At 8-Year High, Grasim may Ce­ment its Gains

Ex­pec­ta­tions of higher ce­ment de­mand, strong growth prospects in non-ce­ment biz make the stock at­trac­tive

The Economic Times - - Smart -

ET In­tel­li­gence Group: Af­ter trad­ing in a range over the past three years, the Grasim In­dus­tries stock has gained 15% in the past three months. It closed at an eight-year high of ₹ 4,095 on Mon­day. The re­newed in­ter­est in the com­pany can be at­trib­uted to two rea­sons.

First, the val­u­a­tion gap be­tween Grasi­mandUl­traTech­has­in­creased. Grasim’s stock trades at a dis­count of 47% to UltraTech’s, com­pared with 30% in 2012. An­a­lysts point out that the dis­count should nar­row given the im­prov­ing prospects of Grasim.

Af­ter a se­ries of ac­qui­si­tions, UltraTech’s ce­ment ca­pac­ity has en­hanced to 92.3 MT from 63.2 MT in FY15. Grasim de­rives over 80% of its to­tal rev­enue from the ce­ment busi­ness of UltraTech. Given the ex­pec­ta­tion of im­prove­ment in de­mand across In­dia due to the govern­ment’s fo­cus on ru­ral in­fras­truc­ture, UltraTech is ex­pected to ben­e­fit in the com­ing quar­ters. This should, in turn, boost Grasim’s rev­enues.

Sec­ond, Grasim’s non-ce­ment busi­nesses have also been per­form­ing Grasim Inds UltraTech Ce­ment well. It is the world’s largest vis­cose sta­ple fi­bre (VSF) pro­ducer with 16% global mar­ket share. Due to lower costs of raw ma­te­ri­als, op­er­at­ing mar­gins of VSF busi­ness im­proved to 15% for nine months of FY16.

In the past two years, the com­pany has ex­panded VSF ca­pac­ity to 498 kilo tonnes per an­num (KTPA) from 434 KTPA in FY15. Due to this, VSF sales vol­ume grew 19% in the nine months to De­cem­ber 2015 YoY. Be­sides, Grasim has ex­panded its textiles port­fo­lio by in­creas­ing fo­cus on high-mar­gin spe­cialty fi­bres such as Modal and Mi­cro Modal. Th­ese spe­cialty fi­bres con­trib­ute close to 9% to to­tal rev­enue.

An­a­lysts point out that the price out­look for VSF is stable for a few quar­ters. This should sus­tain the com­pany’s VSF sales vol­ume mo­men­tum in the com­ing quar­ters.

In ad­di­tion, with the ac­qui­si­tion of AB Chem­i­cals, Grasim’s mar­ket share in In­dia’s caus­tic soda in­dus­try has in­creased to 22% from 13%. The seg­ment’s mar­gin im­proved to 21% in the first nine months of FY16 from 17% in FY15.

Con­sid­er­ing FY17 es­ti­mated earn­ings, Grasim’s en­ter­prise value is 6.8x EBIDTA com­pared with the three year av­er­age EV/EBIDTA of 7.6. It is ex­pected to stay on in­vestors’ radar in com­ing quar­ters con­sid­er­ing the growth prospects.


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