For 3QFY2009, Grasim Industries posted a marginal 6.3% y-o-y growth in consolidated topline to Rs4,588 crore (Rs4,317 crore).
Topline grew marginally despite the strong performance by the cement business due to the poor performance clocked by the VSF business. VSF volumes declined 22% y-o-y mainly impacted by the global slowdown. VSF realisation also fell by 11% during the quarter.
Average realisation for cement increased by 5.7% while volumes moved up by 7.7% y-o-y to 4 million tonnes (3.8mn tonnes). For 9MFY2009, consolidated revenues increased by 9.5% y-o-y to Rs13,470 crore (Rs12,302 crore).
We expect the domestic cement industry to witness substantial bunching up of capacities in FY2009E and FY2010E, as 86.5 million tonnes capacity is expected to come on-stream during these years.
However, even after assuming 20% of the announced capacity addition plans fail to materialise on time due to delay in equipment procurement, land acquisitions, fund raising plans, etc, such a huge capacity addition (69.2mn tonnes) is bound to create an oversupply situation and exert pressure on cement prices.
Also, cement consumption in India has been slowing down on account of the sluggish Housing and Real Estate sectors led by the slowdown in the economy.
At Rs1,190, Grasim is trading at an EV/EBIDTA of 4.0x and 4.4x FY2009E and FY2010E EBIDTA and EV/tonne of $78/tonne and $75/tonne on FY2009E and FY2010E capacities, respectively.
Even though valuations have been at the lower range of their historical band, an imminent downturn in the cement cycle might not lead to a re-rating of multiples in the medium term and cap the upside in the stock.
Also, considering the weak outlook for the VSF segment due to an expected slowdown in global demand, we remain NEUTRAL on the stock.