Grasim Industries

Result Update
Results above estimates-Maintain ACCUMULATE

January 27, 2011

¾ Grasims’s Q3FY11 net profit at Rs2.83bn (+7.9%yoy) ahead of
Reco Previous Reco
estimates (led by high other income earned through dividends
Accumulate Accumulate
from subsidiaries)
CMP Target Price
Rs2,359 Rs2,730 ¾ Revenue (Rs 12.1 bn) grew 17.8% yoy driven by better VSF

EPS change FY11E/12E (%) NA

volumes (+4.1% yoy) and improved realizations (+12.3 % yoy).
Target Price change (%) NA EBITDA at Rs3.64bn declined 6.7%yoy but improved 38% qoq

¾ Higher pulp prices led to decline of 3.7% yoy in VSF EBIDTA

Nifty 5,604
18,684
Sensex (Rs 3.88bn). However improved realizations resulted in
Price Performance margin expansion of 252 bps qoq to 34.4%
1M 3M 6M 12M
¾ At CMP stock implying holdco discount of ~43%. Standalone
(%)
Absolute 4 4 29 21
biz significantly undervalued with implied multiples of 2.5x
Rel. to Nifty 10 12 23 7
Source: Bloomberg
EV/EBITDA which are unwarranted. Maintain ACCUMULATE

Relative Price Chart

2475 Rs % 20 Standalone revenues grow 17.8% yoy
2320 12 Standalone revenues at Rs12.13bn (our estimate of Rs11.9bn) registered a growth of
2165 4 17.8% yoy and 30.1% qoq, as VSF revenues grew 17.3% yoy to Rs11.3bn with
2010 -4
realizations improving 12.3% yoy and 5.7% qoq. Chemical division revenues at
Rs1.47bn posted a growth a 21.6% yoy and 23% qoq.
1855 -12

1700
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
-20 EBITDA at Rs3.64 bn , down 6.7% yoy but improved 38% qoq
Grasim Industries (LHS) Rel to Nifty (RHS)
EBITDA at Rs3.64bn declined 6.7%yoy as higher pulp prices resulted in 3.7% decline in
Source: Bloomberg
VSF EBITDA (Rs3.8 bn). VSF margins contracted by 753bps yoy to 34.4%. However on
sequential basis margins expanded by 252 bps driven by better production and
Stock Details
Sector Cement improved VSF realization. We would like to highlight that though on standalone basis
Bloomberg
VSF EBITDA declined by 3.7% yoy ( due to higher pulp prices) , on consolidated basis
GRASIM@IN
it grew by 2.1% to Rs4.28 bn on account of better profitability from Pulp JVs.
Equity Capital (Rs mn) 917
Face Value(Rs) 10 P&F costs(Rs1.4 bn) increased 19.7% yoy and 24% qoq due to higher imported coal
No of shares o/s (mn) 92 contract prices which rose from USD110/t (in Q2FY11) to USD125/t. Freight costs
52 Week H/L 2,510/1,672 increased 34.6% yoy and 34%qoq (Rs142 mn)due to increase in rail freight whereas
Market Cap (Rs bn/USD mn) 217/4,747 other expenses increased 40%yoy thereby exerting further pressure on margins. Overall
Daily Avg Volume (No of sh)
EBIDTA margins at 29.9% declined 789 bps yoy but improved 166bps qoq.
70353
Daily Avg Turnover (US$mn) 3.6
Net Profit grew 8% yoy
Shareholding Pattern (%) Net profit at Rs2.83bn grew by 8% yoy , higher than our estimates of Rs2.64bn due to
D’10 S’10 J’10 higher other income that the company received through dividends from subsidiaries.
Promoters 25.5 25.5 25.5 Depreciation charges increased 18% yoy whereas interest charges increased by
FII/NRI 38.2 38.3 36.0 5.3%yoy.
Institutions 19.6 19.6 21.0
Private Corp 5.2 5.0 5.6 Financial Snapshot Rs Mn
Public 11.5 11.7 12.0 YE- Net EBITDA EPS EPS RoE EV/ P/BV
Source: Capitaline Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA
FY09 184,039 43,298 23.5 21,867 238.5 -24.3 21.1 9.9 5.5 1.9
FY10 199,334 57,867 29.0 27,595 301.0 26.2 22.9 7.9 3.5 1.7
Ajit Motwani
FY11E 195,198 44,728 22.9 18,539 202.2 -32.8 13.9 11.7 4.4 1.5
ajit.motwani@emkayglobal.com
FY12E 220,233 52,950 24.0 21,518 234.7 16.1 14.2 10.1 3.8 1.4
+91 22 6612 1255

