Correction could be a good entry point in Grasim stock

In the near term, cement volumes are unlikely to grow much; VSF prospects expected to be subdued

Grasim’s break from its trading range has been fuelled by growing optimism on an economic recovery. The company, which had, on May 2, disappointed the Street with a weak performance for the March quarter, saw its stock surge 23 per cent to a 52-week high of Rs 3,256.95 last week. Though it has corrected to Rs 3,031, considering the near-term outlook for its two businesses and the sharp run-up, only investors with a medium- to long-term investment horizon might consider the stock on declines. According to Bloomberg, the consensus target price is Rs 3,228.

While the outlook for the viscose staple fibre (VSF) segment remains weak, owing to subdued international prices (due to overcapacity in China), the cement segment (through subsidiary UltraTech) contributes 75 per cent to Grasim's revenue, and this has driven the rally. With UltraTech being upgraded by brokerages after the election results, Grasim, too, continues to trade firm on bourses.

  The optimism is based on cement demand improving, led by a recovery in the infrastructure sector. Targets for gross domestic product growth are being scaled up; this is likely to improve cement demand. The company will further benefit from increase in cement capacities. UltraTech is expanding capacity to 70 million tonnes (mt) from the current 62 mt, including 4.8 mt acquired from the Jaypee group.

While these bode well for volume growth in the long run, there are challenges, too. In its presentation after the March quarter results, Grasim had said the cement over-supply situation would continue till FY17, keeping capacity utilisation at about 75 per cent. Though the prospects of an economic recovery have improved after the election results, a recovery in volume growth will take time. Sanjeev Kumar Singh at Centrum Broking says he doesn't expect any significant recovery before FY16. Also, in a month, we are likely to enter the seasonally weak period for cement demand, with the onset of the monsoon impacting construction activities. As this is also true for other cement stocks, it should keep them under check on bourses.

For the sector, cement realisations, which were strong in the last quarter due to closure of some capacity, have started seeing corrections, partly led by capacities coming on stream, as well as the approaching monsoon. Analysts say lately, cement prices in the North and South India have corrected by Rs 10 a 50-kg bag.

Prospects of the VSF segment, which accounts for about 15 per cent of Grasim's revenue, too, are unlikely to change significantly. For this segment, the rupee's appreciation isn't good news, as the cushion to domestic prices is reduced by weak international prices. The company, however, might benefit on the volume front, as trial runs at the first line (43,800 tonnes-a-year) of the Vilayat project (120,000 tonnes-a-year) have started.