GRASIM IND : LEADER IN VSF & CEMENT SECTOR !!!

Scrip Code: 500300 / GRASIM

CMP:  Rs. 2504.85; Accumulate at Rs. 2480 - Rs. 2505 current levels.
Short Term Target : Rs. 2800; Medium to Long term Target: Rs. 3060; STOP LOSS – Rs. 2281.00; Market Cap: Rs. 22,992.79 Cr; 52 Week High/Low: Rs. 3510.00 / Rs. 2105.65.

Total Shares: 9,17,93,094 shares; Promoters : 2,34,28,918 shares –25.52 %; Total Public holding : 6,83,64,176 shares – 74.48 %; Book Value: Rs. 1102.68; Face Value: Rs. 10.00; EPS: Rs. 128.46; Dividend: 225.00 % ; P/E: 19.49 times; Ind. P/E: 13.86; EV/EBITDA: 4.93.

Total Debt: 8,427.34 Cr; Enterprise Value: Rs. 31,192.68 Cr.

GRASIM INDUSTRIES: GRASIM IND was incorporated in 1947 and is based in Gwalior, Madhya Pradesh, India. The company was earlier known as Gwalior Rayond Silk Mfg (Wvg). Co. Ltd and changed its name to Grasim Industries on 22 July 1986. Grasim Industries is a flagship company of Aditya Birla Group. Grasim Industries Limited engages in the manufacturing and sale of Viscose Staple Fibre (VSF), cement, chemicals, and textiles worldwide. The company’s products include grey cement, white cement, chemicals, sponge iron, and textiles. The company’s VSF is a biodegradable fibre used in apparels, home textiles, dress material, knitted wear, and non-woven applications; and cement products comprise grey and white cement, and ready mix concrete. The company’s chemical products consist of rayon grade caustic soda; stable bleaching powder used in water purification, sanitation, and as a bleaching agent; poly aluminum chloride used in water treatment, paper sizing, and effluent treatment; and chloro sulphonic acid used in vinyl sulphate, the raw material for dyes and intermediates, saccharin, drugs, and pharmaceuticals. The company’s textile products include fabrics, synthetic yarns, worsted dyed yarn spun, and branded suiting under the brand names Grasim and Graviera. Through its subsidiary, Grasim Industries Limited sells its products through a network of 50 showrooms, as well as through 200 wholesalers and 25,000 multi-brand outlets. In August 2011 Grasim Industries acquired Aditya Birla Power Ventures Ltd and on March 2012 it acquired 33.33 % interest in Aditya Group AB, Sweden. Grasim industries is locally compared with ACC, Jaiprakash Associates ltd, Ultratech Cement ltd, Century Textiles and Industries ltd and globally compared with Lafarge Cement Zambia PLC, Oman Cement Company, Bamburi Cement, Holcim Liban, Kuwait Cement Company

Investment Rationale:

Grasim Industries is India’s one the best and biggest VSF & Cement Company. Phase I of the Harihar captive Power Plant of 20 MW, Karnataka, and expansion of 18,250 tons per annum was commissioned in Sep’12; phase II of similar capacity in May’13. The Greenfield project at Vilayat, Gujarat, (120,000 tons) will be commissioned in 3QFY14 in a phased manner. A major revamp of the Nagda plant has begun, to be completed in phases over the next two years. The fresh capacities and upcoming projects would support strong volume growth, starting 2HFY14. Company has commissioned 3.3MT clinkerisation plant in Karnataka. It had already commissioned clinker unit of 3.3MT at Chattisgarh and a grinding unit of 1.55MT at Hothi, Maharashtra during Q4FY13. Cement grinding capacity will be operational in phases in line with clinker production. Company has further sanctioned a capex of Rs 21 bn towards setting up of grinding units, modernization and RMC plants across the country. Company expects volume increase to reflect from H2FY14 from the recently commissioned capacities. Looking at the capacity expansion underway in both cement as well as the VSF segment, a boost in revenue may be seen from volumes. The cement segment of Grasim is through Ultratech where Grasim hold 60.3 % stake. The capacity in Ultratech is seen to grow from 52.5 Million Tonnes Per Annum to 54.5 MTPA during June 2013 quarter while 10 MTPA capacity expansions are underway. The muted demand and realisation in Cement is likely to get a boost once the monsoon season gets over. The global industry scenario seems to be improving. The demand supply imbalance in China and high cotton inventory continued to impact VSF realisation with sharp decline in May 2013 but stabilisation was seen in July onwards. With the commissioning of Harihar Expansion the production was up by 5 % on year on year basis. The Kharach Unit operated at low capacity for 45 days due to repairs of water canal supplying canal by state government but with the new reservoir at Nagda ensured no loss of production. Due to depreciation of Rupee the realisation remained under pressure in line with the global trend.

Outlook and Valuation:

Grasim Industries is well placed to take advantage of capacity expansion in both its segments. It is expected that government may increase spending before election which will in tuen boost the demand from rural India. The water scarcity problems that had hit the demands in Karnataka and Maharashtra are expected to get resolved. The subdued stock prices here offers a good opportunity for the investors to enter the stock and given the likely recovery in the cement business and with improving balance sheet the stock somewhat provides a defensive opportunity in this volatile markets. The 1QFY14 VSF volumes went up 0.7 % YoY, the realisations was at Rs. 126/kg which saw a dip of 8.3 % YoY. Realisations were hit by a demand-supply imbalance in China and depressed cotton prices due to huge cotton inventories. Despite the Kharach unit operating at low capacity for 45 days due to water supply issues, production rose 5 % YoY. PAT slid 17 % YoY but was higher than expected due to a lower tax charge of 6.6 % of PBT. Grasim expects prices in the near term to be influenced by the trend in cotton prices and recovery in the global economy mainly from China and US. The long-term outlook is bright on a rising population, developing-markets consumption and a preference for comfort fabric leading to a rise in demand for quality cellulosic fibre. Management expects range-bound VSF prices and margins in the near term. Expect profitability in the rest of FY14 to be better, led by expansion at Harihar, Vilayat, and a marginal recovery in VSF prices. At current price of Rs. 2504.85, the stock is trading at 21.97 x P/E for FY14E and company could report an  EPS of Rs. 114 for FY14E and Rs. 135 for FY15 estimates. One can buy GRASIM IND Limited with a target price of Rs. 3060.00 for Medium to Long term investment. And for the shorter term the target could be Rs. 2800

SOTP Valuation :-

Business Division	Value Per Share (in. ₹ )
VSF Division	374.15
Value of Chemical Division	108.04
Less :NET DEBT (standalone)	(173.76)
TOTAL	308.43
60.3 % in Ultratech @20% holding disc.	2534.34
Investments @20% holding disc.	216.56
TOTAL VALUE PER SHARE	3059.33

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	4,876.30	5,181.40	5,546.00	6,635.80
NET PROFIT (₹ Cr)	1,177.60	1,021.60	1050.60	1,234.80
EPS (₹)	128.00	111.00	114.00	135.00
PE (x)	19.90	22.90	22.30	19.00
P/BV (x)	2.60	2.30	2.10	2.00
EV/EBITDA (x)	18.70	22.70	22.20	15.90
ROE (%)	13.70	12.80	10.00	10.80
ROCE (%)	10.60	7.80	6.50	8.10

I would buy GRASIM INDUSTRIES with a price target of ₹ 3060 for Medium to Long term target, for Short term target could be Rs. 2800. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or ₹ 2281.00 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

*As the author of this blog I disclose that I do hold GRASIM INDUSTRIES LTD in my investment portfolio. 

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