Grasim dip offers good entry opportunity

Current weakness can be used to buy stock, given strong prospects of UltraTech, growing VSF volumes

Grasim Industries' share price on Monday dropped 12 per cent to Rs 3,555.80, from its all-time intra-day high of Rs 4,023.60 in early March, on concerns over near-term cement demand, weakness in the viscose staple fibre (VSF) segment and correction in the broader markets.

The VSF business continues to be in an overcapacity scenario and, hence, the pricing pressure has intensified. There has been a sharp decline in prices of competing fibres during the March quarter. As prices of cotton remain range-bound with a downward bias, polyester staple fibre (PSF) prices saw sharp decline of 15 per cent, exerting pressure on VSF prices. In this backdrop, the average VSF realisations have declined seven per cent in the March quarter to about Rs 112 per kg.

This has resulted in earnings before interest, depreciation, tax and amortisation (Ebitda) declining 25 per cent over a year to Rs 97 crore and 28 per cent sequentially.

The respite, however, is likely to be provided by volume growth, on the back of capacity expansion. With full commissioning of Vilayat greenfield, VSF capacity has increased 32 per cent to 498,225 tonnes.

The gains were seen in the March quarter also, with the VSF segment's revenues growing 19 per cent over a year to Rs 1,405 crore, even as prices were down.

For Grasim, the cement segment represented by UltraTech remains the main growth driver. Though the March quarter had seen decline in demand, impacting overall performance of Grasim, too, UltraTech having pan-India presence still saw average realisations of Rs 5,195 a tonne, higher than its peers. UltraTech’s Ebitda per tonne at Rs 1,109 was highest amongst peers growing 27.2 per cent over a year and 6.3 per cent sequentially.

The cement demand, however, is likely to get a push during the second half of 2015-16 as the impact of government's infrastructure sector initiatives percolates. The demand in the housing sector is also likely to improve given government's focus besides gains from softening interest rates.

Analysts at Religare say they expect Grasim's consolidated earnings to be driven by UltraTech that is set to benefit from its expanded capacity and a more extensive pan-India presence. They have a price target of Rs 5,075 whereas consensus target price for the stock as per Bloomberg stands at Rs 4,484 which still indicates a 28 per cent upside. But a weak monsoon would impact cement demand.