Improving VSF prospects cushion earnings

Even though the cement sector continues to remain sluggish, Grasim was able to post a decent performance in the December quarter, driven by the Viscose Staple fibre (VSF) segment. Further, rising prices of competing fibres like cotton pushed the demand for VSF, which boosted realisations and profit in the business.

While, the cement segments’ revenues (Ultratech Cement) at Rs 3,949-crore grew 9 per cent y-o-y, driven by the white cement business (revenues up 24 per cent at Rs 269 crore) and the recently merged Dubai-based Star Cement, which contributed Rs 191 crore. Grey Cement revenues at Rs 3,489-crore could grow only two per cent y-o-y.

The segment’s profitability was impacted as the domestic cement (grey cement) realisations declined 2 per cent at Rs 3,279 a metric tonne (mt), energy costs shot up 26 per cent and rise in other costs. Thus, operating profits at Rs 774-crore were lower by 24 per cent on a y-o-y basis.   

VSF BOOST
In Rs crore	Q3FY11	% chg y-o-y	FY11E
Net sales	5,461	13.0	19,411
Ebitda	1,197	-16.8	4,526
Net profit	502	-14.0	2,000
EPS (Rs)	54.7 *	-14.0	221.6
E: Estimated; * Not annualised                 Source: Company, Bloomberg

On the other hand, the VSF segment reported a 17 per cent jump in revenues to Rs 1,129.3 crore. Even though volumes at 84,621-mt grew four per cent, realisations at Rs 1,23,060 a metric tonne were up a good 12 per cent. Profitability in the segment though was restricted (up only four per cent) by a sharp increase in input costs. Pulp cost went up 35 per cent as sulphur cost increased 119 per cent with energy costs increasing 17 per cent.

Thus, even as the consolidated net sales of Grasim grew at a healthy pace, pressure in the cement business impacted overall profitability. Sequentially though the numbers look better, as the September quarter was amongst the worst in the recent past.

Grasim is expanding its existing 51.75-mt cement capacity by 9.2-mt through the brownfield route. While, Grasim expects cement demand to rise 8-10 per cent annually from 2011-12, analysts fear an oversupply situation in the industry in the next financial year, which may lead to continued pressure on margins.

On the other hand, VSF prices are also expected to be firm in 2011-12 though with some volatility according to Anand Rathi reports. The improving outlook for the VSF business should provide cushion to overall numbers. Here too, Grasim is expanding its VSF capacity of 3,34,000 tonnes per annum (tpa) by almost half over the next two years. While a new 1,20,000-tpa plant is coming up in Gujarat, a brownfield expansion at the Harihar facility will see capacity expanding by another 36,500 tpa. This should help it capitalise on the rising demand in the business.

With strong recovery in the VSF to support profitability, analysts have revised upwards their earnings estimates for Grasim. At Rs 2,236, its stock trades 10.5 and 8.9 times its estimated 2010-11 and 2011-12 earnings, and can deliver healthy returns over one year.