Chandan Asrani
chandan.asrani@emkayglobal.com
+91 22 6612 1241

Emkay Global Financial Services Ltd 1

 Grasim Industries Result Update

Result Table
(Y/E Mar, Rs mn) Q3FY10* Q4FY10 Q1FY11 Q2FY11 Q3FY11 YoY (%) QoQ (%) YTD’11 YTD’10** YoY (%)
Net Sales 10,302 11,037 9,449 9,326 12,137 17.8% 30.1% 30,912 70,685 NA
Total Expenditure 6,404 7,999 6,437 6,689 8,502 32.8% 27.1% 21,628 47,756 NA
as % of sales 62% 72% 68% 72% 70% 70% 68% NA
stock -75 271 -198 -203 -13 -82.3% -93.5% -415 -162 NA
as % of sales -1% 2% -2% -2% 0% -1% 0% NA
raw material consumption 3,833 4,501 4,131 4,088 5,365 40.0% 31.3% 13,584 17,180 NA
as % of sales 37% 41% 44% 44% 44% 44% 24% NA
purchase of traded goods 0 0 0 0 0 #DIV/0! #DIV/0! 0 309 NA
as % of sales 0% 0% 0% 0% 0% 0% 0% NA
payment to employees 793 730 705 827 802 1.1% -3.0% 2,334 4,079 NA
as % of sales 8% 7% 7% 9% 7% 8% 6% NA
power and fuel 1,174 1,178 1,057 1,133 1,406 19.7% 24.1% 3,596 10,478 NA
as % of sales 11% 11% 11% 12% 12% 12% 15% NA
freight and handling 106 149 118 106 142 34.6% 33.7% 367 7,145 NA
as % of sales 1% 1% 1% 1% 1% 1% 10% NA
other expenditure 573 1,170 623 739 801 39.6% 8.4% 2,163 8,726 NA
as % of sales 6% 11% 7% 8% 7% 7% 12% NA
EBIDTA 3,897 3,037 3,012 2,638 3,635 -6.7% 37.8% 9,284 22,928 NA
Depreciation 375 408 445 453 442 18.1% -2.4% 1340 3104 NA
EBIT 3,523 2,629 2,567 2,185 3,192 -9.4% 46.1% 7,944 19,825 NA
Other Income 798 925 593 1623 842 5.5% -48.1% 3058 2833 NA
Interest 112 112 102 103 117 5.3% 14.2% 323 1092 NA
PBT 4,209 3,443 3,058 3,705 3,917 -6.9% 5.7% 10,679 21,565 NA
Tax 1590 549 820 908 1089 -31.5% 19.9% 2817 6899 NA
Adjusted PAT 2619 2894 2238 2796 2827 7.9% 1.1% 7862 14667 NA
(Profit)/loss from
3361 NA
JV's/Ass/MI
APAT after MI 2619 2894 2238 2796 2827 7.9% 1.1% 7862 18028 NA
Extra ordinary items NA
Reported PAT 2,619 2,894 2,238 2,796 2,827 7.9% 1.1% 7,862 18,028 NA
Reported EPS 65.0 65.8 58.8 30.5 30.8 -52.6% 1.1% 85.7 160.0 NA

Margins (%)
EBIDTA 37.8% 27.5% 31.9% 28.3% 29.9% -789 166 30.0% 32.4% 240
EBIT 34.2% 23.8% 27.2% 23.4% 26.3% -789 288 25.7% 28.0% 235
EBT 40.9% 31.2% 32.4% 39.7% 32.3% -859 -745 34.5% 30.5% -404
EAT 25.4% 26.2% 23.7% 30.0% 23.3% -213 -669 25.4% 20.7% -468
Tax rate 37.8% 15.9% 26.8% 24.5% 27.8% -996 329 26.4% 32.0% 561
*Note: YoY figures for Q3FY10 are restated by the company and are comparable on yoy basis . However YTD’10 nos are not adjusted for demerger of cement business hence
are notstrictly comparable.

