Grasim Industries - In-line performance; long-term outlook brighter; Buy

VSF sales 1% lower yoy. Grasim's VSF volumes in 4QFY13 (a record high 0.095m tons) were up 0.3% yoy (21% qoq, led by more exports) while realisations (Rs. 128 a kg) dipped 1.2% yoy (2.5% qoq) leading to a 1% yoy drop in VSF revenue (in line with our estimate). Realisations were hit by surplus capacity in China and depressed cotton prices led by huge cotton inventories.

Profitability still low. OPM was flat yoy but slipped 215bps qoq on cost pressures from caustic soda and lower realisations. Grasim expects a slow recovery in textile sector in near term given the global economy's fragile state. The long term, however, is brighter, with rising consumption in developing markets and less pressure from supply of cotton due to the greater use of land for competing crops and a rise in demand for high-quality cellulosic fibre. Management expects VSF prices, margins to remain range bound in near term.

Adj. PAT down 31% yoy. Reported PAT grew 53% yoy due to exceptional income of Rs. 2bn from the sale of holdings in Thai Carbon Black, Thailand, and Alexandria Carbon Black, Egypt. Adj. PAT (in line with our estimate) was however down 31% yoy. The tax charge (38% of PBT) was higher due to an additional charge for deferred tax liability of Rs. 156m (32% of PBT adjusted for this) due to an increase in the rate of surcharge on income tax.

Expansion update. Phase I of the Harihar, Karnataka, expansion (18,250 tons) was commissioned in Sep'12; phase II of similar capacity in May'13. The greenfield project at Vilayat, Gujarat, (120,000 tons) will be commissioned by 2QFY14. Major revamp of the Nagda plant has started, to be completed in phases over the next two years. The fresh capacities and upcoming projects would support strong volume growth, starting 2HFY14.

Our take. Following robust volumes, 4QFY13 performance was in line with our estimates. Our sum-of-parts price target of Rs. 3,375 is based on the value of investments incl. UltraTech at a holdco discount of 25%, VSF/chemicals at 6x/4x FY14e EV/EBITDA. Risk: Fall in VSF prices.

Source : Equity Bulls

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