Thursday, February 16, 2012


GIL recently reported its Q3FY12 results, which were below street estimates. Given below are some of the key highlights, which we came across while reviewing the results.

Key highlights of Q3FY12 results:
 GIL reported higher sales at Rs.6,260.1 cr on account of higher cement and chemical volumes. Though VSF realisation improved 4.4% y-o-y led by Rupee deprecation, VSF
volumes declined 7.6% impacted by sluggish demand across markets particularly in EU.
 Q3FY12 EBITDA stood at Rs.1,413 cr, up by 18% y-o-y despite cost pressures. This was possible as GIL managed to pass the cost hikes to the consumers thereby improving
margins to 22.6%, up by 40 bps y-o-y.
 Net profit stood at Rs.669.1 cr up by 33.3% y-o-y on account of higher operating profit, higher other income, fall in interest, in depreciation costs and in tax rates.

Performance of business divisions:
■ Q3FY12 ended on a weak note supported by weak demand conditions. After witnessing an upturn in September, Textile Value Chain adopted cautious approach amidst Euro
zone and other uncertainties affecting the business sentiments and therefore demand for VSF. Realisations remained subdued in global markets aided by fall in cotton prices.

 Input costs continue to rise coupled with rupee depreciation. Operating margins were impacted. Standalone PBIDT lower by 29% due to lower volumes and high base in
corresponding quarter. Profit of JVs was affected due to higher input cost. Consolidated PBIDT for VSF Business was lower by 28%. Domsjo performance improved q-o-q despite
fall in pulp realisation. Forex losses reduced substantially. However, plant shutdown and related cost affected Q3FY12 too.

 In the present macro economic conditions, demand could remain volatile. Profitability in such scenario could be governed by the prices of competing fibres, input and energy
costs. New coal pricing mechanism could increase energy cost substantially. Further reduction in international prices of pulp could boost standalone profits. Inventories of VSF in
the system, input cost rise and forex fluctuations remain key issues.

 GIL could emerge stronger from the present challenging times with high level of integration and continued focus on cost and operating efficiency improvement.

 The VSF expansion projects at Vilayat, Gujarat (120,000 TPA) and Harihar, Karnataka (36,500 TPA) are on track. Civil work has commenced at both the locations and will be in
full swing post monsoon. Both these projects are slated for commissioning in FY13. A total capex of Rs.2,450 cr has been earmarked for the VSF business. This comprises of
Rs.2,110 cr for expansion projects and Rs.340 cr towards modernization. Post this expansion GIL’s VSF capacity would jump by 50% to 490,000 TPA by end of FY13 with focus
on specialty fibres. GIL also plans to set up a Greenfield VSF project of 180,000 TPA in Turkey in JV with group companies.

 In the next 18-24 months, new cement capacities could be commissioned across various regions and this could put pressure on prices and margins. However, fresh capacity
additions for GIL are also coming on stream and that will cater to high growth North and Central regions.
■ Lower demand offtake for VSF and cement could be a threat.
■ Sustained rise in input costs like pulp, coal, energy, fuel etc could pose a threat. Rupee depreciation could impact cost of imported coal.
■ Delay in execution of GIL’s proposed capacity expansions.

Conclusion & Recommendation
GIL’s Q3FY12 operating results were below street estimates on account of lower VSF volumes and margins. Demand for VSF has started picking up due to inventory depletion in
the value chain. GIL has highlighted uncertainty in global demand conditions going forward, especially from the current difficulties in the Euro zone. Along with this, cotton production
during this year could also be a key deciding factor about pricing going ahead.

The new coal pricing mechanism by Coal India has brought further uncertainties for the cement and VSF industries. Cement players will try to pass on the cost increase resulting
from the new pricing policy adopted by Coal India w.e.f. January 1, 2012.

The month of January 2012 has witnessed prices in Northern region come under pressure as the demand was affected due to severe cold while South continues to sustain its price
levels led by strict production discipline. Eastern, Central and Western regions saw a slight uptick in prices in anticipation of demand momentum picking up towards the month end
though certain pockets have shown slight improvement in offtake over the last month.

Though cement prices have started recovering post monsoon but demand continues to remain weak. Demand is expected to recover during H2FY12 and oversupply situation could
subside over the next 2-3 years with expected growth of 8% in demand. The management has indicated that cost pressures could continue to hurt the industry.

The chemical division is expected to do well going ahead given the increased off take from the aluminium industry.

Being the largest player with total capacity of 51MT (existing capacity) under control and highest organic growth visibility, GIL could be biggest beneficiary of any further increase in
cement price.

To read full report: GRASIM INDUSTRIES