grasim

Please refer to important disclosures at the end of this report 1

Y/E Mar (Rs cr) 1QFY2011 4QFY2010 % chg qoq 1QFY2010 % chg yoy

Net Revenue 5,119 5,475 (6.5) 5,134 (0.3)

Operating Profit 1,367 1,433 (4.6) 1,628 (16.0)

OPM (%) 26.7 26.2 53bp 31.7 (500bp)

Adj. Net Profit 575 654 (12.1) 744 (22.7)

Source: Company, Angel Research

Grasim’s adjusted net profit de-grew by 22.5% yoy during the quarter to Rs575cr. The company’s consolidated bottom-line de-grew due to poor performance by the cement division, which reported 27% yoy decline in operating profit to Rs1,089cr. However, the VSF division continued its impressive show and registered 54% yoy growth in operating profit to Rs304cr. Going ahead, the company’s 60.3% subsidiary, Ultratech will be the sole driver of its interests in the cement business post the Ultratech-Samruddhi merger, which comes into effect from August 1, 2010. On a stand-alone basis, the company would be focused primarily on its VSF business, which has recovered well over the past few quarters from the slump it witnessed in FY2009. We maintain a Buy on the stock.

OPM plunges 500bp yoy due to fall in cement realisations: Grasim’s consolidated top-line remained flat during the quarter on a yoy basis. Net sales of the cement division were down by 2.2% due to excess supply particularly in the southern and western regions. However, despatches grew 4% yoy to 9.85mn tonnes. The company’s OPMs fell by 500bp yoy to 26.7% largely due to the decline in operating profit of the cement business.

Outlook and Valuation: We have arrived at a SOTP-based Target Price of Rs2,216 for Grasim, by valuing its 60.3% stake in Ultratech at an average EV/tonne of US $105/tonne and 7x FY2012E EV/EBITDA after providing 20% holding company discount. The VSF business has been valued at 5x EV/EBITDA, We maintain a Buy on the stock.

Key Financials Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E

Net Sales 18,297 19,933 19,229 21,004

% chg 7.8 8.9 (3.5) 9.2

Net Profit 2,185 2,893 1,835 2,298

% chg (16.2) 32.4 (36.5) 25.2

FDEPS (Rs) 238 338 200 251

OPM (%) 23.7 29.0 24.4 26.4

P/E(x) 7.9 5.0 9.4 7.5

P/BV(x) 1.5 1.4 1.0 0.9

RoE(%) 21.1 24.0 12.3 12.4

RoCE(%) 18.3 21.5 13.4 14.1

EV/Sales 1.3 1.1 1.2 1.0

EV/tonne 123 103 96 85

EV/EBITDA 5.3 3.9 4.9 3.9

Source: Company, Angel research

BUY CMP Rs1,884 Target Price Rs2,216

Investment Period 12 Months

Stock Info

Sector

Bloomberg Code

Shareholding Pattern (%)

Promoters 25.5

MF / Banks / Indian Fls 26.5

FII / NRIs / OCBs 36.0

Indian Public / Others 12.0

Abs. (%) 3m 1yr 3yr

Sensex 4.2 13.8 19.7

Grasim* (29.7) (32.5) (36.4)

17,276

0.6

2952/1740

37846

Diversified

Avg. Daily Volume

Market Cap (Rs cr)

Beta

52 Week High / Low

* Grasim stock returns does not reflect the change in stock price due to samruddhi demerger

10

18,115

5,440

GRAS.BO

GRASIM@IN

Face Value (Rs)

BSE Sensex

Nifty

Reuters Code

Rupesh Sankhe 022-40403800; Ext 319

[email protected]

V Srinivasan 022-40403800; Ext 330

[email protected]

Grasim Industries Performance highlights

1QFY2011 Result Update | Diversified

August 3, 2010

Grasim Industries | 1QFY2011 Result Update

August 3, 2010 2

Exhibit 1: 1QFY2011 Performance Y/E March (Rs cr) 1QFY2011 4QFY2010 % chg qoq 1QFY2010 % chg yoy FY2010 FY2009 % chg

