Grasim Industries Limited

Industry

Viscose Staplr Fibre 

The long-term outlook for the VSF business remains positive. On the demand front, global VSF consumption has been growing over the past five years, fuelled by an increasing preference for comfort fabrics due to the changing climatic pattern coupled with rising income levels. The demand for VSF in India is also projected to be strong on account of opportunities thrown up by the Quota abolition.

Chemicals

The demand for caustic soda is expected to grow at a healthy rate, buoyed by the anticipated high growth in domestic Alumina production. However, as new capacity additions come in, prices are expected to remain subdued due to the supply pressures.

Cement

The Cement industry has demonstrated a healthy growth of 8.6% in the last five years. With the Indian economy continuing its growth path, cement consumption is expected to grow at 9-10%. The increase in industrial investment and expectations of higher spending on infrastructure portend well for the sector. The robust demand from residential and commercial construction will continue to be the major growth drivers. Capacity additions have been lower than the consumption growth in the last two years. Consequently, the cement industry increased the capacity utilisation levels to cater to the higher demand. Utilisations are expected to remain at higher level during FY08. Enthused by the industry performance during the last 15 months, additional capacities of around 90 million tonnes have been announced by different manufacturers. These capacities, as per such announcements, are expected to be commissioned over three-year period, creating an imbalance in demand and supply resulting in impact on realization. However, impact be partially mitigated by increased volumes and improved cost efficiencies.

Sponge Iron

Sponge iron will play a key role in the development of steel sector as per national steel policy. The industry is very well placed to meet the fast growing demand of metallics. Sponge iron is the substitute for steel melting scrap. Scrap availability is getting difficult and the coking coal reserves are limited. So steel industry has to depend heavily on sponge iron for the supply of metallics in future.

India has an installed capacity of 170 lakh tonne at present. And there are at least 160 more plants in various stages, from planning to implementation. The installed capacity will grow to 3 million tonne in the next five years. Existing sponge iron manufacturers are going in for expansion in addition to large number of Greenfield projects that are in the pipeline.

Textiles

Indian textiles industry is a well established with showing strong features and a bright future. In fact, the country is the second biggest textiles manufacturer worldwide, right after China. Similar force is demonstrated in the cotton production and consumption trend where India ranks just after China and USA. The textiles manufacturing business is a pioneer activity in the Indian manufacturing sector and it has a primordial importance in the economic life of the country, which is still predominantly based on the agro-alimentary sector. Employing around 35 million people, textiles industry stands as a major foreign currency revenue generator and further proves it in its 14% share of industrial production and the 16% of export revenues it generated.

The future of the textiles industry seems to be bright in all aspects. As such Government places all its trust and relies sector for its strong 'employment creation' capability, more precisely in the garments manufacturing side. Lowering tax burdens on companies will play an important part in cutting down production costs and boosting competitiveness, increasing ability to tap high-volume orders from the global market. Modernization would enable companies provide quality and volume solutions which is in constant demand by international buyers.

Company Background

Grasim Industries, a flagship of the Aditya Birla Group was originally incorporated asGwalior Rayon Silk Manufacturing (Weaving) Company in 1947. The company’s key businesses are viscose stable fibre (VSF) and cement. It also produces sponge iron, chemicals and textiles.

Grasim, which commenced operation in 1950 by manufacturing fabrics using imported rayon (a manmade cellulosic fibre) at Gwalior, has now turned into India’s top ten largest private sector companies in terms of assets and sales. The company’s foray into cement became a successful diversification and now it is the largest producer of cement in India with the acquisition of UltraTech Cemco (erstwhile L&T). Previously, it acquired Shree Digvijay Cement, cement division of Indian Rayon and Dharani Cement.

The company had successful joint ventures abroad that include viscose staple fibre plants in Thailand & Indonesia and carbon black plants in Thailand & Egypt and pulp plant in Canada. Joint ventures in India are Tanfac Industries, Bina Power Supply Company, Birla AT&T Co and Bihar Caustic & Chemicals. The company divested its stake in Mangalore Refinery and Petrochemicals. The company also acquired controlling stake in Bihar Caustic & Chemicals by an open offer made during 2002-03.

