BSE Sensex S&P CNX 19,576 5,944 Bloomberg GRASIM IN Equity Shares (m) 91.7 M.Cap. (INR b)/(usd b) 270.6/5.0 52-Week Range (INR) 3,511/2,216 1,6,12 Rel. Perf. (%) 2/-17/5 Financials & Valuation (INR b) Y/E March 2013 2014E 2015E Sales 276.4 285.3 331.2 EBITDA 56.6 60.2 74.8 Adj. PAT 35.6 36.0 49.1 Adj. EPS (INR) 278.7 290.3 400.9 EPS Gr. (%) -3.4 4.2 38.1 BV/Sh. (INR) 2,142 2,403 2,772 RoE (%) 13.0 12.1 14.5 RoCE (%) 18.1 18.0 20.4 Payout (%) 9.4 10.1 8.0 Valuations P/E (x) 10.6 10.2 7.4 P/BV (x) 1.4 1.2 1.1 EV/EBITDA (x) 6.8 6.4 4.7 EV/Ton (x) 139 115 93 6 May 2013 4QFY13 Results Update Sector: Cement Grasim Industries CMP: INR2,950 TP: INR3,747 Buy Results below expectations: Grasim Industries posted lower than expected numbers for 4QFY13. Net sales declined 1% YoY (grew 13% QoQ) to INR13.8b (v/s our estimate of INR12.4b), EBITDA was flat YoY/QoQ at INR2.14b and PAT was down 13% YoY (~7.5% QoQ) to INR2.1b. EBITDA margin contracted 210bp QoQ (flat YoY) to 15.6% (v/s our estimate of 20.6%). Reported PAT of INR3.72b includes ~INR2.04b of profit on sale of its 15% stake in Alexandria Carbon Black and 2.75% stake in Thai Carbon Black to another AV Birla Group company. Terrace Bay losses impact consolidated performance: Consolidated net sales grew 5% YoY to INR75.5b. EBITDA declined 3.4% YoY to INR13.7b, with EBITDA margin contracting 170bp YoY to 19.3%. VSF PBIDT was INR2.04b (v/s INR1.62b in 3QFY12 and INR2.51b in 4QFY12), impacted by decline in realizations. Grasim's proportionate PBIDT losses at Terrace Bay (Canada) for 4QFY13/FY13 were INR273.1m/INR602.1m. Consolidated PAT grew 1% YoY to INR8.2b. VSF margins remain under pressure: VSF business volumes were in line, with 0.3% YoY growth to 95,161 tons (v/s estimate of 95,071 tons). Realizations declined 2% YoY/QoQ to INR119/kg (v/s estimate of INR120.5/kg). Weak realizations coupled with higher caustic soda prices impacted PBITDA margin, which declined 50bp QoQ and 110bp YoY to 17.8% (v/s estimate of 18.6%). Downgrading estimates; maintain Buy: We are downgrading our consolidated EPS estimates for FY14/FY15 by 14.3%/6.6% to INR290/INR401 to factor in weak realization trend in both VSF and Cement business. The stock trades at 7.4x FY15E consolidated EPS of INR401, 1x FY15E BV, and implied valuations of ~USD92/ton. The board has maintained dividend at INR22.5/share. Maintain Buy with a target price of INR3,747. Jinesh Gandhi (Jinesh@MotilalOswal.com) + 91 22 3982 5416 Sandipan Pal (Sandipan.Pal@MotilalOswal.com); +9122 3982 5436 1 Investors are advised to refer through disclosures made at the end of the Research Report.
