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Cement to take over as Grasim's profit driver

Despite rising volumes, viscose staple fibre division loses steam as realisations decline

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Grasim’s fourth quarter and FY12 performance was led by the segment as (VSF) segment failed to provide momentum.

Though volumes in the VSF segment continue to grow, the realisations have declined over last one year. The outlook over the next few quarters is not too good with price of VSF likely to remain volatile.

However, has corrected almost 15% from 52-week highs seen on 21 February 2012. After the correction and looking at the fact that Grasim is trading at discounts to Ultratech valuations, the stock can see some upside. As per Bloomberg data, 80% of the analysts have BUY ratings on the stock.

Fourth quarter and FY12 performance

During the last one year, cotton prices have declined almost 34%. This impacted VSF prices too, and they declined 21% during the period. Average realisations (Rs 121.29 a kg) saw a decline of 16% y-0-y and 5.5% sequentially. Some respite was provided by sales volumes (94,904 tonnes) growth of 11% y-o-y helped by exports.

However, revenues declined on account of lower realisation. VSF revenues (Rs 1,369.25 crore) declined of 10.5% y-o-y.

Rising raw material also impacted the company's profitability. Ebidta per tonne during the fourth quarter came at Rs 24.5 per Kg and Rs 36.5 per Kg for the full year. Full year revenues from the segment at Rs 5,007.17 crore increased 3.8% y-o-y

Cement revenues at Rs 5,659 crore up 19.24% y-o-y pushed the overall revenues for the March’12 quarter at Rs 7205 crore up 12.6%. Ultratech’s Ebidta per tonne of Rs 1,127 helped the overall Ebidta growth by 3%. For the whole year too Cement Revenues (Rs 19,235.70) grew good 17.12% helping the FY12 revenue growth of 17.21%.

VSF segment prospects

Global textile industry has continued to be affected by slowdown in Eurozone and China. Higher cotton crop and new capacities in China has had an impact on VSF prices.

Novonil Guha at BRICS Securities feels that the volatility in VSF prices may continue for few more quarters and he remains
cautious on VSF volumes for FY13 as the European crisis seems far from over. However on the positive side the softening of commodity prices as that of coal and pulp may now benefit Grasim.

Nevertheless analysts at Edelweiss estimate Ebidta per kg of Rs 31.5 in FY13 and Rs 35.3 in FY14 compared to Rs 36.5 in FY12.

On the expansions front the company various projects like VSF (120,000 Tonnes per annum) and Chemical Caustic (182,500 TPA), greenfield projects at Vilayat, Gujarat and brownfield expansion (36,500 TPA) of VSF at Harihar, Karnataka are progressing in line with the schedule.

The production volumes in current year from existing facilities are to remain stable as company expects Nagda plant to run uninterrupted during summers with adequate water storage.

Outlook

While the outlook for VSF business does not hold many promises in the near term it will be the cement business which will continue to drive revenues and profitability.

Analysts differ in their opinions for Cement industry prospect as Edelweiss feels that the profitability in the cement business may come under pressure due to volatility in prices and continued cost pressures. Analysts at Elara capital feel that Grasim’s cement business is available at around $66 per tonne (including Star Cement), only player in the large cap space which is available at discount to replacement cost.

The one-year consensus target price for the stock at Rs 3,133 means 26% upside from current price of Rs 2,488.95.

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