Grasim dip offers good entry opportunity

Grasim Industries that saw 52 week highs of Rs 4023.60 in early March, however has cooled down to Rs 3493 levels now. This has been in the backdrop of concerns on near-term cement demand, weakness in VSF segment as broader indices too witnessing correction.

VSF continues to be in over capacity scenario and hence the pricing pressure has intensified. There has been a sharp decline in prices of competing fibers during March quarter. As prices of cotton remain range-bound with a downward bias, PSF prices saw sharp decline of 15% exerting pressure on VSF prices. In this backdrop average realisations have declined (down 7% in March’15 quarter) to about Rs 112 per kg. This has led profits before interest, depreciation, tax and amortisation (PBIDT) to decline 25% y-o-y to Rs 97 crore and almost 28% sequentially in the March quarter.

The respite however is likely to be provided by the volume growth on the back of capacity expansions. With full commissioning of Vilayat Greenfield capacity, the company’s VSF capacity at 4,98,225 Metric tonne has increased by 32% year-on-year. The impact was seen in March’14 quarter also with the VSF segment contributing to about 16% of overall revenues; its revenues grew by 19% y-o-y to Rs 1405 crore. The volume growth is likely to continue growing though realisations in the segment are likely to remain under pressure in the near-term.

For Grasim, cement segment represented by Ultratech remains the main growth driver. Though the March quarter had seen decline in cement demand that impacted overall performance of Grasim too, however Ultratech having pan India presence still saw highest average realisations of Rs 5195 a ton, higher than peers. It has been able to control costs by increasing pet coke usage even as lower coal prices helped despite increasing limestone royalties due to the MMRDA act. Ultratech’s EBIDTA per tonne at Rs 1109  was highest amongst peers growing 27.2% y-o-y and 6.3% sequentially. 

The cement demand is likely to get push during the second half of current fiscal as the impact of government’s push to infrastructure sector percolates. The demand in the housing sector is also likely to improve with higher government's focus and impact of softening interest rates. Thus improved outlook for cement is likely to provide major boost to the prospects of Grasim as increasing volumes from VSF also provide some impetus to revenues.

Analysts at Religare say that they expect Grasim’s consolidated earnings to be driven by Ultratech that is set to benefit from its expanded capacity and a more extensive pan-India presence. He has a price target of Rs 5,075 whereas consensus target price for the stock as per Bloomberg stands at Rs 4484 indicating a 28.6% upside from current levels.

The key risk is the monsoons. A weak monsoon would impact demand especially from rural India taking away soon sheen from the expected urban and infra demand growth.