Net Sales 5,119 5,475 (6.5) 5,134 (0.3) 19,933 18,297 8.9

Net Raw Material Costs 893 1,137 (21) 1,034 (13.6) 3,742 3,991 (6.2)

(% of Sales) 17.4 22.2

20.1

18.5 21.6

Power & Fuel 1,022 928 10.1 858 19.1 3,523 3,756 (6.2)

(% of Sales) 20.0 18.1

16.7

17.4 20.3

Staff Costs 275 274 0.4 259 6.1 1,058.60 953.6 11

(% of Sales) 5.4 5.3

5.0

5.2 5.2

Freight & Forwarding 789.3 759.6 3.9 667 18.3 2,750 2,346 17.2

(% of Sales) 15.4 14.8

13.0

13.6 12.7

Other Expenses 771.9 942.8 (18.1) 688 12.2 3,073 2,919 5.3

(% of Sales) 15.1 18.4

13.4

15.2 15.8

Total Expenditure 3,751 4,042 (7.2) 3,506 7.0 14,147 13,966 1.3

Operating Profit 1,367 1,433 (4.6) 1,628 (16.0) 5,786 4,331 33.6

OPM (%) 26.7 26.2

31.7 30 23.7 6.2

Interest 91 90 1.6 82 10.8 334.6 306.7 9.1

Depreciation 267 258 3.7 240 11.3 994.7 865.8 14.9

Other Income 96 81 19.6 53 83.5 923.7 462.8 99.6

PBT (Incl. Extr. Items) 1,105 1,167 (5.3) 1,358 (18.6) 5,381 3,622 48.6

Extr. Income/(Expense) - -

336

336.1 0

PBT (Excl. Extr. Items) 1,105 1,167 (5.3) 1,694 (34.8) 5,045 3,622 39.3

Provision for Taxation 320 297 7.6 441 (27.5) 1,570 991.4 58.4

(% of PBT) 28.9 25.5

26.0

31.1 27.4

MI & Profits of Associates 210 215 (2.0) 174 21.2 714.1 444.5

Reported PAT 575 654 (12.1) 1,080 (46.8) 3,097 2,186 41.6

PATM 11.2 12.0

21.0

15.3 11.8

Adjusted PAT 575 654 (12.1) 744 (22.7) 2,893 2,185 32.3


Exhibit 2: Financial performance trend


15.0

25.0

35.0

-

2,000

4,000

6,000

4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11

Net Sales Net Profit OPM(Rs cr) (%)


August 3, 2010 3

Exhibit 3: 1QFY2011 - Actual v/s Angel Estimates (Rs cr) Actual Estimates Variation (%)

Net Sales 5,119 5,529 (7.4)

Operating Profit 1,367 1,415 (3.4)

Net Profit 575 595 (3.3)


Segmental performance

Cement business suffers from fall in realisation

The revenues of the cement business comprising the two subsidiaries Ultratech and Samruddhi declined by 2% yoy to Rs3,974cr. The consolidated cement sales volume was up by a moderate 4% affected by a reduced growth rate in the northern and eastern regions and continued slow-down in the southern region. The sales volume of Samruddhi grew 5% yoy to 5.14mt, while Ultratech posted 3% growth in sales volume to 4.71mt affected by disruptions in operations at West Bengal unit and shortage of wagons. The average net realisations were down by 7% yoy to Rs3,432 due to excess supply particularly in the southern and western regions. Realisations of Samruddhi were down by 6% yoy to Rs3,457/tonne, while Ultratech realisations fell by 8% due to its significant presence in the southern region.

