Motilal Oswal Upgrades Grasim Industries to Buy

GRASIM 3QFY11: Below est; Higher cost in VSF impacts margins; Recent VSF price increase to drive earnings upgrade; Buy

VSF business volumes grew 4% YoY (~25% QoQ) to 84,621 tons (vs est 85,500 tons). Realizations improved Rs6.6/kg QoQ to Rs123/kg (vs est Rs122/kg).

Net revenues grew 18% YoY to Rs12.1b. EBITDA margins at 29.9% were lower 790bp YoY (+160bp QoQ) impacted by higher than estimated cost push.

VSF margins are expected to improve driven by price increase of ~Rs7/Kg from 1-Jan, benefit of which would be partly diluted by higher pulp prices.

3QFY11 VSF utilization at ~100% leaves limited headroom to grow volumes till new capacities commence operations in FY13.

The outlook for VSF business has improved considerably. This coupled with improving short-term outlook for cement business augurs well for Grasim. We are upgrading consolidated EPS for FY12 by 2.2%. The stock is quoting at very attractive valuations of 8.9x FY12E consolidated EPS and 7x FY13E consolidated EPS, and 1.3x FY12 P/BV and 1.1x FY13 P/BV. Maintain Buy with target price of Rs2,852.

Source : Equity Bulls

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