Grasim Industries - Consolidated results in line; Standalone business disappoints - Centrum

Grasim Industries' Q3FY13 consolidated profit at Rs5,492mn was inline with our estimate of Rs5,471mn driven by better than estimated profit of its subsidiary UltraTech which reported results earlier. However, standalone performance was below estimates with EBITDA at Rs2.2bn vs. est. Rs2.6bn and op. margin at 17.9% vs. est. 20%. Lower profit of standalone business was due to 32.3% YoY decline in op. profit of VSF business led by ~5% YoY drop in realization and higher caustic price. EBITDA margin of VSF business was down 7.2pp YoY to 18.1%. Though there remains near-term challenges in the VSF business due to pressure on global prices led by oversupply in Chinese market and depressed cotton price due to higher inventory, we remain positive on the company from a long-term perspective as we believe that capacity expansions in both key segments (cement and VSF) will aid volume growth and thus offer better profits in future. We maintain Buy on the stock with a revised price target of Rs4,014 (earlier: Rs4,210).

Profit declines due to pressure on VSF business: Though, conso. revenue increased 7.3% YoY, op. profit declined 4% YoY to Rs12.6bn primarily due to lower profitability of the VSF segment. In the VSF business, EBIT declined 57.7% YoY during the quarter. Chemical segment reported EBIT increase of 37.4% YoY, whereas, EBIT from cement business was up 3.2% YoY. EBITDA margin was down 2.2pp YoY to 18.7% led by a steep decline in EBIT margin of VSF segment (8.7% against 21.7% in Q3FY12). EBIT margin of chemical segment was at 22.3% against 18.3% in Q3FY12. Adjusted PAT declined 7.3% YoY (and 11.4% QoQ) to Rs5.5bn.

Higher raw material costs and lower realization leads to decline in VSF margins: Revenue from the VSF segment declined 5.1% YoY to Rs10.3bn led by ~5% YoY drop in realization to ~Rs122/kg. Sales volume of VSF was up 0.5% YoY to 78,579 tonnes. Led by lower realization and higher raw material cost (higher caustic price), EBITDA of this segment declined 32.3% YoY to Rs1,880mn and op. margin declined 7.2pp YoY to 18.1%.

Con-call key take-aways: 1) Production loss in Harihar, Karnataka plant is expected for 40-50 days due to non-availability of water led by lower rain in Karnataka. Phase I of Harihar plant expansion was completed in Sep '12 taking the capacity to 1,90,000 tonnes. 2) The management does not expect a sharp increase in VSF price in the near-term even though the inventory pipeline remains low at the current stage. This is because of overcapacity in China and unreasonably low selling prices there. 3) However, it believes that most players in China will be passing through challenging times at current VSF prices and hence, it expects limited downside to VSF prices. 4) Current global price of VSF ranges between $1.95-$2.05/kg. Sequentially, global price is down ~5% QoQ. In India, VSF price is down ~5% YoY supported by weak rupee compared to ~14% drop in global prices. 5) Current domestic price is slightly lower than the average selling price of Q3FY13. However, there has been some recovery in January compared to December '12. 8) Star Cement is currently operating at 90% utilization rate and EBITDA/tonne is in the range of Rs400-450/tonne.

Maintain Buy: At the CMP, the stock trades at 8.4x FY14E EPS, 4.1x EV/EBITDA and 1.4x P/BV. We maintain Buy on the stock with a price target of Rs4,014, an upside of 33.5% from its CMP. We have assigned 40% holding company discount for its holdings in UltraTech and other subsidiaries. We have valued standalone business at 10x EPS.

Source : Equity Bulls

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