We maintain our ?add? rating on Grasim Industries, noting attractive valuations (5x FY16e Ebitda), with a revised target price of R3,060 (from R2,800) a share. Prospects for the cement subsidiary look upbeat in the short-term owing to price increases taken through Q4 FY14 and revival in VSF margins hinges largely on a favourable turn of events in global demand-supply outlook as VSF capacities in China continue to incur losses at current realisations.
We have marginally revised our earnings estimates FY15/FY16 earnings estimates by 6.6% and 2.8% factoring in improved contribution from cement business.
Grasim reported net sales of R8,200 crore (9% y-o-y, 17% q-o-q), operating profit of R1350 crore (-7% y-o-y, 38% q-o-q) and net income of R580 crore (-6% y-o-y, 74% q-o-q) against our estimates of R8,000 crore, R1,260 crore and R660 crore, respectively.
VSF realisations continued to weaken ? global prices fell 4% sequentially as overcapacity in China continued to distort the demand-supply balance. Although Grasim?s VSF realisations were cushioned by an equivalent rupee depreciation during the quarter, they are still at a four-year low.
Healthy VSF volumes (+4% y-o-y, +2% q-o-q) were attributed to (1) currency depreciation, which improved pricing power compared with global peers; and (2) incremental production from the Harihar plant, commissioned earlier. VSF margin erosion was quite steep in this quarter ? operating profit margins declined to 7% in Q4FY14 (14% in Q4FY13, 10% in Q3FY14). The margins are at a four-year low as the VSF business faces the double whammy of weak realisations and continued cost pressure.
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