Recommendation: Buy
CMP = Rs 3,627
Price target: Rs 3,950
Result highlights:
- Grasim reported a 25.3% yoy topline growth to Rs 2,519.2 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 Rs 805.5 crore driven by a whopping 81% yoy growth in VSF profits which stood at Rs 316 crore. The cement division’s profits grew by 24.2% yoy to Rs 442 crore whereas the sponge iron and chemicals division’s profits jumped by 292% to Rs 269 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 Rs 27.2 crore due to higher borrowings in the quarter whereas the depreciation increased by 15.8% yoy to Rs 87.5 crore due to part commissioning of VSF expansion in FY2008.
- The other income increased by 14% yoy to Rs 57.3 crore thanks to deployment of surplus cash. Consequently, the PAT was up 48.1% yoy to Rs 500 crore, beating our expectations.
- 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, I maintain Buy call on this stock with price target of Rs 3,950.
