Grasim Industries Ltd’s viscose staple fibre (VSF) division single-handedly lifted the company’s consolidated profit in the March quarter, even though it contributes just one-fifth of total revenue. Cement sales account for around three-fourths of revenue. But this division’s sales rose by only 5% to Rs4,162 crore over the year-ago period, despite volumes rising 10.6%. The chief culprit was lower cement prices. On a sequential basis, volumes were up 12% but, again, realizations were lower.

Though higher volumes led to an increase in revenue, profit fell because of the drop in realizations, since fixed costs are high in the cement business. Moreover, input costs and freight have both been rising. These factors, plus higher fixed expenses for new plants and modernization affected margins. The segment profit of the cement business fell by 17% year-on-year (y-o-y) as a result. But the VSF business, which has been a cash generator for Grasim, saw smart growth in both sales and profit.

Graphic: Paras Jain/Mint

Thanks to the jump in profit of the VSF business, Grasim was able to offset the drop in the margins of its mainstay cement business and maintain operating profit margin. Grasim’s net profit rose 15% to Rs654 crore, coming slightly ahead of consensus estimates. Still, its share price fell 2.5%.

The outlook for the firm isn’t very bright. The VSF business is operating at nearly full capacity. Grasim is setting up a new plant, but this will be operational only in 2013, and one of its plants may be shut due to lack of water in the current quarter. VSF margins have declined on a sequential basis because of higher input costs. But a doubling of capacity in its Chinese joint venture and debottlenecking efforts could lead to higher volumes.

The outlook for cement continues to be weak, despite higher demand, thanks to surplus capacity. Grasim’s own cement production will rise in FY11 as it ramps up new capacities. Higher volumes will result in higher sales growth, but lower prices and rising coal prices will hit margins. Its share price trades at around nine times estimated 2011 earnings per share, and any recovery in Grasim’s valuations will depend on how soon the outlook for cement prices changes for the better.

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