>GRASIM INDUSTRIES LIMITED (FIRST GLOBAL)

Reasons for Upgrade

• Grasim’s Cement division led the show in Q4 FY09 by delivering an impressive performance, while the company’s VSF division showed some signs of a recovery, with its volumes and margin increasing sequentially

• Going forward, we expect an increase in Grasim’s cement volumes on account of the commencement of its new units and higher demand from the infrastructure space.

• We also expect the VSF division’s realisation to improve and margins to recover, due to a reduction in pulp costs, product mix shift, and various cost reduction measures to be implemented by the company

• Moreover, the sale of its loss making Sponge Iron Division will help the company focus on its core business

The Story...

Grasim Industries Ltd.’s (GRASIM.IN) (GRAS.BO) Cement division led the show in Q4 FY09 by delivering an impressive performance, while the company’s VSF division showed some signs of a turnaround, with its volumes and margin increasing sequentially. Net sales for Q4 FY09 came in at Rs.29.3 bn, up 6% Y-o-Y, while the EBIDTA margin remained flat Y-o-Y at 24.7%, due to higher volumes and increase in productivity of the Cement division. Volumes and realisation of the Cement division were up 13% Y-o-Y and 6% Y-o-Y respectively, while volumes and margin of the VSF division increased by 22% sequentially and 16% sequentially. However, the company’s Proforma Net Profit for the quarter declined 13%, on account of an increase of 33% Y-o-Y and 42% Y-o-Y in depreciation and interest charges respectively, due to the commissioning of several new projects, the benefits of which will be fully reflected in the current year. Despite the impact of the economic slowdown, Grasim recorded a growth of 33% in its cash profit for the quarter, on account of a decline of 66% in the tax rate.

Going forward, we expect an increase in Grasim’s cement volumes on account of the commencement of its new production units and higher demand from the infrastructure space. We also expect the VSF division’s realisation to improve and margins to recover, due to a reduction in pulp costs, product mix shift, and various cost reduction measures to be implemented by the company. Moreover, the sale of its loss making Sponge Iron Division will help the company focus on its core business. We now upgrade Grasim from ‘Moderate Underperform’ to ‘Market Perform’.

Financial Highlights

Revenue growth
Grasim’s net revenues increased by 6% Y-o-Y to Rs.29.3 bn, due to an impressive growth of 21% in revenues of the Cement division. In Q4 FY09, 70% of the company’s revenues came from the Cement division, 25% from the VSF & Chemical division, 5% from the Sponge Iron division, and less than1% from the Textile division.

Going forward, we expect an increase in Grasim’s cement volumes on account of higher demand
from the infrastructure space, as well as rural regions. Moreover, the VSF division is expected to
witness an improvement in its realization in the coming months.

Cost Analysis
■ Raw material expenses & purchased goods increased by 6.9% Y-o-Y to Rs.8.2 bn, while, as a
percentage of sales, it was up merely 21 bps Y-o-Y to 28.1% in Q4 FY09. Going forward, the softening in raw material prices will have a positive impact on the company’s operating costs.

■ Power & fuel expenses rose 10.6% Y-o-Y to Rs.4.8 bn and, as a percentage of sales, was up
68 bps Y-o-Y. The benefits of the decline in imported coal prices were reflected in the company’s performance in Q4 FY09. Imported coal prices are expected to decline further in FY10E.

■ Freight & handling costs were up 15.7% Y-o-Y to Rs.3.4 bn in Q4 FY09 and, as a percentage
of sales, increased by 96 basis points Y-o-Y. However, the commencement of Grasim’s new
cement capacities across various regions will lead to a decline in the company’s Freight &
Handling costs.

■ Personnel expenses declined 10% Y-o-Y to Rs.1.4 bn in Q4 FY09, thereby easing the
pressure on the company’s operating margin.

Margin Analysis
■ The EBIDTA margin remained flat Y-o-Y, but improved by 478 basis points sequentially in Q4 FY09 to 24.7%, on account of a decline of 367 basis points and 128 basis points in Power & Fuel and Personnel expenses, as a percentage of sales, respectively.

■ The EBIT margin improved dipped 89 bps Y-o-Y to 20.4%, due to a sharp increase in depreciation charges, as the company commissioned new projects in the year.

■ The Net Profit Margin (NPM) declined 184 bps Y-o-Y to 13.1% in Q4 FY09, due to a rise of 42% Y-o-Y in interest cost, as a result of higher debt level.

To see full report: GRASIM INDUSTRIES