Grasim: Realingment moves

The company would earn Rs 322 crore by selling its stake in Digvijay

Grasim will sell its stake in Shree Digvijay Cement as it seeks to realign its manufacturing facilities. Digvijay, which was acquired by Grasim in 1998, has a cement manufacturing plant in Gujarat with a capacity of 10.75 lakh tonnes.

But the importance of Digvijay began to diminish after UltraTech came into the Grasim fold. UltraTech has a production capacity of 6 million tonnes a year in Gujarat. Grasim has a consolidated capacity of over 31 million tonnes and will add another 50 per cent by Q2 FY09.

The Rs 322 crore that Grasim will get from its stake sale in Digvijay Cement is merely 7 per cent of its estimated FY08 pre-tax profit. But the sale will give the Digvijay shareholders an opportunity to exit if the open offer price is attractive.

Grasim's consolidated sales went up by about 25 per cent in the September 2007 quarter, while operating profit was up over 40 per cent.

The profitability was strong in cement and viscose staple fibre (VSF) businesses. The operating profit margins were up nearly 340 basis points y-o-y to 29.8 per cent.

The revenues were up 25 per cent and operating profit increased by 51 per cent on a standalone results. The operating profit margin improved 550 basis points to nearly 32 per cent, driven by a massive 900 basis point increase in VSF's operating profit to 40.3 per cent.

Cement sales were 6 per cent higher on a y-o-y basis in Q2 FY08 and the realisation rose by 12 per cent. The buoyant demand conditions resulted in a 130 basis point increase in operating margin to 32.5 per cent.

The chemical business resumed normal operations and reported a 37 per cent operating margin in Q2 FY08. A year back, its operations were curtailed due to a shutdown at its captive power unit.

The VSF prices are likely to stay firm in the next few quarters though margins may fall a little as raw material prices are on a rise. Cement sales have been slower in the first two months of this quarter and there are expectations of price declines after FY09.

Sponge iron should do better when gas supply improves in FY09. Grasim is increasing capacities in both cement and VSF. The stock trades at 13 times and 11.5 times estimated FY08 and FY09 earnings respectively and is likely to be a market performer.

Two-wheeler sales: Subdued

Two-wheeler companies reported lacklustre monthly sales numbers, with total sales of the top three players (Hero Honda, Bajaj Auto and TVS Motor) declining by 0.8 per cent y-o-y to 6,36,590 units in November 2007.

The fall has come despite the fact that Diwali was celebrated in November this year compared with October in the previous year.

In November, only Hero Honda reported a growth in monthly sales on a y-o-y basis, while Bajaj Auto's total unit sales fell 3.2 per cent and in case of TVS Motor there was a dip of 4.6 per cent.

TVS Motor grappled with a 17.1 per cent yearly fall in motorcycles sales to 57,113 last month and is shortly expected to launch a motorcycle in the executive segment to reverse this trend.

The motorcycle sales of Bajaj Auto fell 2.1 per cent y-o-y in the previous month despite strong sales of its recently launched XCD model and the discounts being given with respect to Platina.

These top three players had reported a 1.6 per cent decline in their total sales to 772,812 units, in October 2007. The reason for the low numbers is the high base in 2006, coupled with a curtailment in the lending rates by auto finance companies, especially in the rural areas. In the September 2007 quarter, these players had reported a steep 9.4 per cent decline in their total sales to 16,74,627 units.

Since two-wheeler stocks are trading at a high discount to their future earnings at a time when their sales growth is mediocre, there is little room for a further upside.

Bajaj Auto trades at 22 times estimated FY08 earnings and 19 times FY09 EPS, while Hero Honda enjoys a discounting of 16 times estimated FY08 earnings and 14 times FY09 EPS.