY15 2QFY16 Change 1HFY15 1HFY16 Change
    Raw materials consumed 9,029 10,188   17,565 18,685  
    Purchase of stock-in-trade 6 161   17 197  
    Change in inventory (221) (871)   (488) (330)  
    Total raw materials cost 8,813 9,478 7.5% 17,095 18,551 8.5%
    % of net sales 55.7% 52.1%   56.9% 53.7%  
    Employee expenses 1,168 1,347 15.4% 2,250 2,572 14.3%
    % of net sales 7.4% 7.4%   7.5% 7.4%  
    Power & fuel cost 2,689 2,937 9.2% 5,118 5,411 5.7%
    % of net sales 17.0% 16.2%   17.0% 15.7%  
    Freight & handling expenses 247 346 40.2% 465 685 47.5%
    % of net sales 1.6% 1.9%   1.5% 2.0%  
    Other expenses 942 1,435 52.3% 1,918 2,740 42.9%
    % of net sales 6.0% 7.9%   6.4% 7.9%  
    Total operating expenditure 13,859 15,543 12.2% 26,845 29,960 11.6%
    % of net sales 87.6% 85.5%   89.3% 86.8%  
  • While other income declined marginally, depreciation and finance costs shot up by 34.6% YoY and 52.9% YoY respectively.
  • Despite the margin expansion at the operating level, lower other income and higher non-operating expenses led the net profit to rise at a moderate rate of 13% YoY. Net profit margins contracted marginally from 18.9% in 2QFY15 to 18.6% in 2QFY16.
What to expect?

During the first half of the financial year 2015-16, the company reported good volume growth in the VSF segment aided by the ramping up of the newly commissioned Vilayat plant. On the price front, global VSF prices witnessed a sequential increase due to rise in raw material prices and some plant shutdowns in China. Given that the plant shutdowns are temporary for environmental issues and maintenance, it remains to be seen if VSF prices are able to hold. It must be noted that VSF prices have been under pressure over the last couple of years on account of the slowdown in the global economy and the drop in the prices of competing fibres such as polyester staple fibre (PSF) and cotton.

As far as the merger with Aditya Birla Chemicals (India) Ltd, Grasim has received approval from CCI and the High Court of MP. The company is awaiting approval from the High Court of Jharkhand. The merger process is expected to be completed in the ongoing October-December 2015 quarter. Post merger, the caustic soda capacity is set to increase from 452,000 tonnes per annum to 804,000 tonnes per annum. Once the requisite approvals are in place, the scheme of merger will be effective from the appointed date of 1st April 2015.

During the six month period ended September 2015, the company incurred a capex of about Rs 1,790 million. For the standalone business, the company has chalked out a capex of Rs 7.25 billion. Of this, Rs 4.25 billion is slated to be incurred in FY16 and the remaining Rs 3 billion in FY17.

At the current price level of Rs 3661, the stock is trading at 18.5 times its trailing twelve month consolidated earnings per share. We are currently in the process of reviewing and updating our forecasts for FY18. We will soon be able to share our latest view and target price 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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