Consolidated revenues decline 5% yoy- net profit declines 59%

On account of improved performance of VSF division, Grasims consolidated revenues for
the quarter at Rs53.84bn grew 12%yoy and 21% qoq. Consolidated EBITDA at Rs11.2bn
declined 19% yoy on account of 24.4%decline in EBITDA from cement division. Similarly
APAT after minority interest at Rs5.02bn declined 30% yoy.

Emkay Research 27 January 2011 2

 Grasim Industries Result Update

Consolidated Results
(Rs mn) Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 YoY (%) QoQ (%) YTD’11 YTD’10 YoY (%) Q3FY10
Revenues 47884 53856 50552 44390 53845 12% 21% 148787 145427 2.3% 47884
Exp 34035 40416 37513 37179 42644 25% 15% 117335 100959 16.2% 34035
EBITDA 13848 13441 13039 7211 11202 -19% 55% 31452 44468 -29.3% 13848
Other income 1263 1560 1598 1625 1472 17% -9% 4694 3751 25.2% 1263
Operating Margin 29% 25% 26% 16% 21% -812 456 21% 31% -9.4% 29%
PAT 7153 6545 5751 3234 5018 -30% 55% 14002 23411 -40.2% 7153

Segmental Performance

VSF
¾ Volumes at 84,621mnt grew 4.1% yoy and 25.4%qoq as Nagda Plant (which affected
volumes last quarter due to shutdown for 25 days) remained functional throughout the
quarter.

¾ Realizations are at Rs123.06/kg which have improved 12.3% yoy driven by cotton
shortage globally which has further deteriorated by damage of crops in Pakistan due to
floods and has resulted in improved demand for VSF.

¾ We would like to highlight that though on standalone basis VSF EBITDA declined by
3.7% yoy to Rs3.8bn (due to higher pulp prices), on consolidated basis it grew by 2.1%
to Rs4.28 bn on account of better profitability from Pulp JVs.

¾ EBITDA margins at 34.4 were lower by 753 bps from their highest margins of Q3FY10
but improved by 252 bps sequentially on account of improved realizations.

Chemical
¾ Sales volumes at 67136 tonnes grew 9.5%yoy and 30.1% qoq

¾ However realizations at Rs18125/t though improved 10%yoy declined by 6.6%

sequentially

¾ Resultant sales at Rs 1.47 bn (our estimate of Rs1.36bn) grew 22% yoy, while EBITDA
at Rs314 mn (lower than our estimates of Rs381 mn), grew by 11% yoy but declined by
2.8%qoq.

Segmental performance
(Rs mn) Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 YoY (%) QoQ (%) YTD’11 YTD’10 YoY (%)
Sales
VSF 9624 10447 8561 8555 11293 17.3% 32.0% 28409 25278 12.4%
Chemical 1213 1201 1187 1200 1475 21.6% 22.9% 3862 3728 3.6%
EBIDTA
VSF 4037 3632 3042 2728 3886 -3.7% 42.4% 9656 9566 0.9%
Chemical 283 247 311 323 314 11.0% -2.8% 948 1001 -5.3%
EBIDTA (%)
VSF 42% 35% 36% 32% 34% -753 252 34% 38% -385
Chemical 23% 21% 26% 27% 21% -204 -563 25% 27% -230

Emkay Research 27 January 2011 3

 Grasim Industries Result Update

Standalone Capex
Grasim has planned investments of Rs33.79 bn over next three years in VSF and Chemical
businesses. This includes Greenfield project of 120,000 tons at Vilayat, Gujarat at a cost of
Rs.1,690 Crores, which is expected to start commercial operation by FY2013 and
Brownfield expansion at Harihar with a capacity of 36,500 tons and plant upgradation at a
cost of Rs.449 Crores.

Cash Outflow
Net Capex
Rs Mn FY12 &
to be spent FY11
onwards
VSF Business
- Vilayat (120,000 TPD) and Harihar Project (36,500 TPD) 21390
- Other Capex 3340
Chemical Plant – Vilayat (182,500 TPD) 7720
Chemical Business and Other Capex 1340
Standalone Capex (A) 33790 5870 27920

Cement business Capex

Grasim has planned a total cement capex of Rs101.56 bn out of which UTCL has an
ongoing capex plan of Rs100 bn which will be spent over the next 3 years on augmenting
its grinding capacity in Gujarat, installing waste heat recovery systems and setting up of
packaging terminals across locations. Also the capex plans entails setting up of
clinkerization plants at Chhattisgarh and Karnataka. Consequent to these expansions total
cement capacity additions will be 9.2 mtpa with Overall capacity reaching 61.2mtpa.

