Grasim Industries to focus on cost optimization to increase net profit

Grasim Industries Ltd, a flagship company of the Aditya Birla Group, started as a textile manufacturer in 1948. Today its core businesses are VSF and cement, contributing over 90% of its revenues and operating profits. It is also present in chemicals that are essentially a backward integration of VSF. Currently, Grasim is focusing relentlessly on cost optimization which is hitting the net profit.

The company’s net profit for the quarter ended 30 June was at Rs487.13 crore from Rs610.01 crore for the same quarter a year ago, a decline by 20.14 percent in its consolidated net profit due to higher operation cost. However, net sales for the quarter rose 15.72% to Rs7976.34 crore as compared to Rs6892.76 crore year ago. Total operating cost rose 20.41% at Rs7184 crore for the reporting quarter.

During the quarter under review, the company commissioned two lines of aggregate capacity of 77,000 million tonne per annum of viscose staple fibre (VSF) business at Vilayat, Gujarat, in July. It has also added a 25 MW thermal power plant at Malkhed, Karnatak, 2014 and 6.50 MW waste heat recovery system at Awarpur, Maharashtra, during the quarter in the cement business.

The company said that margins were under pressure due to the pricing environment in both VSF and cement businesses, given the present over capacity in these sectors.

The PBIDT (profit before interest, depreciation and tax) stood at Rs1,488 crore against Rs1,549 crore for the same quarter a year ago. The interest and depreciation has gone up with the commissioning of the various projects, the full benefits of which will be available in gradual manner. The tax charge was also higher due to lower exempt income and recent changes in tax laws.

Due to the overcapacity of VSF in China, the VSF sector margins are likely to continue under pressure in the near term. Going forward, the slowdown of new capacity additions in China should lead to an improvement in industry utilization which augurs well for the company.

On Friday, shares of Grasim Industries ended at Rs3218.35 a piece on BSE, down 0.08% from previous close.