Grasim Industries - VSF vols. upbeat, margins soft; BUY on valuations - Religare

Grasim's Q4 sales/EBITDA/adj. PAT fell 1%/1%/9% YoY, below estimates on EBITDA and PAT. VSF volumes came in higher at 95,161mt, driving the topline beat, but weaker margins in the business led to an overall EBITDA margin miss at 15.6% (RCMLe 17%). New capacity would likely drive VSF volumes, but realisations could remain range-bound medium term. We cut FY14/FY15 earnings by 15%/10% on lower margins and revised UTCEM estimates; our new Mar'14 TP stands at Rs 3,770 (Rs 3,970 earlier). BUY on reasonable valuations.

- Topline down 1.1% YoY: Grasim's topline declined 1.1% YoY to Rs 13.8bn due to a 0.9%/25% YoY decline in VSF/Textile sales, while the Chemical segment grew 2.3%. VSF volumes came in higher than expected at 95,161mt (+0.3% YoY/21% QoQ; RCMLe 90,000mt) on higher exports, driving the topline beat. VSF pricing remained under pressure, falling by ~1% QoQ. We expect prices to remain range-bound and note that management doesn't see any significant downside from current levels.

- Margins flat YoY, down 216bps QoQ: EBITDA margin was below estimate at 15.6% (flat YoY, -216bps QoQ) due to higher RM cost and other expenses, which offset lower power & fuel cost. In VSF, the EBITDA margin fell 120bps YoY/40bps QoQ to 17.7% (incl. other income) due to higher caustic cost, while pulp prices eased. Higher caustic prices continued to benefit the Chemicals segment, boosting margins and ECU realisation. Lower other income and higher taxes pushed adjusted PAT (adjusting for gain on sale of investment) 7% below estimates at Rs 2.2bn (-9% YoY).

- Risk-reward favourable; maintain BUY: We cut our FY14/FY15 consol. estimates by 15%/10% to build in lower VSF margins and revised UTCEM estimates. While the commissioning of new VSF capacity would aid volumes, realisations are unlikely to improve meaningfully, keeping margins under pressure. Nonetheless, risk-reward remains favourable - our revised SOTP value of Rs 3,770 (vs. Rs 3,970 earlier) for Grasim holds 28% upside potential; maintain BUY.

Source : Equity Bulls

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