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Cover Story

From #32 in 2010 to #62 in 2011! Is all Well at Grasim?
Although Grasim Posted its lowest Profit in Five Years, most of The Factors Responsible for this De-Growth were Industry Specific.
Issue Date - 21/07/2011
What started just 10 days after India became independent is now the global leader in Viscose Staple Fibre (VSF, a semi-synthetic fibre made from naturally occurring polymers) – the company holds 21% global market share in the category. And not just VSF, it’s today the country’s largest merchant producer of sponge iron, the second-largest caustic soda maker and the eight-largest cement manufacturer in the world. Grasim Industries, one of the flagship companies of Aditya Birla Group, has certainly come a long way since its inception in 1948.

However, it seems that the last fiscal didn’t turn out to be a usual lucky year for the company which contributes about 15% to the conglomerates’ (read: Aditya Birla Group) total turnover. Reason: For FY 2011, Grasim Industries reported a massive 43.5% decline in its net profit, from Rs.20.92 billion in FY2010 to Rs.11.82 billion in FY2011. This, in turn forced the company to decent to rank 62 in the B&E Power 100 list for 2011 from 32 last year.

Although this was the company’s lowest profit figure in the last five years, most of the factors responsible for this de-growth were industry specific. The decline in profit had nothing to do with the operational performance. In fact, if analysts are to be believed, the company posted yet another year of splendid growth, as it has been doing over the last many years. For instance, over the last decade, the production of VSF has risen from 218,000 tonnes to 302,000 tonnes. Even the production scale for Grey Cement has grown from 9.10 million tonnes to 9.54 million tonnes during the same decade. As for the Ready Mix Concrete, its production has also sprung from a mere 0.10 million cubic metres to 1.08 million cubic metres in the last 10 fiscal years. Agrees J. Radhakrishnan, Research Analyst at IIFL as he tells B&E, “Grasim Industries has performed very well in the last fiscal, particularly on the VSF front.”

Buoyed by a global shortage in cotton and revival in the textile industry, the VSF business posted 17% y-o-y topline growth, from Rs.35.74 billion in FY2010 to Rs.41.70 in FY2011. Although the sales volume went down slightly, from 308,431 tonnes in FY2010 to 305,072 tonnes in FY 2011, realisations improved by 17%. However, operating profit margin (OPM) of the VSF business declined by 750 basis points y-o-y due to a substantial increase in input costs as they could not be passed on entirely. During the year, costs of major inputs such as pulp, sulphur and energy increased by 35%, 119% and 17%, respectively and this made a major dent in the company’s bottomline. In fact, analysts fear that the trend might continue in the near future as well.

Even the company’s cement business was grappling with issues like increase in input costs (a rise in raw materical prices, including coal and pet-coke) and higher employee cost due to wage settlement. This coupled with lower cement realisations affected overall profitability of the company in FY2011. Agrees Adesh Gupta, CFO & Whole-time Director, Grasim Industries as he tells B&E, “The cement business has been facing oversupply issues, due to which in the early part of the year, particularly in Q2 FY2011, the cement realisation and profits had fallen to unrealistic levels. In the same quarter, even the VSF business had gone through market related challenges. However, the better profits in the fourth quarter helped in nullifying the lower up to date profits of the year.” At the same time, he adds that volumes were maintained by the VSF business despite a shutdown at one of their plants. Further, it’s the consumer awareness that has led to a growth in VSF demand.

But then, there are critics like Jinal Joshi, Sr. Research Analyst at Jaypee Capital Services, who doesn’t sound very optimistic about Grasim’s performance in the last fiscal. “Grasim’s stock underperformed the indices in the last fiscal. Grasim’s stock generated negative return of 12.5% y-o-y in the last fiscal as compared to 11.5% positive return generated by Nifty during the same period. Stock price of Grasim underperformed the indices due to overall negative sentiments attached to its core business segment - ‘Cement’ (Grasim holds 60% in the listed cement subsidiary ‘UltraTech’).

Thus, looking at the market scenario and the current trends in both the cement as well as the VSF sector, Grasim Industries aims at working on a few key elements to bring in added efficiency to both its sectoral performance and its ability to deliver on the key result areas (KRAs). In fact, Grasim is now planning to start with improving logistics cost efficiency by creating a hub and spoke model.

When it comes to cement business, owing their own rakes has been the company’s focus. Innovations, both on the cost efficiency front and development of new products, especially on the RMC (ready mix concrete) and Wall Care Putty side, is a continuous process in the cement business, and the company intends to work on that front. This will certainly help the company in the long run as analysts expects all-India cement demand growth to be 8–10% for FY2012, as against 7%, 10.8% and 9% in FY2011, FY2010 and FY2009, respectively.

For their VSF business they are now focusing on specialty fibres. Having developed the technology and new capacity plant at Vilayat in Gujarat, the company is all geared up to produce specialty fibre. Claiming to have a strong R&D base in the VSF business, both at the product as well as product application level, the future is set to beckon the company even though the terrain might be rocky at various sojourns. But it looks like there’s nothing stopping them, at least for the moment.

Shephali Bhatt           

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