> Grasim Industries: RESULTS REVIEW 2QFY15 (HDFC Securities)

Softer pulp drives VSF margins

Grasim Industries’ standalone numbers were inline (EBITDA Rs 2.1n vs. est 2.2bn). New capacities continue to drive volume growth (101kt, +9% YoY). Standalone margins improved in 2Q, led by weakening RM costs on account of cheaper pulp (VSF PBIDT/kg : Rs 15/kg). Realisations held on at roughly same levels QoQ (Rs 125/kg), despite softening in global VSF pricing. Chinese cotton unwinding, which has driven cotton pricing downwards, has not effected VSF globally and the prices are at par with cotton for 1st time since FY13.

Trial runs for the remaining VSF capacity at Vilayat (43 ktpa specialty fibre) are underway and the new capacity should further boost volumes in FY16 (FY15 end capacity 490 ktpa). Thus Grasim is well set to reap the benefits of any demand revival in VSF globally, whenever that happens. We have a BUY on the stock with a revised TP of Rs 3,850 (UltraTech stake at 20% holding company discount, standalone business at 5.0x FY16E EV/EBITDA).

 2QFY15 highlights : Consolidated EBITDA was ahead of estimates driven by UltraTech surprise (EBITDA at Rs 8.3 bn vs Est 7.3 bn). Despite robust revenue growth (16.0% YoY), EBITDA growth was restrained due to weakness in VSF (Stlone. EBITDA down 22.8% YoY). JPA acquisition by UltraTech and higher debt led to 44% YoY higher interest cost. Combined with higher depreciation on account of new commissioning, APAT was down ~12%. In Parent entity, chemicals business continues to do well despite realisation decline (EBITDA margins at 23%) due to higher imports. This is driven by ramp-ups at Vilayat caustic plant and the epoxy facility.

 Outlook and view : We have tweaked our estimates marginally (EBITDA -6.2%/-2.2% for FY15/16), mainly on account of revision in UltraTech nos. Despite correction recently, UltraTech continues to trade at rich valuations (12.0x FY16 EV/EBITDA) with an added overhang of a likely acquisition overseas. Grasim remains undervalued, even on our target valuation for UltraTech (Rs 1,960/sh), and is preferable for an exposure to the cement business. Holding company discount should reduce as VSF prospects improve.

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