>GRASIM INDUSTRIES: Insights on Viscose Staple Fibre (VSF) and Cement pricing scenario

ULTRATECH CEMENTS
PRICE: RS.1507 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.1592 FY13E P/E:16.5X


GRASIM INDUSTRIES
PRICE: RS.2629 RECOMMENDATION: BUY
TARGET PRICE: RS.3109 FY13E P/E: 9.5X



■ We recently met with the management of Grasim and Ultratech Cements to get insights about cement and VSF demand and pricing scenario.
■ Cement demand continues to remain high due to spurt in infrastructure activity primarily in western and northern region.
■ VSF prices have stabilized and pulp prices are also softening. This can aid margin improvement.
■ With excellent ordering seen in the road segment and pre-election spending for infrastructure projects in Gujarat, we expect cement demand to remain strong going forward. Cement prices are also expected to remain strong for next two quarters till monsoons. We thus revise our estimates for Ultratech Cements and Grasim Industries to factor in improved pricing and volumes for FY13 and continue to maintain our positive bias for both the companies.
■ We thus continue to maintain ACCUMULATE on Ultratech Cements and would advise investors to use declines in the stock to buy (Price target Rs 1592) and BUY on Grasim Industries (Price target Rs 3109 )


Key highlights about the company


Cement demand and pricing
Cement demand has been witnessing an improvement since past few months with improvement in the demand from infrastructure segment as well as residential real estate segment. Cement prices have also remained strong after witnessing declines in Dec, 2011 to Jan, 2012. Prices have moved up in line with improvement in cement demand as well as increase in cost pressures. Company's domestic dispatches stand at nearly 35.7MT for Apr,11-Feb,12 vis-a-vis 34.57MT for the full year in FY11.


Though prices have moved up but margins may remain at similar levels on sequential basis since cost pressures continue to remain high. Freight cost per tonne may remain high going forward due to hike in railway freight rates as well as expected increase in diesel prices. Power and fuel cost per tonne may also remain high due to expected increase in domestic coal prices by Coal India. Imported coal prices have come down in past few quarters but corresponding rupee depreciation has netted off its impact to some extent.

VSF demand and pricing
VSF prices have stabilized in the range of Rs 120-125 per kg for the company. Demand growth revival has not happened since textile value chain has adopted a cautious approach amidst uncertainties related to euro zone. Out of the total production, nearly 80% is sold domestically while 20% is exported. However, domestic sales are also indirectly dependent upon global markets. Along with this, price of competing fibres like PSF and cotton has also remained subdued.We expect VSF prices to remain in the similar range till demand revival and inventory build up starts again in the value chain.


However, raw material prices especially pulp have witnessed a correction of nearly 6% QoQduring Q4FY12. Further rupee depreciation from the current levels may play a spoilsport since it can increase the landed cost of the imported pulp.


Capex schedule
Grasim's expansion plan in VSF is under implementation and is progressing well. Company is adding greenfield plant of 1,20,000 TPA at Vilayat, Gujarat and carrying out a brownfield expansion of 36,500 TPA at Harihar, Karnataka which will increase its capacity by nearly 50%. Both the projects are expected to be commissioned by Q4FY13. Along with this, it is also setting up 182,500 TPA caustic capacity and 90MW power plant at Vilayat for its captive use. Company is also planning to set up a greenfield project of 180K TPA in Turkey in JV with group companies but is currently awaiting necessary approvals.


For cement, company is in the process of setting up 4.8 MT plant at Raipur, Chattisgarh and 4.4 MT plant at Malkhed, Karnataka along with a captive power plant of 75MW and waste heat recovery plant of 45MW. It had earlier targeted to spend nearly Rs 47 bn as capex for cement division for FY12 and Rs 63 bn for FY13 and onwards. However, now company has lowered its capex target for FY12 and expects to spend nearly Rs 38 bn for cement division capex. However, we had already factored in lower capex in our estimates taking into account the capex done till 9MFY12.



Financial outlook for Ultratech Cements
■  We revise our cement volume and realizations estimates upwards for the company and expect domestic cement volumes of nearly 40.1MT and 44 MT for FY12 and FY13 for the company. White cement volumes are also likely to remain robust going forward and thus we expect revenues of Rs182bn(Rs175bn earlier) and Rs207bn(Rs201bn earlier) for FY12 and FY13 respectively.
■  Operating margins are expected to be 21.5% and 22.5% for FY12 and FY13 respectively. Despite increase in the cement prices, margins are expected to remain largely stable since power and fuel cost and freight cost per tonne may witness an increase going forward.
■  As a result, we expect net profits to grow to grow to Rs 22.3 bn and Rs 25 bn for
FY12 and FY13 respectively as against our earlier expectation of Rs18.7bn and
Rs21.9bn for FY12 and FY13 respectively.



Financial outlook for Grasim industries
■ With change in the estimates for Ultratech Cements, our revenue estimates for Grasim Industries stand revised upwards. We expect consolidated revenues to grow at a CAGR of 11.6% between FY11-FY13.
■ Imported coal prices and pulp prices have come down in past one quarter but corresponding rupee depreciation may mitigate the impact of fall in the prices. We thus expect margins to be around 21.6% and 22% for FY12 and FY13 respectively. 􀂄 Net profits are expected to grow at a CAGR of 5.7% between FY11-FY13.


Valuation and recommendation

Ultratech Cements at current price of Rs1507 is trading at 16.5x P/E and 8.7x EV/ EBITDA on FY13 estimates. We value Ultratech Cements at 9x EV/EBITDA (8x earlier) and arrive at a revised price target of Rs1592 (Rs 1241 earlier). We would continue to maintain ACCUMULATE rating on the stock and would advise investors to use declines in the stock to buy with a long term view.



Grasim industries at current price of Rs2629 is trading at 10x and 9.5x P/E and 4.1x and 3.8x EV/EBITDA on FY12 and FY13 estimates respectively. We value Grasim on sum of the parts valuation and arrive at a revised price target of Rs3109 (Rs 2867 earlier). Our price target also got enhanced due to change in market value of holding investments of Grasim as well as change in estimates for cement volumes and pricing. We remain positive on the company since we expect company to benefit from improvement in cement volumes as well as improved pricing in cement.


RISH TRADER