Press Release

06 Aug 2013

Grasim: cement and VSF capacity expansions to provide boost

Grasim that saw its stock touch 52 week low of Rs 2,477.75 on 5th August continues to trade weak. While the Viscose Staple Fibre (VSF) segment is feeling the heat of excess capacities and lower cotton prices impacting segment’s performance, cement demand and realisations too continue to be sluggish.

The same was reflected in the company’s June 2013 quarter performance, where net sales declined 7.3% at Rs 1,149 crore over June 2013 quarter. Operating margins too slipped 621 basis points and thus adjusted profit at Rs 226.1 crore had declined 17.2%.

However, looking at the capacity expansions underway in both cement as well as the VSF segment, the company may see its revenues getting a boost from volumes if not realisations. For instance, the outlook for realisations in the VSF segment may not change significantly in the near-term but the company is on the verge of commissioning 128 ktpa ( kilo tons per annum) capacities during the September quarter. This will cause the company’s overall capacities to grow almost 35% (Present capacities 370 ktpa ).

The cement segment of the company is represented through UltraTech in which Grasim hold 60% stake. UltraTech too has seen its capacities grow from 52.5 MTPA (million tonnes per annum) to 54.5 MTPA during the June 2013 quarter, while 10 MTPA capacity expansions are underway. The cement demand and realisations that have remained muted for sometime is likely to get a boost when monsoon season gets over.

Analysts see increased government spending before elections providing a boost as the demand from rural India. The water scarcity problems that had hit demand in Karnataka and Maharashtra may also get resolved.

Thus, the company seems to be well placed to take advantages of capacity expansion in both its segments. The subdued stock prices thereby offer good opportunity for the investors to enter the stock. Analysts at Religare believe that the stock provides a defensive opportunity amid market volatility, given a likely recovery in the cement (UTCEM) business and balance sheet strength. Their revised SOTP (sum-of-the-parts) based price target stands at Rs 3,540 vs Rs 3,770 earlier.

Out of 20 analyst recommendations in the month of August 2013 as per Bloomberg, 16 are BUY ratings and 4 Neutral. The target prices stand in the range of Rs 2,950-Rs 3,692, with consensus one year target price at Rs 3,412 for the stock trading at Rs 2,491 levels.

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Aditya Birla Management Corporation Private Limited

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