Grasim Industries

Investors in the stock of Grasim Industries can hold the stock. The company’s impressive capacities post-expansion are set to support its topline growth, even as cement despatch numbers suggest that the sector has managed to sidestep the worst of this slowdown. The sharp correction in global coal prices from $193 last year to $62 now will help the company expand margins by saving significantly on fuel cost. Grasim Industries imports nearly one-fourth of its coal requirements. At Rs 1,634, the stock trades at an attractive price-to-earnings ratio of 8 times (lower than ACC that trades at 10 PE).

The demand-supply situation is also conducive now for the cement manufacturers. Higher demand from government-backed infrastructure projects and supply shortage in some pockets of the country are contributing to a firm trend in cement prices. Between February and April this year, prices have increased, on an average, by Rs 15-20 per 50 kg bag.
Expansions sweep capacity issues

Grasim Industries recently commissioned work at its new 3.3-million tpa clinker capacity at Kotpuli, Rajasthan. With this, the company’s total capacity has risen to 21.3 mtpa. This would help the company improve volumes tonnes and retain market share as demand revives. There are already signs of demand picking up with all-India despatches for the March quarter up by 8.5 per cent. In the Northern region, particularly, the industry estimates despatches to have grown by 16.8 per cent. Grasim has outlined a capex of Rs 940 crore in 2009-10, of which Rs 757 crore would be spent on putting up grinding units, RMC plants, waste heat recovery systems, power plants and on modernising and upgrading plants.

With capacity additions and related higher borrowings, interest expenses have been on the rise for Grasim. Till last December (for the nine months of FY-09), the company’s interest expenditure had risen 30 per cent over the corresponding previous period. But what is comforting is that the company’s interest coverage ratio is still a comfortable 13 times, superior to most Sensex companies. Even if the company’s interest cover comes down to half the present (six times) levels, the company would still be well-placed to service debt.

The company’s debt-to-equity ratio stands at a moderate 0.4. Cash profits for the first nine months of 2008-09 sttod at Rs 1,743.5 crore, lower by just 8 per cent compared to the previous year.
Cost pressures to reduce

Grasim’s cement division, which contributes nearly 80 per cent of the group’s earnings, is set to see cost benefits from the sharp fall in global coal and pet coke prices, which are key inputs.

One-fourth of the company’s fuel requirements are met by imported coal and another one-fourth by pet coke and waste fuel, with the balance by coal from linkages and auctions.

Power and fuel expenses, which are 20 per cent of the company’s sales, were higher by over 45 per cent year-on-year during the third quarter of 2008-09.

Lower thermal coal prices, which had already fallen by 45 per cent from their July 2008 peak, did not reflect in the numbers as the company had locked into long-term contracts. High-cost inventory eroded savings made from the company’s cost-cutting efforts.

The effect of reduced coal price will, however, be seen from this quarter as coal stock piles have been substantially reduced. The cut in diesel prices by Rs 2 per litre will also to an extent bring down freight expenses for Grasim.
Realisation inches UP

In the third quarter of FY-09, realisations across Grasim’s divisions were higher but for the VSF business, which remained a drag on profits. Realisation in the cement division was up 6 per cent and RMC up 2 per cent over the corresponding quarter last year. The Viscose Staple Fibre division saw realisations dropping by 11 per cent on a fall in domestic and export demand.

Cement prices have been inching higher since the beginning of this year; prices have risen by around Rs 10-15 per bag between January and March this year. The improved demand follows increased orders from government infrastructure and rural housing projects Higher prices with despatches growth of around 9 per cent in the March quarter are expected to support sales growth in the period.

While the VSF division might not post encouraging numbers following the fall in VSF prices globally, one can expect decent sequential growth in earnings for the March quarter.

via BL