Exhibit 4: Cement realisation trend


VSF business posts good results once again

Net sales of the VSF business grew 20% aided by the 21% growth in realisation to Rs117.9/kg. However, volumes of the division remained flat at 67,302MT. Realisations improved due to the better business scenario in the global markets as compared to 1QFY2010. However, profitability of the division was down by 22.8% on a qoq basis as there were signs of demand-side weakness due to inventory build up in the value chain and uncertainty in Europe. Operating margins surged by 790bp yoy to 35.3% (27.4%) despite the increase in pulp prices following higher consumption of captive pulp and lower caustic prices.

3,683 3,675

3,330

3,356 3,432

3,100

3,200

3,300

3,400

3,500

3,600

3,700

3,800

1QFY10 2QFY10 3QFY10 4QFY10 1QFY11

(Rs/tonne)


August 3, 2010 4

Exhibit 5: VSF business performance trend


Chemical business

Net revenues of the chemical business declined 1% yoy to Rs119cr during 1QFY2011 despite the 9% increase in the sales volume to 54,386 tonnes. The division’s OPM dropped by 320bp yoy to 26.2% on account of the 11% decline in ECU realisations to Rs18,455/tonne.

Exhibit 6: Grasim Segment-wise consolidated revenue Rs cr 1QFY11 1QFY10 Chg % yoy FY10 FY09 Chg %

Fibre and Pulp 968 806 20.1 3,940 2,915 35.2

Cement 3,974 4,061 (2.1) 15,476 13,512 14.5

Sponge Iron - 111

111 1,008 (89.0)

Chemicals 119 120 (0.8) 493 523 (5.7)

Textiles 93 73 27.4 351 318 10.4

Total (Gross) 5,154 5,171 (0.3) 20195 18496 9.2


195148

64110

198

355404 394

304

0

100

200

300

400

500

1Q

FY0

9

2Q

FY0

9

3Q

FY0

9

4Q

FY0

9

1Q

FY1

0

2Q

FY1

0

3Q

FY1

0

4Q

FY1

0

1Q

FY1

1

(Rs cr)


August 3, 2010 5

Investment Arguments

A diversified play with presence in cement and textiles: Grasim is a diversified player with interests in the cement and textile business. The company’s subsidiary, Ultratech, is India’s largest cement player with a pan-India presence with a capacity of 49mtpa. Ultratech is in the process of acquiring the overseas cement assets of Dubai-based ETA star, which will take its overall capacity to 52mn tonnes. Further, Ultratech which enjoys good brand equity is expected to be insulated from wide variation in regional demand and price volatility due to its pan-India presence. Going ahead, on a consolidated basis, Grasim’s cement business is expected to be driven by the large scale capacity addition.

Exhibit 7: Overall cement capacity of Grasim and its subsidiaries


Strong recovery in VSF business to boost profitability: Grasim, with total VSF capacity of 334,000 tonnes, is the third largest player in the world with 11% market share. This division made a strong recovery in FY2010 after struggling in FY2009 due to the substantial decline in textile consumption both in the domestic and western markets accompanied by fall in realisations. The strong recovery in the VSF market was largely on account of the fast recovery of the textile industry in the emerging markets and a decline in the global cotton production. From the lows of 4QFY2009, VSF realisations have recovered by 38% to Rs117/kg currently. The company proposes to expanding its VSF operations by setting a new 80,000tpa VSF plant at Vilayat in Gujarat at an investment of Rs1,000cr. Land for the project has been obtained and the environment clearance is also in place. This plant is expected to be operational in FY2013E. The company is also doubling the capacity of its overseas joint venture in China to 70,000tpa by March 2010. The company’s VSF business is well integrated with 75% of the pulp requirement and 100% of the caustic soda requirement sourced captively.

3034

42

4952

57

0

10

20

30

40

50

60

FY07 FY08 FY09 FY10 FY11E FY12E

(mtpa)


August 3, 2010 6

Outlook and Valuation

We expect Grasim’s top-line to register moderate 2.6% CAGR, primarily due to the pricing pressure in its cement business. We expect the company’s cement realisations to decline by around 7% in FY2011E, but recover by 5% in FY2012E. VSF demand is likely to remain stable in the short to medium term on the back of improved demand fallowing the fast recovery in the textile sector in emerging markets coupled with the decline in global cotton production. However, an increase in input prices (pulp and sulphur) is expected to exert pressure on margins. VSF realisations could also witness downward pressure on large capacity expansion in China.

