The profits of Grasim Industries Ltd from its cement division for the stand-alone company in the March quarter were up a hefty 30.5% on the back of a 21% increase in the division’s revenue. Sales volumes rose by 13% year-on-year (y-o-y), thanks to production starting at a new factory in Rajasthan.
Realizations, too, have improved. The division’s operating margin rose to 27.2% during the quarter, well above the 19.2% operating margins for the segment in the December quarter, with lower energy costs contributing to the higher margins.
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In contrast with the cement business, Grasim’s viscose staple fibre (VSF) business has been languishing, with pressure on price realization and a slowdown in demand. Revenues at the division fell 11.7% y-o-y, while operating profits were down 51%. But that’s better than the December quarter, when the segment’s revenues were down 29% y-o-y and operating profits fell a huge 88%. Operating margin for the VSF division was 12.9% in the March quarter, compared with 6.6% in the December quarter.
The sponge iron business, which has since been sold off, slipped into the red in the March quarter. The chemical business did worse than in the December quarter, with lower revenues and profits. Despite volumes rising 16% in the March quarter, higher salt and power costs reduced margins.
But with the cement division contributing 69% of the stand-alone company’s revenues and 88% of its operating profit, Grasim’s position has improved considerably from the December quarter. Profit after interest but before exceptional items was down just 10.5% y-o-y in the March quarter, compared with a 49% y-o-y decline in the December quarter. That has enabled the stock to outperform the benchmark Sensex index on the Bombay Stock Exchange this year.
The problem, though, is that the outperformance may not continue. “The commissioning of over 20 million tpa (tonnes per annum) of new capacity by the industry in FY09 and the expected commissioning of much larger capacities in FY10 may result in a reduction in capacity utilizations, with adverse impact on margins,” the company says. However, higher volumes from Grasim’s new capacities will help cushion that impact.
In the VSF business, the company points out that the improvement seen in the March quarter is the result of restocking by customers and that the “the long-term outlook remains uncertain due to VSF over capacity in China and relative prices of competing fibres”.
The company says that caustic soda prices, too, are expected to remain under pressure and production will have to be curtailed in June on account of water shortage.
In short, even though the company’s performance has improved in the three months to March, the road ahead remains uncertain.
Graphics by Ahmed Raza Khan / Mint