Monday, February 6, 2012


Grasim Industries’ Q3FY12 consolidated results were largely in line with our estimates with EBITDA at Rs13.9bn, 6.4% above our estimates and adjusted PAT at Rs5.6bn, 3.4% lower than estimates. On standalone basis, the operating margin (22.7% vs. 29.9% in Q3FY11) was under pressure primarily due to decline in VSF sales (7.6% YoY decline) and increase in input costs. Though VSF prices improved 3.1% QoQ to Rs128.5/kg, it could be under pressure going forward if the demand condition does not improve. The management has given a cautious outlook for both the key businesses Cement (surplus scenario to exist for 2-3 years and overall margins are under pressure due to rising input costs) and VSF (In the short-to-mid term, demand is expected to be volatile due to macro economic conditions and Euro Zone uncertainties). Considering the cautious stance of the management and the absence of near-term catalysts, we retain our Hold rating on the stock with TP of Rs2,377.

 Improvement in consolidated profit led by strong growth in the cement business: Consolidated revenue increased 16.3% YoY to Rs62.6bn led by strong 23.1% growth recorded in the cement business by its subsidiary, Ultra Tech. Driven by higher domestic realization (20.1% YoY) of cement, consolidated EBITDA increased 16.9% YoY to Rs13.1bn and adjusted PAT increased 12.4% YoY to Rs5.6bn.

■ Operating margin under pressure in the VSF business: Revenue from VSF segment declined 3.9% YoY to Rs10.9bn primarily due to 7.6% YoY decline in VSF sales volume to 78,215tonnes. VSF realization increased 4.4% YoY (and 3.1% QoQ) to Rs128.5/kg. Led by lower sales volume and higher input costs (sulphur price and energy cost), EBITDA from VSF segment declined 28.5% YoY to Rs2.8bn. EBITDA margin from VSF segment declined 9pp YoY to 25.3%.

■ Operating results for standalone business disappoints: Led by lower operating profit of VSF segment, standalone EBITDA declined 22.8% YoY to Rs2.8bn. Standalone EBITDA margin declined 7.3pp YoY to 22.7%. Despite weak operating performance, higher other income (up 35.4% YoY) coupled with lower interest burden (down 39% YoY) and tax rate (21.8% vs. 27.8% in Q3FY11) restricted marginal drop by 2.9% at PAT levels.

 Cautious management commentary on key business segments: The management gave a cautious outlook for key business segments, Cement and VSF. For Cement, it believed the oversupply will persist in the industry for the next two-three years and at the same time, rising input costs will put pressure on margins. In the VSF business, it believed that in the short-to-mid term, demand will be volatile due to macro economic conditions and Euro Zone uncertainties.

 Near-term catalysts missing, maintain Hold: At the CMP of Rs2,485, the stock trades at 11.6x FY13E EPS, 4.5x EV/EBITDA and 1.4x P/BV. The company’s both the key businesses (Cement and VSF) are under pressure and we don’t foresee any near term catalyst for the stock. Hence, we maintain our Hold rating with a target price of Rs2,377.