Grasim Industries' earnings beat street expectations on every front.
In an interview to CNBC-TV18, Mihir Jhaveri, Director-Institutional Research, Religare Capital Markets along with Mangesh Bhadang, Research Analyst, Quant Capital share their outlook on Aditya Birla Group company Grasim Industries' financial performance in Q2FY15 and the road ahead.
Grasim Industries' earnings beat street expectations on every front. Its second quarter profit after tax fell 27.7 percent year-on-year to Rs 299 crore on standalone basis (includes viscose staple fibre and chemicals businesses) impacted by weak operational performance and higher tax cost. Profit in the year-ago period was Rs 413.5 crore.
Below is the verbatim transcript of Mihir Jhaveri and Mangesh Bhadang’s interview:
Q: The market seems to be quite pleased with the top line and the bottom line figure that we have seen. How do you react to these numbers?
Jhaveri: The numbers have been pretty good as far as consensus and our numbers are concerned. They have done margins of 12.4 on overall basis on the stand alone numbers. Expectation was somewhere around between 9 and 10 percent margins so overall result seems to be pretty good.
Q: What do you think could have been the real kicker here? At the operating level and the top line level there seems to be a very clear beat.
Jhaveri: Yes in terms of VSF business the expectation was somewhere around 5.5 percent EBIT margin which has come in at 9 percent. So that has been one factor which is reflected in good set of numbers for the standalone business.
Q: What would your outlook be, you think that the VSF business performance for this quarter could it be kind of one-off or do you think this is a cycle turning down we will continue to get more of these positive numbers in the next quarter as well?
Jhaveri: It is pretty volatile, it is very difficult to say because Chinese markets still remains an oversupply and Chinese VSF prices still remains weak. But Grasim is dependent largely on how Ultratech does because most of the value comes from the cement business and probably cement business looks pretty decent given that we are going into the busy construction season now and we will have the price increase, probably better demand pickup along with better pricing scenario coming in during the next two quarters. So overall it should look good for Grasim as well in the coming quarters not leaving aside VSF alone.
Q: How would you expect the cement business to behave and what is your call on realisations from here on?
Jhaveri: My call on realisations is largely that you will see the busy construction season coming in, you will have some pickup in demand momentum coming up in the country and you will also see Pan India wise price increases starts moving up. So that is my call over the next two quarters as far as cement is concerned.
Q: Would this result let you go back, rework your numbers and perhaps increase your target price on Grasim at all and just a word on the capacity utilisation as well. If you expect the company to start utilising more of its capacity in the second half.
Jhaveri: I think it will not do much to the target price. My target is around Rs 4500 and purely based on Ultratech’s target price so we will not have much change in terms of target price is concerned. So I think there is much more upside in Grasim and Ultratech going forward a well so it is a buy for me.
Q: Do you like what you see when it comes to the Grasim numbers?
Bhadang: The numbers are relatively better than what we were expecting but we cannot take this in future saying that all is well for the VSF business. The management has stated in the past and continue to say that VSF because of over capacity in China will remain under pressure and they have received some benefit of lower pulp prices in this quarter which was absent in the last couple of quarters. So overall, the number is better than what we were expecting but not something that can actually we can build for the future for Grasim’s VSF business.
Q: So the operating margin that we have seen this time around almost close to 13 percent do you think that is a sustainable figure or is it subject to perhaps volatility in the coming quarters?
Bhadang: Compared to last couple of quarters margins are definitely better at around 12.4 percent at an EBITDA operating profit level. But if you know about this company it is known to have margins in excess of 25 percent in the past. Because of over capacity in China global relative slowdown in the VSF demand all these things have led to lower margins. Now that can sustain for the next couple of quarters at least so we are going to see margins in the range of 9-12 percent. So nothing is better compared to the highs that we have seen.
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