Cash Outflow
Net Capex
Rs Mn FY12 &
To be spent FY11
onwards
Cement Subsidiaries
- Capacity expansion – 4.8 Mn TPA at Raipur,
Chhattisgarh and 4.4 Mn. TPA at Malkhed, Karnataka 56000
- Residual capex for earlier projects 6290
- Material Evacuation and Logistic Infrastructure 11810
- Thermal Power Plant (25 MW) & Waste Heat Recovery
System (38 MW) 4600
- Bricks (2 Units) & RMC Plants 1350
- Modernisation, Upgradation and others 21510
Cement Business Capex 101560 20690 80870

Emkay Research 27 January 2011 4

 Grasim Industries Result Update

Grasim SoTP fair value at Rs2,730

Business segment Valuation measure Rsmn Rs/share (Rs/share)
Equity value of consolidated cement business 284481
Grasim's Stake in cement business 60.3%
Value of Grasim’s stake in cement business 171627 1870 1870
Holding Co disc 0% 25%
Total value of cement business 171627.4 1872 1404
ADD: Value of Non Cement Business
Viscose Staple Fibre 5X EV/EBIDTA 72047 786 786
Chemical 3X EV/EBIDTA 3640 40 40
Other 3X EV/EBIDTA 934 10 10
Total Value Of Non Cement Business 76621 836 836
Total value of Investments @25% discount 52747 575 575
Total Enterprise value 300996 3282 2814
Less:
Standalone Debt 7362 80 80
Target Mcap 293634 3202 2734
Source: Emkay Research

Grasim’s Standalone Business significantly undervalued – FY12E implied

EV/EBIDTA at 2.5X
At current levels the stock is implying holding company discount of ~43%. Assigning a 25%
holdco discount to all investments of Grasim, at current levels, Grasim's standalone
business looks significantly undervalued with the implied multiples of 2.5x FY12
EV/EBITDA. We believe such pessimistic valuations are unwarranted, given that peak VSF
margins are ahead for us. Maintain our ACCUMULATE rating on the stock with a revised
price target of Rs2730.

Rs mn
Grasim's Current EV 221165
Less:
Value of Grasim 60.3% stake in Ultratech @ 25% Holdco Discount 128605
Value of other investment @ 25% discount to CMP 52689
Implied Value of Grasim Standalone business 39870
Grasim FY12E Standalone EBIDTA 15934
Implied EV/EBIDTA (X) 2.5

Emkay Research 27 January 2011 5

 Grasim Industries Result Update

Financials

Income Statement Balance Sheet

Y/E, Mar (Rs. m) FY09 FY10 FY11E FY12E Y/E, Mar (Rs. m) FY09 FY10 FY11E FY12E
Net Sales 184039 199334 195198 220233 Equity share capital 917 917 917 917
Growth (%) 7.9 8.3 -2.1 12.8 Preference paid up 332 363 363 363
Total Expenditure 140741 141467 150470 167283 Reserves & surplus 114209 123827 140148 159091
Raw Materials Cost 40813 37637 16863 18748 Networth 115579 125246 141567 160511
Power & Fuel cost 61016 62733 30856 34517 Minority Interest 16704 37548 43495 50699
Freight 9536 10586 10705 11775 Secured Loans 37197 38508 37544 43544
Others 29378 30510 92047 102243 Unsecured Loans 21964 17484 17305 18305
EBIDTA 43298 57867 44728 52950 Loan Funds 59162 55992 54850 61850
Growth (%) -12.6 33.6 -22.7 18.4 Net Deferred tax liability 15919 20057 20057 20057
EBIDTA % 23.5 29.0 22.9 24.0 Total Liabilities 207364 238844 259969 293117
Depreciation 8658 9947 10710 12498 Gross Block 210631 229509 251212 289684
EBIT 34640 47920 34018 40452 Less: Depreciation 68254 71646 82355 94853
EBIT Margin (%) 18.8 24.0 17.4 18.4 Net block 142377 157864 168857 194831
Other income 4530 5356 5120 5563 Capital work in progress 19822 7734 31145 45910
Interest 3104 3346 3855 4253 Investment 35627 66759 66759 66759
EBT 36066 49930 35283 41762 Current Assets 45343 45379 47364 50519
Tax 9914 15705 10797 13040 Inventories 22210 21835 18366 20496
Effective tax rate (%) 27.5 31.5 30.6 31.2 Sundry debtors 8239 8803 6912 7690
Adjusted PAT 26152 34225 24485 28722 Cash & bank balance 2270 2379 8611 8858
Growth (%) -21.8 30.9 -28.5 17.3 Loans & advances 12625 12362 13475 13475
Net Margin (%) 14.2 17.2 12.5 13.0 Current liabilities 35806 38891 54156 64902
E/O items -4444 -7141 -5947 -7204 Current liabilities 29245 30370 44247 54993
Reported PAT 21867 27595 18539 21518 Provisions 6562 8522 9909 9909
(Profit)/loss from JV's/Ass/MI 0.0 -3360.7 0.0 0.0 Net current assets 9537 6488 -6792 -14383
PAT after MI 21867 30955 18539 21518 Miscellaneous expenditure 1 0 0 0
Growth (%) -24.3 41.6 -40.1 16.1 Total Assets 207363 238844 259969 293117

