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Grasim’s results for the quarter ended September’14 were primarily driven by the cement segment. While Viscose Staple fibre (VSF)’s increasing volumes led by capacity expansions helped revenues, the segment’s profitability remained soft pulling down overall profitability. Moving forward, too, excess capacities in China may keep VSF realisations under pressure. The volume expansions and cement business are likely to continue driving Grasim’s performance even as the company attempts improving VSF realisations by adding new value-added products. The cement business is represented by UltraTech Cement, in which Grasim holds 61.69 per cent stake.
Looking at the strong prospects of cement business, analysts remain positive on the stock with consensus target price (according to Bloomberg) of Rs 3,861. This indicates an over 11 per cent upside for the stock now trading at Rs 3,438.
Aided by strong volume growth in all segments on the back of capacity expansions, Grasim’s revenues grew 16 per cent year-on-year to Rs 7,945 crore, marginally ahead of Bloomberg estimates of Rs 7,866 crore. The cement segment that contributed 73 per cent to total revenues reported a 15.6 per cent year-on-year growth in revenues helped by better realisations and also contribution from the 4.8 mtpa (million tonnes per annum) capacity acquired from JP Associates. The acquisition enhanced Grasim’s total capacity to 61.75 mtpa.
It was the larger cement segment whose strong PBIDT growth of 28 per cent to Rs 987 crore (margins improved 130 basis points to 17 per cent) boosted overall profitability. Ebitda at Rs 1,175 crore came better than Bloomberg’s’ consensus estimates of Rs 1,097 crore. With higher depreciation charges and finance costs (up 44.6 per cent) thanks to the expansions, Grasim’s net profit at Rs 416 crore came just in line with Bloomberg consensus estimates of Rs 417. On the back of better profitability, the stock closed more than a per cent up on the bourses.
While Grasim continues with its capacity expansions, it maintains its cautious view on VSF segment. The company release says that margins are likely to remain under pressure in the near term due to the overcapacity in China. Sharply declining cotton and polyester prices is a major challenge. However, as the trend reverses they will be geared with capacities to utilise the opportunity.
On the other hand, Grasim expects cement demand to grow by about eight per cent in the current fiscal and accelerate going forward. The company that has seen its capacities cross 60-mtpa mark, plans to scale it to 70 mtpa by March 2016 to utilise emerging opportunities.
