Emkay Research has maintained accumulate rating on Grasim Industries with target price of Rs 3270. On EV/ ton basis the stock is trading at USD 174 for FY2008 and USD 108 for FY2009.

Grasim Industries’ (Grasim) Q1FY2008 standalone net profit at Rs 5.11 billion is ahead of our expectation primarily because of better then expected cement and VSF realizations. Also the other income was higher than expected and interest and tax charge was lower than expected. This coupled with better than expected performance by its 51% subsidiary Ultratech Cement meant that the consolidated net profit at Rs 6.69 billion was also ahead of expectation. The standalone revenue for the quarter stood at Rs 24.45 billion up 30.3%, driven by a stellar 25% growth in cement revenues and a stupendous 58% growth in VSF revenues. EBIDTA for the quarter grew by a very healthy 54% to Rs 7.92 billion driven by 30% growth in EBIDTA of cement division and 124% growth in EBIDTA of VSF division. The consolidated net profit for the quarter grew 54% yoy to Rs 6.69 billion. We are upgrading our consolidated earnings estimates for Grasim by 11% for FY2008 and 7% for FY2009. The company has also enhanced the capex program by 10% for cement capacities at its Shambupura and Kotpotli. On account of our earnings upgrade for Grasim Standalone and price target upgrade for Ultratech Cement we are upgrading our price target for Grasim to Rs 3270. At current levels the stock is trading at 10.2X its FY2009 earnings and 4.5X its FY2009 EBIDTA. On EV/ ton basis the stock is trading at USD 174 for FY2008 and USD 108 for FY2009. We maintain our accumulate rating on the stock.

Results highlights

Grasim Industries’ (Grasim) Q1FY2008 standalone net profit at Rs 5.11 billion is ahead of our expectation primarily because of better then expected cement and VSF realizations. Also the other income was higher than expected and interest and tax charge was lower than expected. This coupled with better than expected performance by its 51% subsidiary Ultratech Cement meant that the cons olidated net profit at Rs 6.69 billion was also ahead of expectation.

The standalone revenue for the quarter stood at Rs 24.45 billion up 30.3%, driven by a stellar 25% growth in cement revenues and a stupendous 58% growth in VSF revenues.

The growth in VSF division looks very steep as VSF operations in Q1FY2007 were impacted by water shortage, which meant that the division utilized the capacities sub-optimally. VSF volumes yoy grew by a very smart 33.6%, where as on the back of strong demand the VSF realizations improved a very healthy 20% yoy to Rs 94.5 per kg. The VSF to further build up on this stellar performance as the company has further hiked VSF prices by 6-7% at the start of Q2FY2008.

With peak capacity utlisation of 118%, cement volumes (inclusive of white cement) improved by a decent 11.3% and cement realisation improved by 12.5%. RMC business also did well with a strong 19% growth in volumes.

EBIDTA for the quarter grew by a very healthy 54% to Rs 7.92 billion driven by 30% growth in EBIDTA of cement division and 124% growth in EBIDTA of VSF division.

While the VSF division did benefit from higher volumes and better realisations, higher proportion of captive pulp (Nagda operation impacted in Q1FY2007) and appreciation of the Indian currency agains t the dollar also helped improving EBIDTA margins for the division. Consequently EBDITA margins for the VSF division stood at a very healthy 36.7% as compared to 25.9% in Q1FY2007.

With decent volume growth and healthy cement realization, the EBDITA margins for the cement division improved by 140 bps to 35.3%. The improvement in EBIDTA margins could have been higher but for a 28% rise in fuel cost and 8% rise in freight cost.

With decent volume growth and healthy cement realization, the EBDITA margins for the cement division improved by 140 bps to 35.3%. The improvement in EBIDTA margins could have been higher but for a 28% rise in fuel cost and 8% rise in freight cost.

Grasim’s Chemical division reported decent growth of 57% in EBIDTA as the operations of the division stabilized with maintenance works for the captive power plant getting over and the base effect kicking in (production in Q1FY2007 impacted due to water shortages). Even though then realization for the quarter were down 10% yoy, 40% growth in sales volumes and conversion to membrane cell technology (which helped in reducing power cost) helped the report a decent margin expansion of 750 bps. However sequentially the chemical division did report a 430 bps margin erosion.

The Sponge iron division also did better than expectations as the division reported a 148% growth in its EBIDTA as the sponge iron realisation improved making it viable to use even high cost Naphtha to boost the production and sales volume. With higher scrap prices sponge iron realization improved by 22% yoy.

With higher treasury income the other income for the quarter grew by 80%. Interest charge for the quarter grew by 21% depreciation charge grew by 14.7%. Consequently net profit for the quarter grew by a very healthy 64% yoy to Rs 5.11 billion.

Consolidated revenue for the quarter grew by 26.5% driven by 21% growth consolidated cement revenues and 55% growth consolidated VSF revenues. Consolidated EBIDTA grew by 37.3% as margins expanded by 250bps to 31.2%. The consolidated net profit for the quarter grew 54% yoy to Rs 6.69 billion.

Outlook

Going forward Grasim cement business is expected to report stable performance as the earnings would largely be driven by better volumes and cost rationalization exercise. The cement prices though could firm in Q3FY2008, they are unlikely show significant improvement as witnessed in FY2007. Also in a longer cement prices are expected to soften as FY2009 and FY2009 cumulatively is expected to witness huge capacity addition of 70 million tonne, which in turn could disrupt demand supply equation and thereby taking its toll on cement prices. The VSF business is expected to better its performance as in Q2FY2008 as apart from the 20% yoy increase in VSF realisation witnessed during this quarter, the company has further increased prices by 6-7% at the start of Q2FY2008. Also the volumes are expected to be healthy on account of capacity expansion and robust demand for cellulosic yarns. Overall the outlook for the division remains positive. On the back better realisation and the availability of gas by December 2007 the sponge iron division is expected to further improve its performance driven by better volumes. Chemical division however is expected to register muted performance as surplus capacities would continue to put pressure on realisation.

Upgrading earnings

We are upgrading our consolidated earnings estimates for Grasim by 11% for FY2008 and 7% for FY2009 on account following reason-

* Significant better performance of the VSF business and a further price hike of 6-7%
* Hike in cement capacity expansion at Shambupura and Kotputli
* Higher other income and lower interest charge
* Upgrade in earnings of Ultratech cement- ( upgrade of 11% for FY2008 and FY2009)

Upgrading price target to Rs 3270

On account of our earnings upgrade for Grasim Standalone and price target upgrade for Ultratech Cement we are upgrading our price target for Grasim to Rs 3270. The key changes in our target price are –

* Revision of cement capex plans for Standalone and cons olidated cement business
* Peak cycle EV/EBITA multiple of 7X FY2009 for VSF business.