At current levels, the stock trades at a P/E of 7.5x and an EV/EBITDA of 3.9x on FY2012E estimates. We have valued the company’s 60.3% stake in Ultratech at an average EV/tonne of US $105/tonne and 7x FY2012E EV/EBITDA after providing 20% holding company discount, to arrive at a value of Rs1,568/share. We have valued the VSF business at 5x EV/EBITDA on FY2012E estimates. We maintain a Buy on the stock, with a Target Price of Rs2,216.

Exhibit 8: SOTP based target price based on FY2012E Parameter Valuation Parameter Rs per share

Grasim stake in Ultratech@ 20% holding company discount EV/EBITDA @7x, EV/Ton @US$105/Ton 1,568

VSF EBIDTA*5 355

Chemicals & Others EBIDTA*4 59

Cash & Investments 234

Per share value 2,216

Source: Angel Research

Exhibit 9: Change in estimates (Rs cr) FY2011E FY2012E

Earlier Revised Var (%) Earlier Revised Var (%)

Net Sales 19,229 19,229 - 21004 21,004 -

Operating Exp 14,573 14,532 (0.3) 15,561 15,466 (0.6)

Operating Profit 4,656 4,697 0.9 5,443 5,537 1.7

Depreciation 1,164 1,150 (1.2) 1,210 1,226 1.3

Interest 335 350 4.5 290 360 24.1

PBT 3,748 3,743 (0.1) 4,462 4,477 0.3

Tax 1,142 1,117 (2.2) 1,324 1,326 0.2

PAT 1,906 1,835 (3.7) 2,389 2,298 (3.8)



August 3, 2010 7

Exhibit 10: Recommendation summary Company Reco. CMP Tgt. Price Upside FY2012E FY2012E FY2010-12E FY2012E FY2012E

(Rs) (Rs) (%) P/BV (x) P/E (x) EPS CAGR (%) RoCE (%) RoE (%)

