Grasim Industries Ltd
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GRASIM INDUSTRIES LTD. January 23, 2012 BSE Code: 500300 NSE Code: GRASIM Reuters Code: GRAS.BO Bloomberg Code: GRASIM:IN Grasim Industries Limited (GIL), a flagship of the Aditya Birla Group, is among Market Data India's largest companies in the private sector in terms of assets and turnover. Rating BUY Initially established as a textile manufacturer in 1947, GIL has successfully diversified into VSF (Viscose Staple Fiber), Cement, Sponge Iron and Chemicals CMP (`) 2,540 Target (`) over the past years. During FY11, the cement division contributed to 75% of 2,912 revenues with VSF contributing 21%. The other segments include textiles and Potential Upside ~15% chemicals that contributed 2% each. Duration Medium Term 52 week H/L (`) 2,625/1,981 All time High (`) 3,830 Investor’s Rationale Decline from 52WH (%) 3.2 Rise from 52WL (%) 28.2 Beta 0.74 GIL, a flagship of the Aditya Birla Group, is expected to garner a Mkt. Cap (` bn) 232.9 consolidated revenue growth at a ~CAGR 12% during FY’11-13E to `279.5 billion, Enterprise Value (` bn) 324.1 while the net profit is expected to outpace revenue growth by growing at a Fiscal Year Ended CAGR of over 37% to `42.8 billion during same period. FY10A FY11A FY12E FY13E GIL maintains leadership position in the two distinct businesses viz. VSF Revenue (`bn) 204.9 221.4 247.7 279.5 business and Cement business. In order to retain its leadership position in both Net Profit(`bn) 31.0 22.8 33.0 42.8 key businesses, the company has lined up total capex of around ~`144 billion to Share Capital 0.9 0.9 0.9 0.9 be spent over FY’12-FY’14E. Grasim is expanding its capacity in the VSF segment EPS (`) 337.6 248.5 359.5 466.2 from 0.33 million tonnes to 0.49 million tonnes in order to capitalize on future PE (x) 7.5 10.2 7.1 5.4 growth. P/BV (x) 1.9 1.6 1.3 1.1 EV/EBITDA (x) 5.1 6.3 6.7 5.7 GIL has reported an increase of 29.2% in its Q2 FY’12 net profit at `4,179 ROE (%) 24.7 15.6 18.9 20.4 million from `3,234 million in the corresponding period last year, supported by ROCE (%) 22.3 15.4 12.4 13.4 improved performance of both Cement and VSF businesses. Further, GIL’s net One year Price Chart sales surged by 27.3% at `56,492 million from `44,390 million on yoy basis, mainly due to 17% and 9% rise in its revenue from its VSF and cement business 2,700 20,000 respectively. 2,500 18,000 2,300 GIL’s cement division was a major contributor to the revenues, making 16,000 2,100 for 75% of the total revenues in FY’11. In order to accelerate the pace of growth 14,000 1,900 11 11 11 11 11 11 11 11 11 11 11 in cement, over the next 3 years, GIL has earmarked a capital outlay of US$2.5 11 - - - - - - - - - - - - Jul Jan Jun Oct Feb Apr Sep billion (`110 billion). Dec Aug Nov Mar May SENSEX GIL Considering the diversified nature of group’s business, we have valued Shareholding Pattern Sep’11 Jun’11 Diff. GIL on SOTP methodology, and assigned 15% holding company discount. We Promoters 25.6% 25.6% - recommend a Buy on the stock, with a target Price of `2,912, implying an upside of ~15% from current levels. Institutional 41.1% 41.4% (0.3) General Public 11.1% 11.4% (0.3) Others 22.2% 21.6% 0.6 Segmental Performance GIL derives major revenue from its cement business, as the cement division contributed 75% to the total revenues in FY’11. In line with this, the company’s VSF division - the second biggest contributor to the overall revenues provided 21% to the total revenues. Further, the chemical and textiles divisions contributed 2% each to the total revenues in FY’11. Due to the rise in the demand of VSF and rise in prices, the revenue of the VSF division register a growth of ~23% as compared to the previous year. The chemical business achieved record production and sales volume aided by a capacity utilization of 94%. The textile division also recorded a double digit revenue growth driven both by higher off-take in the Ready Made Garment segment and better pricing. However, the revenue from the Cement and Chemicals division has witnessed de-growth in revenues. The decrease in the average cement realization has affected the performance of the cement division. In terms of profitability, the decline in the caustic soda prices due to cheap imports has affected the performance of the chemicals division. However, the VSF division has maintained its healthy margin (PBIDT) at 33.7% led by higher volumes and prices supported by better product quality that resulted in higher profitability. Further, the PBIT of the cement division contracted due to cost inflation and pressure on cement realization during FY’11. Segment wise revenue break up for FY11 (consolidated) Geographic revenue break-up for FY11 (Consolidated) Chemicals, Rest of the 2% Textiles, 2% World, 10% VSF, 21% Cement, 75% India, 90% Strong Q2FY’12 results GIL has reported an increase of 29.2% in its Q2 FY’12 net profit at `4,179 million from `3,234 million in the corresponding period last year, supported by improved performance of both Cement and Viscose Staple Fibre (VSF) businesses. Further, Grasim’s net sales surged by 27.3% at `56,492 million from `44,390 million on yoy basis, mainly due to 17% and 9% rise in its revenue from its VSF and cement business respectively on yoy basis. Despite of higher input costs, GIL recorded improved performance in its business as its production grew by 20% with full capacity utilization at Nagda plant during Q2FY’12 while, sales volume surged by 17% on yoy basis. However, the performance of the pulp units was impacted by higher energy cost and scheduled annual maintenance. On account of growth in its production, GIL has reported a rise of 30.8% yoy in its EBITDA at `10,278 million from `7,855 million in the corresponding quarter last year Finally, net profit margin (NPM) of the company grew by 10bps to 7.1% in Q2 FY’12. VSF business - strong volumes drive performance Trend in VSF business volumes & realizations GIL has reported a strong growth in its VSF business volumes at 78,959 tonnes in Q2FY’12, a growth of 17% YoY and 44% QoQ 90 85.7 84.6 85.7 180 81.3 79.0 driven by better full utilization of capacity at the Nagda plant 80 74.0 160 67.4 67.3 67.5 and sharp rise in demand for inventory restocking. The Nagda 70 140 plant was remained shut for 25 days in Q2FY’11 and for 27 60 54.8 120 days in Q1FY’12. While, the realization from VSF business stood 50 100 at `125/kg, an increase of ~7% YoY while it declined by ~18% 40 80 QoQ. Further, the company expects the profitability from the 30 60 20 40 VSF business to improve in the near future on the back of 10 20 recovery in prices and volumes. Besides, for the VSF business, 0 0 Grasim expects global demand to grow at 5-6% in the long run. Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Volumes ('000 tonnes) Realizations (INR/KG) Cement division ~ major contributor to the revenues The cement division was a major contributor to the revenues, making for 75% of the total revenues in FY’11. In order to accelerate the pace of growth in cement, over the next 3 years, GIL has earmarked a capital outlay of US$2.5 billion (`110 billion). UltraTech Cement Ltd., (UltraTech), a subsidiary of the Company is in the process of setting up additional clinkerisation plants at Chhattisgarh and Karnataka together with grinding units, bulk packaging terminals and ready mix concrete plants across the country at a cost of `51,590 million. These expansions are expected to be operational in FY’14 and will augment the company’s cement capacity by 9.2 mtpa. UltraTech is working on further projects to consolidate its leaders hip position in the business. However, the cement sector is facing various challenges like demand supply mismatch, infrastructural bottlenecks and rising input costs. However, with the Government’s enhanced focus on urban as well rural infrastructure development and housing and further capital allocation towards infrastructure in the 12th – Five year plan that will drive the sector in the long run. Cement division performance during FY2011 FY’10 FY’11 % growth Grey Cement Capacity (mtpa) 48.7 51.7 6.2 Production (mt) 37.0 39.6 7.2 Sales Volume Cement 37.2 39.9 7.2 Clinker 2.2 1.6 -30.1 Realisation (`/tonne) Cement 3,503 3,360 -4.1 Clinker 1,785 1,697 -4.9 White Cement Volume (tonne) 509,054 546,661 7.4 Realisation (`/tonne) 8,304 8,571 3.2 Maintain leadership position in the VSF business– GIL is the market leader in the VSF sector worldwide with having a total capacity of over 744,000 tonnes per annum (TPA). In a move to maintain the leadership position in the VSF business and to gain from the growing demand for textiles in emerging market, the company is expanding its capacity at Harihar (Karnataka) by 36,500 TPA through a brownfield expansion at a cost of `4.49 billion.