Standalone EBITDA below estimates; non-core divestments boost PAT Net sales down 1% YoY (+13% QoQ) to INR13.8b (v/s est INR12.4b), EBITDA flat YoY/QoQ to INR2.14b and PAT down 13% YoY (~7.5% QoQ) to INR2.1b. EBITDA margin declined by 210bp QoQ (flat YoY) to 15.6% (v/s est 20.6%). It accounted for ~INR2.04b of profit on sale of its 15% stake in Alexandria Carbon Black Co and 2.75% stake in Thai Carbon Black to another A.V.Birla Group company. As a result, reported PAT was higher at INR3.72b. Consolidated net sales grew by 5% to INR75.5b, with EBITDA margin decline of 170bp YoY to 19.3%, EBITDA de-growth of 3.4% YoY to INR13.7b and PAT growth of 1% YoY to INR8.2b. Consolidated performance was impacted by ~INR240m PBIDT loss in Terrace Bay. Snapshot of consolidated performance (INR m) 4QFY13 4QFY12 % YoY 3QFY13 % QoQ Net Sales 75,525 72,067 4.8 67,292 12.2 EBITDA 14,585 15,100-3.4 12,564 16.1 EBIDT Margins (%) 19.3 21.0-160bp 18.7 60bp Adj.PAT 8,176 8,088 1.1 5,492 48.9 Adj. EPS (INR) 89.1 88.2 1.1 59.8 49.0 Source: Company, MOSL VSF business pressure on pricing continues VSF business volumes were in-line with 0.3% YoY growth to 95,161 tons (v/s est 95,071 tons). VSF realizations declined 2% YoY/QoQ to INR119/Kg (v/s est INR120.5/Kg). Weak realizations coupled with higher caustic prices impact PBITDA margins into 17.8% (-50bp QoQ v/s -110bp YoY v/s est 18.6%). On consolidated basis, PBIDT was at INR2.04b (v/s INR1.62b in 3QFY12 v/s INR2.51b in 4QFY12) was impacted YoY by decline in realizations. Grasim's proportionate losses at recently acquired pulp JV, AV Terrace Bay (Canada) for 4QFY13/FY13 were INR273.1m/INR602.1m. AV Terrace Bay, the pulp JV acquired in 2QFY13 with Grasim holding a 40%, commenced operations in Oct-12, as planned. Its losses are expected to reduce and converted into profit in a phased manner through mill up-gradation and cost optimization. VSF business performance 4QFY13 4QFY12 % YoY 3QFY13 % QoQ Production (ton) 85,992 83,349 3.2 88,297-2.6 Sales volume (ton) 95,161 94,904 0.3 78,579 21.1 Net Turnover (INR m) 12,164 12,279-0.9 10,299 18.1 Avg Realizations (INR/ton) 119,150 121,293-1.8 121,668-2.1 PBIDT Margin (%) 17.8 18.9-110bp 18.3-50bp PBDIT (INR m) 2,160 2,320-6.9 1,880 14.9 Source: Company, MOSL 6 May 2013 2
Trend in VSF business volumes and realizations Trend in VSF business EBITDA Source: Company, MOSL Limited downside to pricing, upside dependent on cotton outlook and Chinese players rationality The management has indicated that amidst challenging near-term, it doesn't see any further downside to VSF pricing, as at current global VSF prices Chinese players would be making losses. The management indicated that current VSF pricing is slightly lower than 4QFY13 average pricing. Chinese players are operating at 65-68% utilizations. Hence it doesn't expect any further decline in VSF prices globally. While surplus capacity at China remains major overhang on margins, the outlook of cotton crop and rationality of Chinese players would be key to VSF pricing. Abnormally deficient rains in Karnataka, production at Harihar is likely to be impacted intermittently from February onwards till onset of monsoons, having impact of 40-50 operating days between Feb-Jul'13. VSF worst is over; investing aggressively to consolidate leadership in both businesses; Capex plan on schedule; new capex of INR2.2b for Epoxy plant at Vilayat; VSF Outlook: Given the prevailing global economic conditions, coupled with the surplus capacity in China, the VSF industry is expected to remain under pressure in the short term. Despite recent improvement in cotton prices, VSF prices currently are subdued. Given the fragile global economy, recovery of textile sector is expected to be slow in near term. Present market conditions will require balancing between volumes and prices for expanded capacity. Its capex program to add ~156,500 ton is on track, with Harihar brownfield addition of 36,000 commissioning operations, whereas Vilayat Greenfield addition of 120,000 units by 2QFY14. Further, it is investing INR2.38b for setting up an Epoxy plant (51,500 TPA) at Vilayat, expected to be operational in 3QFY14. It plans to set-up Greenfield VSF capacity in Turkey through JV with other promoter owned companies (33% stake for INR567m). The JV has acquired requisite land and is in process of getting regulatory approvals including environment clearance. Also, it is capacity expansion of pulp capacity in Domsjo by 45,000 tons to 255,000 tons completed during 4QFY13 and is in under stabilization phase. Cement Outlook: In Cement, the demand is expected to grow by an average 8% in the long term with housing, infrastructure and allied spending being the key 6 May 2013 3
