Grasim Industries (Grasim) has posted results for Q1FY2010 on a stand-alone basis. The adjusted net profit improved by 3.2% year-on-year (y-o-y) to Rs530.5 crore.
This is above our estimates on the back higher-than-expected profit before interest and tax (PBIT) margin in the cement and viscose staple fiber (VSF) divisions. Moreover, lower-than-expected effective tax rate also contributed to the growth in the bottom line.
The revenues grew by 18.1% y-o-y to Rs3,045.3 crore in Q1FY2010 mainly driven by the cement and VSF divisions, whereas the revenues from the sponge iron and chemical divisions declined during the quarter on a y-o-y basis.
The operating profit margin (OPM) improved marginally by 46 basis points y-o-y to 29.1%. However, the same improved sharply by 436 basis points on a sequential basis.
The sequential increase in the OPM was mainly on account of improvement in the PBIT margin of the cement and VSF divisions during the quarter.
Moreover, the power & fuel cost as percentage of sales declined to 14.8% during the quarter as against 16.4% in Q4FY2009. Thus, the operating profit increased by 20% y-o-y and 22.2% quarter-on-quarter (q-o-q) to Rs885.3 crore.
During the quarter Grasim commissioned expansion of Kotputli facility to clinkerisation level, and added cement grinding capacity of 1.6 million tonne at Shambhupura and 1.3 million tonne split grinding unit at Aligarh.
With the commissioning of the aforesaid capacities the total cement capacity of the company increased to 22.55 million tonne metric (MMT).
Outlook and valuation
We have revised our earnings estimates upwards for FY2010 and FY2011 by 15.8% and 16.8% respectively mainly to factor in higher-than-expected volume growth in cement and VSF divisions and higher-than-expected cement realisation due to improved demand environment.
The revised earnings per share (EPS) on a stand-alone basis for FY2010 and FY2011 works out to Rs190 and Rs180.9 respectively.
At the current market price of Rs2,837 the stock trades at a price/earnings (PE) of 15.7x FY2011 earnings estimate, an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBITDA) of 8.9x and an EV/tonne of $109 on FY2011 capacity of 37.7MMT (including proportionate capacity of UltraTech Cement held by Grasim).
We maintain our HOLD recommendation on the stock with revised price target of Rs3,067 based on the sum of the parts (SOTP) valuation model.