Grasim Industries - Q4FY12 Result update - Centrum

Operationally in-line; VSF margins under pressure

Grasim Industries' Q4FY12 consolidated result was largely in line with our estimates on operational parameters with Revenue at Rs72bn (vs. est. Rs71bn), EBITDA at Rs15.3bn (vs. est. Rs15bn) and EBITDA margin at 21.2% (vs. est. 21.1%). Though, operating profit was in line with estimates higher other income (Rs3.6bn vs. est. Rs2.8bn) and lower tax rate (25.3% vs. est. 28.1%) led to higher-than-estimated profit of Rs8.1bn (est. Rs7.4bn). On a standalone basis, the operating margin (15.6% vs. 32.4% in Q4FY11 and 22.7% in Q3FY12) was under pressure primarily due to decline in VSF realization (16.3% YoY decline) and increase in input costs (caustic soda and energy cost) for VSF. EBITDA margin of VSF segment plunged 16.3pp YoY (and 5.6pp QoQ) to 18.9%. The management has given a cautious outlook for both the key businesses, Cement (surplus to exist for 2-3 years and overall margins are under pressure due to rising input costs) and VSF (In the short to mid term, demand to be volatile due to macro economic conditions and Euro Zone uncertainties. New capacities in China may also create pressure on the VSF business. We maintain hold rating on the stock with TP of Rs2,660 considering attractive valuations.

- Consolidated margins under pressure driven by sluggish performance of the VSF business: Consolidated revenue increased 12.8% YoY to Rs72bn led by 18.9% YoY growth in the cement business by its subsidiary, Ultra Tech. But, 54.8% YoY decline in VSF segment's operating profits resulted in 0.8% YoY drop in consolidated EBITDA to Rs15.3bn. EBITDA margin declined 289bps YoY to 21.1%. Adjusted profit was up 9.4% YoY to Rs8.1bn, however, adj. PAT margin declined 34bps YoY to 11.2%.

- Disappointing performance of the VSF business: Revenue from VSF segment declined 7.6% YoY to Rs12.2bn primarily due to 16.3% YoY drop in VSF realization to Rs121.2/kg. VSF sales volume increased 10.8% YoY to 94,904tonnes. Led by lower realization and higher input costs (increase in caustic soda and energy cost), EBITDA from VSF segment declined 54.8% YoY to Rs2.3bn. EBITDA margin from VSF segment declined 19.9pp YoY to 18.9%.

- Operating result for standalone business disappoints: Led by lower operating profit of VSF segment, standalone EBITDA declined 53.1% YoY to Rs2.2bn. Standalone EBITDA margin declined 16.8pp YoY to 15.6%. Adj profit was down 38.4% YoY to Rs2.4bn.

- Management cautious on key business segments: The management gave a cautious outlook for both its key business segments, Cement and VSF. For Cement, it believes oversupply will persist in the industry for the next twothree years and at the same time, rising input costs will put pressure on margins. In VSF business, it believes that in the short to mid term, demand will be volatile due to macro economic conditions and Euro Zone uncertainties. New capacities in China may also create pressure on VSF business.

- Near-term catalysts missing, maintain Hold: At the CMP of Rs2,492, the stock trades at 8.9x FY14E EPS, 4.5x EV/EBITDA and 1.2x P/BV. The company's key businesses (Cement and VSF) are under pressure and we do not foresee any near term catalyst for the stock. Hence, we maintain Hold rating on the stock with a target price of Rs2,660.

Source : Equity Bulls

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