Grasim Industries - Consolidated results operationally in-line; lower cost results in better standalone margins - Centrum

Grasim Industries' consolidated result was in-line with estimates on operational parameters; however, profit was higher due to lower tax rate. In the standalone segment, OPM was better than estimates driven by sequential improvement in the margin of VSF segment. Though, we have cut our earning estimates by 12.6%/10.2% for FY14E/FY15E due to revision in margin estimate for the VSF segment and earnings revision for its subsidiary UltraTech, we believe the recent correction in the stock factors in most of the concerns. In our view, the stock attracts 59% discount for its stake in UltraTech at current valuations and we expect it to narrow going forward. We maintain Buy with a price target of Rs3,326 (earlier: Rs3,843), an upside of 30.6% from CMP.

Subdued performance of all key segments: Though consolidated revenue increased 1.5% YoY, operating profit declined 20.3% YoY due to lower profit reported from all key segments. In the Fibre business, EBIT declined 55.1% YoY in the quarter. Cement and Chemical segments reported 20.6% and 32.4% YoY decline in EBIT. EBITDA margin declined 5pp YoY to 18.4%. EBIT margin of Fibre/Cement/Chemical declined 11.7pp/3.4pp/7.2pp YoY in the quarter. Profit declined 15% YoY to Rs6.1bn. Lower decline in profit was due to higher other income (up 60.1% YoY) and lower tax rate (23.3% vs. 27.6% in Q1FY13).

Sequential improvement in VSF segment's margins: OPM of the VSF segment improved 1.1pp QoQ despite sequential fall in volume and realization. Improvement in margin was led by the fall in raw material prices (sulphur, caustic and pulp). Led by higher margin and lower tax rate, standalone profit increased 6.3% QoQ to Rs2.3bn.

Earnings estimates revised downwards: We have revised EBITDA estimates downwards by 7.1%/6.6% for FY14E/FY15E considering a) 5.5%/5.2% cut in est. for UltraTech and b) assuming lower VSF realization (Rs115/kg for FY14E against Rs120 earlier and Rs119/kg for FY14E vs. Rs124 earlier). EPS estimate stands revised downwards by 12.6%/10.2% for FY14E/FY15E.

Valuation and key risks: The stock trades at 8.6x FY15E EPS, 3.2x EV/EBITDA and 1.1x P/BV. We have valued standalone entity on 5x FY15E EV/EBITDA and assign 40% discount for its holding in UltraTech and other companies. We maintain Buy with a price target of Rs3,326, upside of 30.6% from its CMP. The key risk to our rating could be a) fall in cotton price globally which may in-turn impact VSF price, b) lowerthan-expected sales volume of its cement subsidiary in 2HFY14E and c) lower cement price due to rising competition and lower demand.

Source : Equity Bulls

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