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
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.