UltraTech boost for Grasim

Viscose staple fibre performance to improve with capacity expansion and raw material integration, adding to the strength of the cement segment

Grasim Industries’ stellar financial performance was led by the cement segment that contributes more than 75 per cent to its consolidated revenues. Viscose staple fibre (VSF) however, continues to dent consolidated profitability. As a result the stock lost 2.58 per cent on the bourses closing at Rs 3,290.95.

Even though VSF revenues increased, higher input cost led to lower margin. It was a strong performance from the cement division that provided the impetus for Grasim, resulting in a 48 per cent net profit growth.

Going forward while cement segment is anticipated to continue doing well, the ongoing VSF capacity expansions and benefits of backward integration will see revenue and profitability improvement. Thus 31 out of 35 analysts polled by Bloomberg have a ‘Buy’ rating on the stock.

Cement contributes to growth
Ultratech with revenues at Rs 4,970 crore contributed more than 75 per cent of Grasim’s Rs 6,551.91 crore revenue. A 19 per cent year-on-year growth by UltraTech and nine per cent growth in other segments resulted in Grasim’s consolidated revenues increasing by 16 per cent.

Operating margin in the cement business shot up from 14.9 per cent in September 2011 to 21.4 per cent in September this year. Margins of the VSF division on the other hand fell from 24 per cent to 22 per cent during the same period on account of rupee depreciation resulting in higher cost of imported raw material like rayon grade pulp.

Price hikes undertaken in September have not reflected fully in the quarter and are likely to show in coming quarters, points out Sanjeev Kumar Singh from Centrum Research. Grasim increased prices of VSF by Rs 4 a kg to Rs 132 a kg.

UltraTech’s share in Grasim’s consolidated profits more than doubled from Rs 160 crore in the September 2011 quarter to Rs 333 crore in September 2012 quarter leading to the company’s profits at Rs 619.18 crore registering a 48.4 per cent growth year-on-year.

Strong cement prospects
Cement prices have increased with the end of monsoon. However, after initial hikes some regions have seen prices softening but analysts are not too worried as they see it as a temporary trend owing it to the ongoing festive season that impacts construction activity.

Taking this into account Edelwiss Research has revised their FY13 and FY14 Ebitda per tonne estimates by 21 per cent and 25 per cent respectively, for Ultratech. Ravi Sodah of Elara Capital observes that UltraTech is trading at an Enterprise Value of $164 a tonne on its FY14 capacity. The stock is still trading at 12 per cent discount to Ambuja ($185 a tonne) despite strong volume growth visibility for the next few years. Revised price of UltraTech to Rs 2,200-2,400 should also help in increasing Grasim’s target price.

VSF prospects improving
VSF capacity is expected to increase by about 40 per cent to 4,98,000 tonnes per annum (TPA) on account of ongoing expansion. Importantly, capacity addition will be with additional focus on specialty fibres. On raw material front, caustic soda capacity will increase by 70 per cent from 2,58,000 TPA to 4,41,00 TPA. The company will also benefit from completion of its Canada based-Terrace Bay Pulp Inc (TBP) acquisition which has a 285,000 tonne paper grade pulp capacity. This unit has restarted its operations from October. These backward integration steps should result in higher operating margins for the company.