India - High input costs may keep Grasim growth in check
Dated- 26 Jan , 2012 - Pakistan
For Grasim, the December quarter was marked by an improvement in cement realisations which boosted its operating margin by 30 basis points year-on-year.
The company's consolidated cement despatches also rose 5% y-o-y to 10.4 million tonnes in the third quarter with its cement division -- its subsidiary Ultratech Cement contributing nearly 76.4% of its consolidated net sales. That helped offset the sluggish performance of its smaller viscose staple fibre (VSF) business.
Grasim, however, had a tough operating environment to contend with in its VSF business with rising input costs coupled with the key user industry - the textile sector-- adopting a cautious stance after the Eurozone crisis. Segment profit of this division also fell 31.4% y-o-y in the third quarter.
Strong cement realisations on a per tonne basis helped offset higher input costs for this division. This coupled with a jump in its other income, enabled Grasim's consolidated net profit improve 33.3% y-o-y in the third quarter.
The growth in its net profit in the third quarter on a y-o-y basis was faster than that reported in the first two quarters of the current financial year on a y-o-y basis.
Grasim, however, says that the results of the December quarter are not strictly comparable with a year earlier. That's because the consolidation of results of the earlier acquisition of Sweden-based pulp maker Domsjo Fabriker with Grasim was with effect from June 2011.
For instance, Coal India has announced anew pricing mechanism for coal supplies from the current month and analysts tracking the sector say that this could lead to a further rise in power and fuel costs for the cement sector. This could squeeze operating margins of cement companies in the near term or cement prices will need to rise further.
Cement prices have also been broadly strong across the country, in the postmonsoon season. However, analysts remain cautious on the company's VSF business in the near term, given the uncertainty being faced by the key user industry in the near term.
The stock trades at a consolidated P/E of nearly 8.4 times on a trailing fourquarter basis and appears reasonable.
