Grasim will continue to ride on UltraTech's fortunes

As VSF prospects stay weak, the cement segment remains the key driver of the company's prospects

Grasim's more than 16 per cent surge in January on the bourses took a pause on Monday. The stock corrected almost two per cent to close at Rs 3,810 on a day when broader indices were down 0.22 per cent, as the company's December quarter profits came marginally lower than street expectations. While higher tax and a decline in other income led to lower than expected profits, earnings before interest, tax, depreciation and amortisation (Ebitda) was in line with estimates.

Amongst segments, weakness in Viscose Staple Fibre (VSF) remains a matter of concern. The decline in VSF sales was largely driven by about four per cent decline in average realisation as volumes were flat at 97,001 tonne (analysts had pegged it at 97,500 tonne) . On sequential basis, VSF realisation dipped 1.5-2 per cent, in line with the decline in international VSF prices. The company, however, keeps its efforts on and is adding capacities, which will help partly offset the pricing pressures.

After commissioning the first two lines at its Vilayat plant in Gujarat during September 2014 quarter, Grasim commissioned line 3 last month, which has a capacity of 21,900 tonnes per annum for producing Speciality Fibre. The company’s VSF capacity thereby has increased to 476,000 tonnes per annum. The trial run is on for the fourth line with 22,000 tonnes capacity, following which the total VSF capacity will rise to 498,000 tonnes per annum.

Even as no respite continues to be seen on realisations front, the company feels that the new capacity at Vilayat, with higher share of premium specialty fibre, will drive volumes gradually. The other two segments of Grasim, Pulp & Paper joint venture and Chemicals continued with their satisfactorily performance.

Hence, the company's prospects currently continue to hinge on the Cement segment (represented by UltraTech), which is now contributing 73-74 per cent to its gross revenues. UltraTech is well placed to take benefits of the cement up cycle expected from next fiscal. After completing the acquisition of JP Associates' Gujarat-based cement unit, its capacity has already crossed 60 mt.

The rebound in GDP and need for infrastructure keep analyst upbeat on demand for cement growing exponentially. Thus, being a holding company, Grasim also benefits. Analysts at Religare post-results have a target of Rs 4,550 and those at HDFC Securities Rs 4,898. Consensus target price for the stock (now at Rs 3,808) as per analyst polled on Bloomberg since January'15 stands at Rs 4,230.