Cementing VSF growth for Grasim

By : Ujjval Jauhari
Last Updated: Mon, Oct 15, 2012 19:30 hrs

Grasim’s stock has been riding high on good performance of the cement segment, but with prospects for its viscose staple fibre (VSF) business improving, analysts see further gains. Additionally, with cement major UltraTech’s stock (where Grasim holds 60.3 per cent stake) rising faster, it has increased the valuation gap between UltraTech and its holding company, Grasim.

For Grasim, it stock hit a 52-week high of Rs 3,436 earlier this month but continues trading at similar levels. However, UltraTech has been outperforming peers and the Sensex — since May-end it is up 50 per cent. Analysts however, say the gains should soon reflect in Grasim’s stock as well, as they are getting upbeat on improving profitability in the VSF segment. This provides more reason for the stock to do well on the bourses and narrow the valuation gap. Given that analysts are revising their target prices for Grasim’s stock to Rs 3,700-4,000, there is an 8-17 per cent upside from current levels of Rs 3,422.

Cement: On strong footing
The cement business that contributes 70 per cent to consolidated revenues of Grasim is going great guns and is likely to continue spearheading the stock’s performance. The September quarter, which is historically weak for cement players, however, has not been impacted much this year due to delayed monsoons. The average all-India cement price of Rs 300 per 50-kg bag seen in the September quarter is much higher than Rs 247 per bag seen in the September 2011 quarter. Sequentially, too, cement prices (instead of declining) increased by 1.6 per cent.

In Rs crore Q2FY13E FY13E FY14E
Revenues 1,254 27,816 31,860
% change y-o-y 4.0 11.3 14.4
Ebitda 300 6,164 7,160
Ebitda (%) 23.9 22.2 22.5
Adjusted net profit 345 2,880 3,236
% change y-o-y - 8.8 12.4
EPS (Rs) - 313.9 352.9
PE (x) - 10.9 9.7
E: Estimates
Source: Analyst reports

On the cost front, the impact of increase in freight costs is to be negated by softening in international coal prices and favourable movement of the rupee, feel analysts. Hence, all the stocks in the cement sector have seen a huge run-up led by good realisations and improving profitability. At current levels, analysts feel Grasim’s valuations are factoring holding company discount of 35 per cent for its cement business, which they expect should reduce to 25 per cent, given the traditional benchmarks. In other words, either Grasim’s stock should rise or UltraTech should fall—the former is more likely. Analysts at Emkay, considering a base case scenario, have arrived at a fair value of Rs 3,717 for Grasim (considering holding company discount of 25 per cent for cement business) and using sum-of-the-parts (SOTP) valuation method.

VSF outlook improves
Grasim’s revenues have largely been led by the cement segment, while VSF business contributions have remained generally subdued (around 25 per cent in FY12). The ongoing capacity addition of 164,000 tonnes to be completed by the March 2013 quarter should boost revenues from the segment, too. Analysts are getting positive on the VSF business, wherein revenues grew at a tepid pace of 9.6 per cent compounded annual growth rate (CAGR) over FY08-12 on the back of severe capacity constraints restricting volume growth to just 3.6 per cent. However, with Grasim’s VSF capacity expansion (around 50 per cent of current capacity) nearing completion, analysts at Emkay observe that its standalone financials should witness a dramatic shift in growth profile. They add that with global VSF demand expected to clock an impressive wight per cent CAGR (during 2011-15), they expect Grasim with its enhanced capacity, to cash in on the same and gain market share. They see Grasim’s VSF volume growing 12.2 per cent CAGR during FY12-15. The company has been working on the raw material front, too. In July, Grasim signed an agreement to acquire Canada-based Terrace Bay Pulp Inc (TBP), which has 285,000 tonnes of paper grade pulp capacity. The company plans to convert TBP’s paper grade pulp capacity to rayon grade pulp, which would be used in its VSF unit. Amit Srivastava at Nirmal Bang Research believes this to be another step by Grasim to increase its reliance on captive sources for major raw materials required for producing VSF and developing an integrated business model that is immune to rising input costs. With 85 per cent backward integration now for pulp and 100 per cent for caustic soda, Grasim’s standalone earnings before interest, taxes, depreciation and amortisation (Ebitda) is also likely to get a boost. Analysts at Emkay expect standalone Ebitda to clock a CAGR of 16.3 per cent during FY12-15.

On the realisations front, Sanjeev Kumar Singh at Centrum observes that a price hike of Rs 4 a kg had been undertaken during the September quarter taking per kg prices to Rs 132. Some benefits of the same will be seen during the September quarter, while full benefits will accrue from the third quarter onwards.

Analysts at Motilal Oswal Securities in their result preview expect Grasim’s September quarter VSF volumes to be stable at 73,375 tonnes (up 1.4 per cent year-on-year) given steady demand and no production impact due to water shortage. VSF realisation should also be stable at Rs 127 a kg (up Rs 2.5 year-on-year). Analysts see FY13 and FY14 average realisation at Rs 127 and Rs 129 a kg, respectively.

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