Cluster: Apple Green
Price target: Rs3,950
Current market price: Rs3,627
Price target revised to Rs3,950
- Grasim reported a 25.3% yoy topline growth to Rs2,519.2 crore during Q2FY2008 on the back of robust realisations of the VSF division as well as pick up in the sponge iron and chemicals division.
- The overall EBITDA jumped by 51.3% yoy to Rs805.5 crore driven by a whopping 81% yoy growth in VSF profits which stood at Rs316 crore. The cement division's profits grew by 24.2% yoy to Rs442 crore whereas the sponge iron and chemicals division's profits jumped by 292% to Rs269 crore.
- Overall margins expanded by 550 bps to 32% mainly as the VSF margins expanded by 900 bps to 40%. The cement margins expanded by 110 bps to 32.3%.
- Interest expenses were up 13% yoy to Rs27.2 crore due to higher borrowings in the quarter whereas the depreciation increased by 15.8% yoy to Rs87.5 crore due to part commissioning of VSF expansion in FY2008.
- The other income increased by 14% yoy to Rs57.3 crore thanks to deployment of surplus cash. Consequently, the PAT was up 48.1% yoy to Rs500 crore, beating our expectations
- As we mentioned in our earlier reports, Grasim is expanding its cement capacity by 10.4 MMT including a 4.4 MMT plant at Shambhupura and 4.5 MMT Greenfield plant at Kotputli. The capex is progressing as per schedule whereby the facility at Shambhupura is expected to get commissioned by Q4FY2008 and at Kotputli by Q1FY2009.
- The company is expanding its VSF capacity by 94875 tonne to 366000 tonne including a 63875 tonne expansion at Kharach, Gujarat and 31000 tons at Harihar in Karnataka. Additionally, the company also has announced an Rs.840 crore Greenfield plant of 88000 tons at Vilayat,in Gujarat which is expected to be commissioned in the next 24 months.
- The VSF division is peaking at the right time for the company in the wake of an expected downturn in the cement cycle in the next one-year. Going ahead the strong volume growth for the VSF business coupled with better realisations and cost control, will drive the cashflows of the company more than offsetting the fall in the cashflows of the cement business. Also, any surprise on the cement prices will only be positive for the company. Consequently, we believe this is one of the most comfortably placed companies in our cement pack. At the current valuations, the stock trades at 13.7x its FY2008E EPS and 15.7x its FY2009E EPS. The company's cement business is trading at valuation of USD 125 on the expanded capacity which is cheap considering the fact that benchmark valuations have gone up as mentioned in earlier reports. Taking cognizance of the cheap valuations of the cement business coupled with the positive outlook for the VSF business, we are upgrading our SOTP price target to Rs3,950 per share.
Cluster: Ugly Duckling
Price target: Rs581
Current market price: Rs530
Diwali sales deferred to Q3
- The Q2FY2008 results of ICI India are not comparable on a yoy basis due to divestment of several businesses in FY2007. The net sales for the quarter stood at Rs239.1crore.
- The paints business revenue grew by 5.6% yoy to Rs202.2 crore in Q2FY2008. The growth appears subdued due to high base effect as the festive sales on account of Diwali got deferred to Q3 as against most of it being registered in Q2 of FY2007. Thus we expect the paints division to record handsome growth in Q3FY2008.
- The continued chemical business grew by 21.9% yoy to Rs36.8 crore. Thus the overall revenues of the continued businesses grew 7.8% to Rs239 crore. The discontinued business (surfactant and advanced refinish) had contributed Rs22.8 crore to the company's total revenues in Q2FY2007.
- The PBIT in the paint business declined by 3.8% yoy with a 90 basis-point contraction in the margin to 9%. The PBIT in the continued chemical business grew 41.9% yoy with the margin expanding by 234 basis-points to 16.6%. After the sale of the Uniqema business, the chemical business now contributes only 15.4% to the top line as against 21.7% in Q2FY2007.
- Overall, the operating margin stood at 12.5% against 13% in Q2FY2007. With a higher other income at Rs6.5 crore for the quarter against Rs3.9 crore in Q2FY2007 the adjusted net profit grew by 3.5% yoy to Rs21.3 crore.
- Pursuant to the scheme of buy back, till the end of the quarter the company has bought back 15.87 lakh shares against a target of buying back ~36.7 lakh shares (worth Rs211.06 crore).
- The outlook for the business remains positive with the company following a strategy of divesting non-paint businesses and focusing more on growing the paints business. Further a cash pile of ~Rs700 crore leaves open inorganic growth opportunities for the company.
- We have realigned our estimates for FY2008 and FY2009 considering H1FY2008 performance. The buyback of shares and the expected open offer by Akzo make the stock attractive for investors. Thus we expect the stock to remain an outperformer. We shall revisit our numbers and target price on further moves by Akzo Nobel. At the current market price of Rs530, the stock trades at 18x its FY2008E adjusted EPS of Rs29.4 and 16x its FY2009E adjusted EPS of Rs33.1. We maintain our Buy recommendation on the stock with a price target of Rs581.