Grasim: On concrete path

With cement contributing 72% to consolidated sales and 80% to operating profit in Q1, Grasim set to sparkle.

Strong cement sales with better price realisations helped Grasim's consolidated operating margin improve by 604 basis points (bps) y-o-y to 28.88 per cent. Net sales went up 29.2 per cent y-o-y, while operating profit rose 19.08 per cent.

Although the company managed other costs quite well, the employee cost increased to 31 per cent. The 33 per cent increase in freight cost turned out to be lower than the 53 per cent rise in the March 2006 quarter owing to better optimisation of rail road.

The 49 per cent growth in sales of Ultratech, its 51.08 per cent subsidiary, made up for the decline in sales of fibre and pulp, and sponge iron. Ultratech also posted 151 per cent growth in its operating profit to Rs 374.6 crore.

In Grasim's standalone results, operating profit margin grew at a lower rate of 324 bps to 27.35 per cent compared with its consolidated numbers.

Standalone cement sales were up 5 per cent with 36 per cent improvement in prices over the June 2005 quarter.

VSF prices were 8 per cent higher on a y-o-y basis, and despite the water shortage at Nagda, which lowered capacity utilisation to 70 per cent, profitability in this segment improved.

The sponge iron business managed a marginal profit before interest and tax after three consequent quarters of losses.

However, it continued to be a drag because of factors like lower prices, unavailability of natural gas and rising prices of iron ore and pellets.

Sponge iron realisations were 29 per cent lower y-o-y, along with lower capacity utilisation, and the segment profit plummeted 90 per cent to Rs 5.6 crore. The saving grace was that there was 10.7 per cent rise in sponge iron prices over the March 2006 quarter.

With cement contributing 72 per cent and 80 per cent to consolidated sales and operating profit, respectively, in Q1, Grasim should continue to do well, as cement demand is likely to remain robust over the next few quarters.

VSF demand and prices are also expected to remain strong. Sponge iron will remain a problem till gas supplies improve by the end of 2007. At the market current price, Grasim's forward P/E of about 12 appears reasonably attractive.

Zee: New businesses still a problem

With advertising revenues in the June quarter up a smart 31 per cent y-o-y, Zee TV's total revenues grew 24 per cent to Rs 388 crore.

However, since its new businesses continue to post losses (Rs 57 crore in the quarter), operating profit margin declined to 18.7 per cent. Even sequentially, OPM fell 40 basis points. Operating profit slumped 27 per cent y-o-y to Rs 72.5 crore.

The fact that Zee increased its investments in programming to 60 per cent from 40 per cent of revenues has resulted in better audience share; it has overtaken Sony in prime time.

However, competition in the general entertainment space continues to be fierce and while the channel may now have ten shows in the top 50, which is an improvement over the three-year-ago number, the ratings need to sustain over time.

Zee has big investment plans for its distribution (cable and DTH) business, though it has to be on its guard for keen competition from Sky TV that has deep pockets.

Nonetheless, subscription revenues will grow as CAS is implemented, so there could be a big upside to revenues from this source.

Post-restructuring, the management should be able to focus better on the various business segments, thereby unlocking value.

The stock has underperformed the BSRB Entertainment index since November 2005, though it has outperformed the broader market in the last six months.

At the current price of Rs 260, the stock trades at 38 times and 29 times estimated FY07 and FY08 earnings, respectively, and is expensive.

While there is an improvement in the existing businesses, the new businesses still need to stabilise so that the overall numbers improve.