Stock Review: GRASIM Industries

Grasim Industries benefited from an improved performance in both its cement and viscose staple fibre (VSF) businesses in the June 2011 quarter. As a result, the company's consolidated operating profit margin rose 90 basis points y-o-y to 27.6% in the first quarter of FY12, while its net sales rose 16% to . 5,936.5 crore. However, Grasim's consolidated results of June '11 quarter are not strictly comparable with a year earlier, as its subsidiary Ultratech's acquisition of UAEbased Star Cement became effective from late August '10. Meanwhile, Grasim was able to offset higher operational costs like power & fuel and freight in its key cement division, with realisations improving nearly 10.7% yo-y on a per tonne basis in the first quarter of FY12. Its consolidated cement volumes also rose 5% yo-y to 10.3 million tonnes in the quarter under review.

It also made gains in its VSF business, benefitting from higher realisations on a per-tonne basis in the quarter under review, despite sales volumes weakening by nearly 19% y-o-y. As a result, Grasim's consolidated net profit increased 30.7% y-o-y to . 751.7 crore in the June '11 quarter. The company declared its results on Saturday, and by Monday, the stock gained 0.3% to . 2,199.9.

Going forward, the outlook for the cement division is rather hazy in the short term, given the ongoing monsoon season and a major curtailment in construction activity. Also, there are concerns that higher interest rates could hit cement demand from key user industries like real estate, in the short term. Apart from that, key input costs for the cement industry remain at elevated levels.

As for the company's VSF business, analysts highlight that VSF prices have shown some signs of weakness over the past few weeks, at a time when competing inputs for the textile industry like cotton, have also seen a decline in their prices. Nevertheless, Grasim remains one of the most cost-efficient players, globally in its VSF business. Also, it has enhanced its captive access to key inputs for the VSF business. Grasim recently acquiring a onethird stake in Aditya Holding which had acquired a leading Swedish pulp manufacturer.
Grasim trades at a consolidated P/E of nearly 8.2 times on a trailing four-quarter basis and appears reasonably valued.