Hold Grasim Industries; target of Rs 2550: Emkay

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Hold Grasim Industries; target of Rs 2550: Emkay

Emkay Global Financial Services has recommended hold rating on Grasim Industries with a target of Rs 2550, in its January 25, 2012 research report.

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Emkay Global Financial Services has recommended hold rating on Grasim Industries with a target of Rs 2550, in its January 25, 2012 research report.

"Grasim's Q3FY12 EBITDA at Rs2.8bn (-23% yoy) came in below estimates (Rs3.53bn) on account of lower than estimated VSF volumes and higher costs. Though VSF realizations improved 4.4% yoy to Rs128/kg (due to rupee depreciation), volumes disappointed with a 7.6% decline (as global slowdown and Eurozone uncertainties affected demand for VSF) thereby dragging VSF sales by 3.9% yoy to Rs10.85bn (vs est of Rs11.53bn). Consequently net sales for the quarter at Rs12.38bn (+2% yoy) came in below estimates of Rs13.12bn. On the cost front higher landed cost of imported pulp due to rupee depreciation and super inflated energy costs have resulted in margin contraction of 8820bps to 25.6% for the VSF segment. However chemical division delivered better than estimated performance. With 6% yoy growth in chemical volumes and 34% improvement in ECU realizations, revenues from the chemical division at Rs2.09bn (vs estimates of Rs1.88bn) grew 42% yoy. Led by better realizations driven by higher caustic prices, margins for the segment expanded 129bps yoy to 22.6%."

"Despite disappointing operational performance PAT at Rs2.74bn, -3% yoy is in line with estimates of Rs2.7bn on account of higher other income of Rs1.14bn that the company received through dividends from subsidiaries & high investment yields. Also Grasim's tax rate for the quarter at 21.8% was lower than our estimates of 32%."

"VSF scenario continues to remain uncertain due to 1. Demand remains volatile with the adverse macro environment and global slowdown affecting consumption. Also, due to high volatility in the prices for VSF and the macro credit environment, inventory levels in the value chain have been fluctuating thereby affecting volumes. 2. Even though the prices for pulp are expected to moderate in the near term, currency fluctuations and energy costs (post CIL's new pricing mechanism) are bound to exert pressures on the profitability. In the cement business , though sharp price hikes ensured recovery in UTCEM's profitability in Q3FY12 with normalized level of EBIDTA/t, cement demand remains sluggish (12M rolling average growth at 5.4%) raising question on medium to long term sustainability of price hikes."

"Additionally, CIL's new pricing method (Pricing on Gross Calorific Value (GCV) compared to Useful Heat Value (UHV)) with effect from Jan-12 is effectively a 28% coal price hike intensifying cost headwinds further. This has led to 3.9% downgrade in our earnings for Ultratech. Led by revision in our volumes estimates for VSF and higher costs in both VSF and cement segments we have revised our estimates for EBITDA on consolidated level downwards by 3.9% for FY12 and 5.1% for FY13. However due to higher other income and lower tax expenses, PAT estimates for FY12 are revised upwards by 0.9% while FY13 earnings are cut by 4.9%. Consequently we downgrade rating to HOLD with revised target price of Rs 2550 (Rs 2700 earlier)," says Emkay Global Financial Services research report.

Institutional holding more than 40% in Indian cos

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