>Grasim Industries (MERRILL LYNCH)

Co expects 4Q FY09 & 1Q FY10 to be strong for cement

Grasim said continuously falling imported coal prices coupled with stable cement prices will boost cement profits through 4Q FY09E & 1Q FY10E. This short-term visibility coupled with expected free cash generation from FY10 onwards may be driving investor interest in the stock; FII ownership in Grasim is now ~22% vs ~20% in Sep ‘08. Our underperform rating on Grasim reflects f’cast YoY earnings weakness in FY10E and downside risk to cement prices over next 12-months.

Pressure on cement prices likely from 3Q FY10E
Grasim expects pressure of oversupply to hurt cement prices from 3Q FY10E onwards. The Co estimates ~30mn tpa of new capacity additions across the industry by Mar ‘09 but believes the ramp up of new capacities could take 2-3 quarters. Citing its own experience with both the Shambhupura & Tadpatri expansions, Grasim said that the clinkerisation units were ready in Mar ’08 but associated grinding capacity will be ready only in next 1-3 months.

North India witnessing demand surge
Grasim said that demand growth in certain pockets of north India has surged led by 1) activity relating to Commonwealth Games (the games village is targeted to be complete by Dec ’09); 2) lower cement imports from Pakistan owing to reimposition of counter-vailing duty (CVD) on imports. At a pan-India level, however, economic visibility remains low; the Co cautiously f’casts demand growth at 5-6%.

To see full report: GRASIM