Stock Review: Grasim Industries

Grasim Industries' consolidated results were broadly better than analysts' expectations, thanks to a sharply improved performance in its smaller viscose staple fibre (VSF) and wood pulp division.

In its cement business through its subsidiary UltraTech, there has been a pick-up in realisations on a per tonne basis YoY in the quarter under review, but the pressure on account of higher input costs has not eased.

No doubt, the consolidated results of the fourth quarter are not strictly comparable with a year earlier, but the company's operating profit margin fell on a YoY basis to 25.4% in the quarter under review. Its consolidated net sales grew 18.8% YoY to . 6,502 crore in the fourth quarter, but a sharply improved performance in the VSF business helped its net profit surge 34.3%. The results were declared after the close of trade on Thursday, but the stock had already gained 0.3% to close at . 2,362. This stock had earlier reached its 52-week high in early April and has corrected about 10% since then.

Going forward, the company's VSF division is expected to be a key driver for growth in the short term, and that's despite the recent correction in alternative input prices for the textile industry like cotton, from record highs. And that's because analysts are still bullish on the demand prospects for VSF, given the revival of the global textile industry.

In addition, the Aditya Birla group had recently acquired a Swedish speciality pulp maker and bio-refiner, and Grasim would control a one-third stake in the holding company that would control this over-seas player. This acquisition should help significantly enhance the captive access of key raw materials for Grasim's VSF business at a time when it is scaling up its capacties in this segment over the next few years.

In the company's cement business, the outlook remains difficult in the medium term, given expanding capacities in key markets of in the South, and a sluggish demand growth. However, in the June '11 quarter, one typically will witness peak construction activity in the run-up to the monsoon season, and it could help the company deal better with higher input prices.