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Volume growth boost for Grasim Industries

 
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Ujjval Jauhari
Business Standard
8 May 2013

Despite near-term headwinds, ongoing capacity expansions will drive volume growth in VSF, cement segments

STRONG REVENUE GROWTH
In Rs crore
FY13
FY14E
FY145E
Net sales 27,639 30,729 35,743
% change y-o-y 10.6 11.2 16.3
Ebitda 5,659 6,121 7,348
% change y-o-y 6.4 8.2 20.0
Ebitda(%) 20.5 19.9 20.6
Net profit 2,500 2,845 3,263
% change y-o-y -5.6 13.8 14.7
E: Estimates Source: Elara Securities

Grasim Industries continues to focus on expansion and volume growth, even while demand and realisations remain muted for viscose staple fibre (VSF) and the larger cement segment. Its performance in the March quarter on a year-on-year (y-o-y) basis reflected this impact. The company is adding capacities in its VSF segment, as well as the cement segment, which is likely to drive volume growth. 

Though near-term headwinds are there, as and when the cycle turns, the company will be largest beneficiary, with available capacities. Hence, 33 of 36 analysts polled by Bloomberg have a buy call on the stock with consensus target price of Rs 3,616, indicating an upside of almost 19 percent from current levels of Rs 3,031.

VSF segment
VSF capacities during the March quarter at 88,056 million tonnes (mt) grew five percent y-o-y, leading to production increasing three per cent to 85,992 mt. Sales volumes at 95,161 mt (flat on y-o-y basis) beat the analyst’s estimates. Hence, the standalone revenues of the company at Rs 1,377 crore beat analysts’ estimates of close to Rs 1,200 crore.

Company observes that sluggish global economy continues to impact textiles sector. In this back drop, realisations are weak. The increased caustic soda prices, too, continue to impact the margins in the VSF segment on a y-o-y basis. Surplus VSF capacity in China and high cotton inventory continue to exert pressure on realisations for now. VSF demand, though, is showing an upward trend. The company’s observation on increasing demand in the VSF segment was substantiated by the fact that VSF volumes increased by 21.1 per cent on sequential basis due to improvement in demand and higher exports. With softening of pulp prices, the margins were 50 basis points higher sequentially.

Moving forward in the VSF segment, Phase-I of the Harihar, Karnataka expansion (18,250 tonnes) was commissioned in September 2012, taking total capacities to 352,000  TPA as Phase-II of the expansion of similar capacity is to be completed soon.  The new project at Vilayat, Gujarat, (120,000 tonnes) will be commissioned by the September quarter. Major revamp of the Nagda plant has started, to be completed in phases over the next two years. The fresh capacities and upcoming projects would support strong volume growth, starting H2FY14, observe analysts at Anand Rathi.

Cement segment
In the cement division, given that the company’s 10 mt new capacity is going on stream in the next 6-12 months, the company will be the largest beneficiary of the demand improvement expected in the second half of FY14. Its closest peers, ACC and Ambuja, are not likely to see significant capacity-led benefits before 2015.  The cement segment is represented by UltraTech, where Grasim holds 60.32 per cent stake.

The cement segment remains the largest one for the company, contributing to 76 per cent of revenue and 81 per cent of operating profit. Though the capacities increased four per cent to 53.90 mt per annum during the quarter for grey cement, the weak demand scenario took its toll and sales volumes at 11.79 mt declined two per cent y-o-y. However, on sequential basis the total grey cement and clinker volumes were up 14.2 per cent sequentially 12.1 mt due to seasonal cement demand. Nevertheless, prices remained flat sequentially due to increase in supply. Helped by lower operating costs Ebitda per tonne at Rs 1,063 was up Rs 63 a tonne compared to the December 2012 quarter and was just Rs 18 lower than in March 2012 quarter.

Outlook
Looking at the capacity expansions, analysts at Edelweiss observe that with VSF and cement capacity expansion projects nearing completion, the volume growth story remains intact. With current valuation of 6x FY14E and 4.3x FY15E EV/ Ebitda remaining attractive, they maintain ‘BUY/Sector Outperformer’ rating with revised target price (Rs 3,823). Ravi Sodah at Elara capital observes that given attractive valuations and expected improvement in VSF earnings, with capacity additions, he has an accumulate rating on the stock.

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