Rising VSF prices improve outlook for Grasim Industries

Rising VSF prices improve outlook for Grasim Industries

Grasim Industries Ltd’s consolidated performance in the near future is likely to be bolstered by its viscose staple fibre (VSF) business. Domestic prices of VSF have been steadily rising in the last few months. Demand has increased on rising consumption. An unabated rise in the price of cotton has pushed up the price of man-made fibres such as VSF. In the last few weeks, the VSF price has risen by around 4-5% after moving up by 2-3% about two months ago. Textile industry experts predict it will move higher in the next two quarters too. This is on the back of a 3% increase in the September quarter, which resulted in a 10-11% year-on-year (y-o-y) jump in realizations for Grasim.

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While the selling price of VSF is rising, that of the key raw material used in manufacturing VSF—wood pulp—is expected to remain stable in the near future. This was not the case in the September quarter. Although about two-thirds of the company’s pulp requirements are met through captive sources, the company management said that pulp prices had risen by about 52% from a year-ago levels, thereby adversely hitting profitability. This was one of the reasons for the y-o-y dip in its stand-alone operating profit margin from 34% to about 28%. Of course, water shortage at one of its plants led to loss of production for 25 days compared with eight days in the year-ago period, resulting in a 9% dip in VSF production volumes. Even the segment-wise break up of Grasim portrays the lower profits of the VSF division in the September quarter. While the y-o-y revenue of the VSF segment inched up by about 8.4% thanks to higher VSF prices, profit before interest and tax fell by about 13%, squeezed by lower volumes and higher costs. Going forward, however, rising VSF prices with stable input costs should result in an improvement in its margins over the next two quarters.

Spurred by the increase in demand and uptrend in international VSF prices, Grasim has nearly doubled its capacity expansion plans to about 150,000 tonnes by fiscal 2013. This will increase its overall VSF capacity from the present 340,000 tonnes per annum to 490,000 tonnes.

Analysts say that the cost of expansion—about Rs3,000 crore—can be met through internal accruals. In fact, at the consolidated level, analysts estimate its VSF business should account for nearly half its profit after tax, although it would accrue for only about one-fifth of its revenue. Of course, consolidated performance would also be influenced by the cement business, where the outlook on profitability isn’t bright.

The rise in VSF prices and the optimism for the next few quarters seem to have prompted the 5.1% rise in Grasim’s share price to Rs2,345 since October.

An IIFL report has upgraded the fiscal 2011 earnings for Grasim by around 2% on the back of higher realizations and stable costs. The current market price discounts forward earnings around 10 times. Given that its cement business will continue to weigh down profits for the next 18 months, the Grasim stock should continue to underperform the market.