Cash Flow Key Ratios

Y/E, Mar (Rs. m) FY09 FY10 FY11E FY12E Y/E, Mar FY09 FY10 FY11E FY12E
PBT (Ex-Other income) 36066 49930 30163 36199 Profitability (%)
Depreciation 8658 9947 10710 12498 EBITDA Margin 23.5 29.0 22.9 24.0
Interest Provided 2658 3143 3855 4253 Net Margin 14.2 17.2 12.5 13.0
Other Non-Cash items -2859 -2045 0 0 ROCE 20.7 23.9 15.7 16.6
Chg in working cap -2885 -1497 19511 7838 ROE 21.1 22.9 13.9 14.2
Tax paid -5509 -11190 -10797 -13040 RoIC 28.1 30.8 21.6 24.9
Operating Cashflow 36129 48288 53442 47748 Per Share Data (Rs)
Capital expenditure -26412 -14555 -45114 -53237 EPS 238.5 301.0 202.2 234.7
Free Cash Flow 9717 33733 8328 -5489 CEPS 333.0 409.5 319.1 371.1
Other income 1548 12497 5120 5563 BVPS 1261 1366 1544 1751
Investments -11661 -32909 0 0 DPS 30 30 20 23
Investing Cashflow -36526 -34967 5120 5563 Valuations (x)
Equity Capital Raised 222 18 0 0 PER 9.9 7.9 11.7 10.1
Loans Taken / (Repaid) 6664 -4647 -1143 7000 P/CEPS 7.1 5.8 7.4 6.4
Interest Paid -3316 -4039 -3855 -4253 P/BV 1.9 1.7 1.5 1.4
Dividend paid (incl tax) -3033 -3025 -2218 -2574 EV / Sales 1.3 1.0 1.0 0.9
Income from investments 392 -1009 0 0 EV / EBITDA 5.5 3.5 4.4 3.8
Others -1166 -520 0 0 Dividend Yield (%) 1.3 1.3 0.9 1.0
Financing Cashflow -237 -13221 -7216 173 Gearing Ratio (x)
Net chg in cash -633 100 6232 246 Net Debt/ Equity 0.2 -0.1 -0.1 -0.1
Opening cash position 2903 2270 2379 8611 Net Debt/EBIDTA 0.5 -0.2 -0.5 -0.3
Closing cash position 2270 2370 8611 8858 Working Cap Cycle (days) 2.4 0.5 0.0 0.0

Emkay Research 27 January 2011 6

 Grasim Industries Result Update

Recommendation History: Grasim Industries – GRASIM IN

Date Reports Reco CMP Target

15/12/2010 Grasim Industries Company Update Accumulate 2,365 2,730

01/11/2010 Grasim Q2FY11 Result Update Accumulate 2,240 2,600

02/08/2010 Grasim Industries Q1FY11 Result Update Accumulate 1,587 2,340

24/05/2010 Grasim Industries Q4FY10 Result Update Accumulate 2,453 2,997

Recent Research Reports

Date Reports Reco CMP Target

25/01/2011 Ultratech Cement Q3FY11 Result Update Reduce 1,019 1,040

21/01/2011 Orient Paper Q3FY11 Result Update Buy 50 77

21/01/2011 Cement Sector Update

31/12/2010 IRB Infrastructure Event Update Accumulate 224 304

Emkay Global Financial Services Ltd.

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