Grasim Industries - Margin delight - ElaraCapital

Lower other income and higher tax leads to earnings miss

Grasim's VSF business profit was in line with our expectations but net profit was lower 17.4% due to lower other income and tax rates. Consolidated revenues for the quarter grew by 4.8% YoY( 12.4% QoQ) to INR75.5 bn. EBITDA margins improved ~60 bps QoQ (down YoY by 190 bps) due to margins improvement in VSF and cement business. Due to cumulative impact of lower other income and higher tax rate, net profit decline by 24.2% YoY (up QoQ by 11.7% QoQ) to INR 6.1bn

Margins in VSF business improves QoQ due to lower pulp prices

Due to saving on account of softening of pulp prices and operating leverage EBITDA margins of VSF business improved by 50 bps QoQ. However same were down YoY by 550 bps as caustic soda prices remain firm YoY.

Improvement in demand also boost volumes

VSF volumes increase of 21.1% on QoQ basis due to improvement in demand and higher exports.

Cement profits grow on the back of higher volumes

Total grey cement volumes were up 14.2% QoQ to 12.1mn tonnes due to seasonal cement demand. However, prices remained flat QoQ due to increase in supply.

Capex plans on schedule; likely to drive volume from H2FY14

The capacity addition in both VSF and cement business is on track. Capacity addition in both the business is likely to drive volume growth from H2FY14.

Valuations

At CMP of INR 2,945 the stock is trading at an attractive valuation of 8.3x FY15E consolidated earnings and 1.1x P/BV despite having healthy return ratios and margins. Given attractive valuations and expected improvement in VSF earnings with capacity additions, we have assigned Accumulate rating to the stock with price target of INR 3,485.

Source : Equity Bulls

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