ACC Neutral 830 - - 1.9 11.1 (7.5) 21.3 19.0

Ambuja Cements Neutral 117 - - 2.2 15.0 (3.5) 19.1 16.3

Grasim Buy 1,884 2,216 17.6 0.9 7.5 (13.8) 14.1 12.4

India Cem Buy 103 135 31.5 0.8 9.4 0.4 5.8 4.7

JKLC Buy 61 92 52.1 0.6 4.2 (2.3) 12.8 14.9

Madras Cem Buy 100 141 41.1 1.3 9.9 (15.3) 8.4 10.7

Ultratech Buy 858 1,087 26.7 1.5 11.6 (7.9) 15.2 14.0



August 3, 2010 8

Profit and loss statement Y/E March (Rs cr) FY07 FY08 FY09 FY10 FY11E FY12E

Net Operating Income 14,095 16,973 18,297 19,933 19,229 21,004

Total operating income 14,095 16,973 18,297 19,933 19,229 21,004

% chg 37.9 20.4 7.8 8.9 (3.5) 9.2

Total Expenditure 10,123 12,015 13,966 14,147 14,532 15,466

Net Raw Materials 2,929 3,603 3,991 3,742 4,049 4,509

Other Mfg costs 2,473 2,907 3,756 3,523 3,723 3,884

Personnel 673 845 954 1,059 1,101 1,252

Other 4,048 4,659 5,265 5,823 5,660 5,821

EBITDA 3,972 4,959 4,331 5,787 4,697 5,537

% chg 92.0 24.8 (12.7) 33.6 (18.8) 17.9

(% of Net Sales) 28.2 29.2 23.7 29.0 24.4 26.4

Depreciation& Amortisation 610 670 866 995 1,150 1,226

EBIT 3,362 4,289 3,465 4,792 3,547 4,311

% chg 123.3 27.5 (19.2) 38.3 (26.0) 21.5

(% of Net Sales) 23.9 25.3 18.9 24.0 18.4 20.5

Interest & other Charges 229 222 307 335 350 360

Other Income 318 463 463 923 546 525

(% of PBT) 9.2 10.2 12.8 17.2 14.6 11.7

Share in profit of Associates (0) 2 16 - - -

Recurring PBT 3,451 4,530 3,621 5,042 3,743 4,477

% chg 122 31 (20) 49 (30) 20

Extraordinary (Expense)/Inc. - 282 - 338 - -

PBT (reported) 3,451 4,812 3,621 5,380 3,743 4,477

Tax 1,092 1,466 991 1,570 1,128 1,329

(% of PBT) 31.6 30.5 27.4 27.5 30.1 29.7

PAT (reported) 2,359 3,346 2,630 3,810 2,615 3,148 Add: Share of earnings of associate

(0) 2

- - -

Less: Minority interest (MI) 392 457 444 714 780 850

PAT after MI (reported) 1,968 2,890 2,185 3,096 1,835 2,298

ADJ. PAT 1,968 2,607 2,185 2,893 1,835 2,298

% chg 89.9 32.5 (16.2) 32.4 (36.5) 25.2

(% of Net Sales) 14.0 15.4 11.9 14.5 9.5 10.9

Basic EPS (Rs) 215 315 238 338 200 251

Fully Diluted EPS (Rs) 215 315 238 338 200 251

% chg 89.1 46.8 (24.4) 57.1 (46.5) 25.2


August 3, 2010 9

Balance Sheet Y/E March (Rs cr) FY07 FY08 FY09 FY10 FY11E FY12E

SOURCES OF FUNDS

Equity Share Capital 92 92 92 92 92 92

Preference Capital 6 35 57 57 57 57

Reserves& Surplus 6,464 9,017 11,421 12,383 17,190 19,431

Shareholders Funds 6,562 9,144 11,570 12,532 17,339 19,580

Minority Interest 859 1,276 1,670 3,754 3,754 3,754

Total Loans 4,873 5,577 5,916 5,599 6,099 6,399

Deferred Tax Liability 1,153 1,158 1,592 2,006 2,006 2,006

Total Liabilities 13,447 17,154 20,748 23,891 29,198 31,739

APPLICATION OF FUNDS

Gross Block 12,528 13,729 19,062 20,944 22,544 24,044

Less: Acc. Depreciation 6,012 6,340 6,825 7,165 8,314 9,541

Net Block 6,515 7,389 12,237 13,779 14,230 14,503

Capital Work-in-Progress 1,957 5,534 1,982 773 1,973 3,073

Goodwill 1,844 1,991 2,001 2,007 2,007 2,007

Investments 2,272 1,661 3,563 6,676 8,715 9,415

Current Assets 3,301 4,258 4,534 4,545 5,838 7,017

Cash 369 290 227 237 549 2,174

Loans & Advances 748 1,205 1,261 1,237 1,317 1,317

Other 2,184 2,763 3,046 3,071 3,972 3,526

Current liabilities 2,443 3,678 3,568 3,889 3,565 4,277

Net Current Assets 858 580 966 656 2,273 2,740

Mis. Exp. not written off - - - - - -

Total Assets 13,447 17,154 20,748 23,891 29,198 31,739


August 3, 2010 10

Cash flow statement Y/E March (Rs cr) FY07 FY08 FY09 FY10 FY11E FY12E

Profit before tax 3,451 4,812 3,621 5,718 3,743 4,477

Depreciation 610 670 866 995 1,150 1,226

Change in Working Capital (31) (56) 420 (372) 1,466 838

Less: Other income 318 463 463 923 546 525

Direct taxes paid 1,092 1,466 991 1,570 1,128 1,329

Cash Flow from Operations 2,620 3,497 3,453 3,848 4,685 4,687

(Inc)/ Decin Fixed Assets (2,553) (4,777) (1,782) (673) (2,800) (2,600)