Grasim’s subsidiaries are Kerala Spinners, Sun God Trading and Investments and Samruddhi Swastik Trading and Investments. The company hived off its software business Birla Technologies Ltd (BTL) to PSI ata Systems, a group company for a consideration of Rs113mn during the year 2001-02.

Financials

Grasim Industries Limited posted good results for the 3rd quarter ended 31st December 2007. The improved performance was propelled by its core businesses, viz., Cement and Viscose Staple Fibre (VSF). The Company’s Chemical and Sponge Iron businesses too aided the performance. Revenues increased by 19% y-o-y to Rs.4, 358 crores (Rs.3, 668 crores). Gross Profit rose by 26% at Rs.1, 420 crores (Rs.1, 128 crores). Net Profit was higher by 29% at Rs.722 crores (Rs.559 crores).

VSF Business

VSF business recorded a positive performance during the quarter. The Company plans to expand its capacity by 94,875 tons, through capacity additions of 63,875 tons at Kharach (Gujarat) and 31,000 tons at Harihar (Karnataka), at an estimated outlay of Rs.606 crores. Upon completion, the Company’s VSF capacity will be 364,975 tons. Alongside, a Greenfield 88,000 tons plant is being set up at Vilayat (Gujarat) at an estimated capital cost of Rs.840 crores. The plant is expected to go on stream in about 2-3 years’ time. The Company plans to foray into the consumer product segment with a test launch of non-woven products.

Chemical Business

The Chemical plant’s performance improved during the quarter. Production of caustic soda was higher by 68% at 50,452 tons. During the corresponding quarter, production was lower owing to the shut down of a captive power plant. Sales volumes rose by 70% at 49,978 tons.

Cement Business

UltraTech Cement Limited (UltraTech), a subsidiary of Grasim, too reported improved performance. Sales of cement and clinker were at 3.66 million tons and 0.71 million tons respectively. Net Profit was higher at Rs.281 crores.

The capex plans of both Grasim and UltraTech are progressing satisfactorily. The Company’s aggregate cement capacity (including that of its subsidiaries) will stand augmented by 17 million tons at 47 million tons, upon completion of all expansions. Besides, both the Company and its subsidiary are setting up Ready Mix Concrete plants at various locations in the country. The additional capacity of around 90 million tons, as announced by the industry, over the 3-year period FY08 to FY10, could result in a surplus scenario, affecting realisation from end-FY09. Rising energy prices would lead to increased costs. However, the addition of captive power plants at various locations will help contain this impact. The strong growth in demand emanating from the housing and infrastructure sectors bode well for the Company’s Cement business.

Sponge Iron Business

Valuation

At the current market price Grasim Industries trades at a P/E of 10.9X FY08E earning and EV of 6.25xFY08E EBIDTA. Compared to other cement majors, Grasim is trading at an attractive valuation on all parameters.

Outlook

Grasim Industries is expected to post a 39% Y-o-Y growth in revenue and 134% Y-o-Y growth in EBIDTA with margins improving by 1290 basis point to 31.9% on a consolidated basis. On the back of 8% growth in despatches and 53% growth in realization, Grasim’s cement division is expected to post a 54% y-o-y growth in revenue. PBIDT is likely to be up by 1261 basis points to 34.3%.

VSF business is expected to show a 13% growth in revenues on the back of 1% de growth in volume sales and 19% higher realization. EBIDTA margins may improve by 1650 basis points to 40%.

Sponge Iron business is likely to show a slightly better result on improved realizations but overall performance to remain subdued due to lower volumes. Revenues will grow by 10% and PBIDT increasing to Rs.80 million as against Rs.33 million last year.

Backed by significant improvement in Ultratech performance, Grasim Industries is expected to report a 180% YoY growth in net profit at Rs.5459 million.The company is expected to post better set of numbers on the back of upturn in its major business of cement and VSF. Besides its Sponge iron business seems to have bottomed out as performance is expected to improve after FY07 end when the availability of natural gas is likely to improve.