Grasim Industries improved its performance in the March 10 quarter, thanks to a strong performance in its VSF business, which helped the company’s standalone operating profit margin rise by 360 basis points Y-o-Y to 28.2%. Grasim’s net sales also increased 16.9% Y-o-Y to Rs 3,437.3 crore in the quarter under review.

As per the restructuring plan announced earlier by Grasim, its cement business demerged to its wholly-owned subsidiary Samruddhi Cement and it has provided the quarterly results, including the cement division, to facilitate comparison. In addition, Grasim’s results of the fourth quarter are not strictly comparable with a year earlier, given the sale of its sponge iron unit in May ’09.

Meanwhile, in its VSF division, a revival in the global textile industry, helped realisations in this division rise by a healthy 25.6% to nearly Rs 1.2-lakh per tonne in the quarter under
review, while sales volumes rose 31%

Y-o-Y to 85,714 tonne. As a result, segment profit of this division jumped 315% Y-o-Y to Rs 335 crore.
However, in its cement division, realisations declined nearly 2.7% Y-o-Y to Rs 4,200 per tonne, while its total sales volume grew 10.6% Y-o-Y to 5.3 million tonne.

The realisations have been affected, given the company’s presence in southern and western regions, where cement prices weakened on a Y-o-Y basis in the fourth quarter. Grasim’s standalone cement division’s realisations for the quarter have been calculated by adjusting the sale of UltraTech Cement, from the consolidated cement segment’s sales.

An improved performance of the VSF division helped Grasim’s standalone net profit jump 56.7%

Y-o-Y to Rs 603 crore during the quarter. The stock declined 2.5% to Rs 2,513.5 on Thursday, given the difficult outlook for the cement industry. That’s because analysts are not optimistic of a revival in the cement
division’s realisations over the next few quarters due to increased capacities being brought on stream in the South.

In addition, the rising cost of the key input, coal, is also a cause for concern. As per the restructuring plan announced earlier, Aditya Birla’s cement business will ultimately be housed in UltraTech, and the merger between Samruddhi and UltraTech is expected to be completed shortly.

Grasim is also expanding its VSF capacity with a greenfield project that will have a capacity of 80,000 tonne at a cost of Rs 1,000 crore in Gujarat. The stock trades at 7.4 times on a consolidated basis on a trailing four-quarter basis and we are neutral on the stock.