>Grasim Industries (KOTAK SECURITIES)

Best is already factored in the price...


Grasim Industries, a diversified player in cement, viscose staple fibre (VSF), chemicals and sponge iron, is set to become the largest cement player in India post commissioning of its new capacities. However, due to demand slowdown, we expect decline in realizations across its core
businesses - VSF and cement, which may result in muted revenue growth between FY08-FY10. Pricing outlook for next one year for VSF continues to remain negative due to adverse global conditions impacting textile exports while oversupply and lower-than-expected demand growth may impact cement realization negatively. Lower realizations are also expected to offset the benefit of reduced raw material prices, thereby keeping margins lower going forward. Along with this, higher depreciation and interest charges post commissioning of new capacities are likely to keep the earnings growth depressed.

We value the company on sum-of-the-parts methodology on FY10 estimates and arrive at a price target of Rs.1600. Our assumptions of better cement prices based on prevailing firm cement prices as well as healthy dispatch growth for FY10 also leaves no stock price upside at current valuations. Though company has got pan India presence and is increasing its capacity significantly, most of the positives related to firm cement prices, low power and fuel costs as well as volume growth are already factored in the current stock price. Hence we initiate coverage with a REDUCE recommendation. We would wait for declines in the stock price for upgrading our recommendation.

Key disinvestment rationale

■ Cement oversupply and moderation in demand to impact cement realizations negatively. Cement demand had registered a growth of nearly 9% between FY06-FY08 driven primarily by strong demand from construction, infrastructure and real estate projects. However, with the slowdown witnessed in the real estate sector and overall moderation witnessed in the GDP growth, cement demand is expected to grow at a CAGR of 7% between FY08-FY10. We expect capacity addition to the tune of 60-70MT between FY08-FY10 while demand is expected to remain subdued in the next two years. We thus opine that, pace of commissioning of new capacities is expected to exceed the demand growth and will likely result in fall in cement prices. We expect cement prices to decline in next one year post commissioning of new capacities from Q1FY10. We have assumed total dispatches of 39 mn tonne and average cement realizations of Rs.3345 per tonne in our estimates on a consolidated basis for the company.

■ VSF division is also witnessing demand slowdown and price declines.
Adverse economic factors such as US recession, declining demand from textile sector and declining exports have impacted the VSF division negatively in terms of volumes as well as prices. Grasim has also further reduced prices by Rs 7 per kg (7.2%) in January, 2009 and we expect prices to remain under pressure due to poor demand from the textile sector going forward. Margins are also expected to remain subdued since company has correspondingly passed on the benefits of cost reduction by reducing the VSF prices because of low demand.

To see full report: GRASIM INDUSTRIES