value drivers. Industry capacity utilization is likely to improve to 80% in FY 2016 as the pace of capacity addition will slow down. Cost pressures are easing off with the decline in global commodity prices, particularly energy. It is setting-up 9.2MT capacity at Chhattisgarh and Karnataka, along with with split grinding units, split grinding units and packaging terminals. This capacity would be entirely operational by 1HFY14. It has already commenced Clinkerization unit of 3.3MT at Chhattisgarh, grinding units of 1.55MT and 0.6MT in Maharashtra and Gujarat, taking total cement capacity to 50.9MT. The board has approved fresh brownfield capacity addition of 2.9mt at Rajasthan (incl 2 split grinding units) with capex of INR20b and commissioning by Mar-15, taking total capacity in India to 61.45mt. Total cement capex for the above stood at INR114b (INR40.6b in FY14) Capex of ~INR53b in FY14 both cement and VSF business (INR Cr) Valuation and view We are downgrading FY14/15 EPS consol estimates by 14.3%/6.6% to INR290/INR401, to factor in weak realization trend in both VSF and Cement business (Ultratech EPS downgraded by 18%/10% for FY14/15). VSF business is expected to have bottomed-out on pricing and profitability; however recovery would be function of demand recovery and/or competing fibre pricing (which are at unsustainable levels). Cement business outlook is improving with expected improvement in demand and pricing. Further, its aggressive capex plan of investing INR86b over FY14-16 endorses our long term positive outlook for both the businesses. The stock trades at 7.4x FY15 Consol EPS of INR401, and 1.1x P/B and implied valuations of ~USD93/ton. Maintain Buy with target price of INR3,747 (SOTP based, valuing economic interest in cement business at 9x EV/EBITDA & 20% hold-co discount and VSF at 4x EV/ EBITDA). 6 May 2013 4
Grasim (Consolidated): Revised forecast (INR b) FY14E FY15E Rev Old Chg (%) Rev Old Chg (%) Net Sales 285.3 296.6-3.8 331.2 341.7-3.1 Net Profit 26.6 31.1-14.2 36.8 39.4-6.5 EPS (INR) 290.3 338.6-14.3 400.9 429.3-6.6 Source: MOSL Grasim: SOTP based fair value (INR m) Parameter Multiple FY14E FY15E Standalone VSF business EV/EBITDA (x) 4 41,340 49,859 UltraTech Cement @ 60.3% EV/EBITDA (x) 9 207,140 261,406 (post 20% holdco discount) Total EV 248,481 311,265 Less: Gross Debt (incl pro-rata in subs) 60,551 57,536 Add: Cash & liquid invest 37,534 59,311 Add: Group holdings @ 20% discount 30,590 30,590 Total Equity Value 256,054 343,630 Fair value (INR/sh) post demerger 2,792 3,747 Source: MOSL Implied Hold-co discount FY14E FY15E CMP 2,950 2,950 Market Cap 270,579 270,579 Add: Net Debt -7,573-32,365 EV 263,006 238,214 Less: EV of VSF @ 4x EV/EBITDA 41,340 49,859 Implied EV of Cement 221,666 188,355 Implied EV/EBITDA (x) 7.7 5.2 Implied EV/Ton (USD) 113 93 Implied Discount to UltraTech on replacement cost (%) 27 37 ACC/Ambuja on replacement cost (%) 15 28 UltraTech on EV/EBITDA (%) 26 36 ACC/Ambuja on EV/EBITDA (%) 22 42 Source: MOSL 6 May 2013 5
Grasim Industries: an investment profile Company description Grasim is a diversified company with cement and VSF being core business, accounting for 65% and 35% of revenues (post-restructuring). Its other business includes chemicals and textiles. The acquisition of UltraTech Cement, the cement division of L&T, by Grasim catapulted it to number one position in the Indian cement industry with total capacity under control of 51mt. Key investment argument Being largest player with total capacity of 51MT (existing capacity) under control and highest organic growth visibility, Grasim would be biggest beneficiary of any further increase in cement price. Global leader in VSF business, with backward integration in pulp, experiencing robust demand in both global and domestic markets. Key investment risks Cement sector is likely to add huge capacities in coming year which can result in significant volatility in cement prices. Declining competing fibre prices coupled with increasing cost would put pressure on VSF business profitability Recent development The board has maintained dividend at INR22.5/share. Valuation and view The stock trades at 7.4x FY15 Consol EPS of INR401, and 1.1x P/B and implied valuations of ~USD93/ton. Maintain Buy with target price of INR3,747 (SOTP based, valuing economic interest in cement business at 9x EV/EBITDA & 20% hold-co discount and VSF at 4x EV/EBITDA). Sector view We believe we have already witnessed bottom-ofthe-cycle utilization & profitability, and it should gradually improve hereon given sustainable demand drivers. Structural increase in cost base would necessitate higher cement prices. Continued revival in cement demand, witnessed in 2HFY12, would be key catalyst for the stock performance. Comparative valuations Grasim ACC ACEM P/E (x) FY14E 10.2 17.9 18.8 FY15E 7.4 19.3 18.5 P/BV (x) FY14E 1.2 3.1 3.3 FY15E 1.1 3.0 3.0 EV/Ton (USD) FY14E 115 119 165 FY15E 93 113 153 EV/EBITDA (x) FY14E 6.4 10.0 9.9 FY15E 4.7 10.1 9.7 EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY14 290.3 333.6-13.0 FY15 400.9 391.5 2.4 Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 2,950 3,747 27 Buy Stock performance (1 year) Shareholding pattern (%) Mar-13 Dec-12 Mar-12 Promoter 25.5 25.5 25.6 Domestic Inst 15.4 15.4 16.9 Foreign 41.1 39.7 38.6 Others 18.0 19.3 19.0 6 May 2013 6
Financials and Valuation 6 May 2013 7
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