(Inc)/ Dec in Investments (920) 611 (1,902) (3,113) (2,039) (700)

(Inc)/ Dec in loans and advances

Other income 318 463 463 923 546 525

Cash Flow from Investing (3,155) (3,703) (3,222) (2,863) (4,293) (2,775)

Issue of Equity - - - - - -

Inc./(Dec.) in loans 1,190 704 339 (317) 500 300

Dividend Paid (Incl. Tax) 294 355 327 323 230 227

Others 229 222 307 335 350 360

Cash Flow from Financing 667 127 (295) (974) (80) (287)

Inc./(Dec.) in Cash 132 (79) (63) 10 312 1,625

Opening Cash balances 237 369 290 227 237 549

Closing Cash balances 369 290 227 237 549 2,174


August 3, 2010 11

Key Ratios Y/E March FY07 FY08 FY09 FY10 FY11E FY12E

Valuation Ratio (x)

P/E (on FDEPS) 8.8 6.0 7.9 5.0 9.4 7.5

P/CEPS 5.8 4.3 4.9 3.4 4.6 3.9

P/BV 2.6 1.9 1.5 1.4 1.0 0.9

Dividend yield (%) 1.7 2.1 1.9 1.9 1.3 1.3

EV/Sales 1.5 1.3 1.3 1.1 1.2 1.0

EV/EBITDA 5.5 4.5 5.3 3.9 4.9 3.9

EV / Total Assets 1.6 1.3 1.1 0.9 0.8 0.7

Per Share Data (Rs)

EPS (Basic) 214.6 315.2 238.3 337.5 200.2 250.6

EPS (fully diluted) 214.6 315.2 238.3 337.5 200.2 250.6

Cash EPS 323.8 438.1 381.2 560.8 410.6 477.0

DPS 32.1 38.8 35.7 35.2 25.1 24.8

Book Value 715.7 997.3 1,261.9 1,366.8 1,891.1 2,135.4

Dupont Analysis

EBIT margin 23.9 25.3 18.9 24.0 18.4 20.5

Tax retention ratio 68.4 69.5 72.6 72.5 69.9 70.3

Asset turnover (x) 1.2 1.1 1.0 0.9 0.7 0.7

ROIC (Post-tax) 20.0 19.9 13.5 15.7 9.5 10.4

Cost of Debt (Post Tax) 3.7 3.0 3.9 4.2 4.2 4.1

Leverage (x) 0.7 0.6 0.5 0.5 0.4 0.3

Operating ROE 31.4 30.6 18.6 21.0 11.5 12.1

Returns (%)

ROCE (Pre-tax) 28.4 28.0 18.3 21.5 13.4 14.1

Angel ROIC (Pre-tax) 39.5 46.1 26.8 25.6 15.6 17.5

ROE 34.5 33.2 21.1 24.0 12.3 12.4

Turnover ratios (x)

Asset Turnover (Gross Block) 1.2 1.3 1.1 1.0 0.9 0.9

Inventory / Sales (days) 32.7 33.4 39.6 40.3 43.2 41.1

Receivables (days) 18.3 19.8 18.4 15.6 23.6 24.1

Payables (days) 79.5 93.0 94.7 96.2 93.6 92.5 Working capital cycle (ex-cash) (days)

11.7 8.4 10.3 10.6 20.3 19.9

Solvency ratios (x)

Net debt to equity 0.7 0.6 0.5 0.4 0.3 0.2

Net debt to EBITDA 1.1 1.1 1.3 0.9 1.2 0.8

Interest Coverage (EBIT / Interest) 14.7 19.3 11.3 14.3 10.1 12.0


August 3, 2010 12

Research Team Tel: 022 - 4040 3800 E-mail: [email protected] Website: www.angeltrade.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment.

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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement Grasim Industires 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors. Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%)

grasim

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