Grasim Industries - Consolidated results in-line, Standalone margin under pressure - Centrum

Grasim Industries' Q2FY13 consolidated result was largely in-line with our estimates on operational parameters with Revenues at Rs65.5bn (vs. est. Rs64.4bn) and EBITDA at Rs13.5bn (vs. est. Rs13bn). EBITDA margin during the quarter was at 20.7% vs. est. 20.2%. However, lower-than-expected other income resulted in profits of Rs6.2bn (vs. est. Rs6.5bn). We remain positive on the company from a long-term perspective though there could be some challenges in VSF business in the near-term due to global slowdown and surplus capacities in China. We maintain Buy on the stock with price target of Rs4,210.

- Cement subsidiary's performance helps to post better results: Consolidated revenue increased 16% YoY to Rs65.5bn (vs. est. Rs64.4bn) led by 18.1% growth in the cement business and 17.7% growth in the chemical segment. EBITDA increased 50.1% YoY to Rs13.5bn (vs. est. Rs13bn) led by strong performance of the cement and chemical segments. EBITDA margin improved 4.7pp YoY to 20.7% (vs. est. 20.2%). EBIT margin of cement and chemical segments improved 6.6pp YoY and 6.2pp YoY respectively during the quarter. Adjusted profit of the company increased 46.3% YoY to Rs6.2bn.

- Higher raw material costs led to decline in VSF margins: Revenue from the VSF segment increased 8% YoY to Rs11.6bn led by 8% YoY increase in sales volume and 2.7% YoY increase in realization. On a sequential basis, realization of VSF was flat at Rs128/kg. Despite higher prices and sales volume, operating margin of VSF declined 6.6pp YoY (and 4.1pp QoQ) to 21.6% primarily due to higher raw material costs (pulp, sulphur and salt).

- Analysts' meet key take-aways: 1) VSF prices could be under pressure in the near term due to a fall in global prices and rupee appreciation. The company adjusted VSF prices in October '12 post appreciation in rupee and fall in global VSF prices. 2) In the short term, the environment continues to be challenging due to global slowdown and surplus capacities in China which may impact market conditions and margins. 3) In the long run, the management believes that cotton production may not keep pace with demand with increasing use of land for competing crops. Cotton production may be in the range of 24-26mt going forward. 5) Chinese government may put MSP for Cotton, which is likely to be 25-30% higher than the current global prices, which will in turn, help an increase in competing fibers. 6) During the quarter, production capacity of Harihar, Karnataka plant was increased by 18,250 tonnes pa. Total planned expansion of this plant is 36,000 tonnes pa which will be completed by Q4FY13E. 7) The company has also planned to set up an epoxy plant at Vilayat, Gujarat at a cost of Rs223cr. The capacity of this plant will be 51,500 tpa. 8) The company has planned a major revamp of Nagda plant for technological up gradation at a capex of Rs300 cr. This will be completed over the next 3 years. 9) In the cement division, realization for the company grew 1% QoQ during Q2FY13. 10) The management expects cement demand to grow by ~8% YoY in 2HFY13E. In Sept '12, cement demand grew by ~9-10% YoY.

- Maintain Buy: At the CMP, the stock trades at 8.5x FY14E EPS, 4.3x EV/EBITDA and 1.5x P/BV. We maintain Buy on the stock with a price target of Rs4,210, an upside of 27.6% from its CMP. We have assigned 40% holding company discount for its holdings in UltraTech and other subsidiaries. We have valued the standalone business at 10x EPS.

Source : Equity Bulls

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