Hold on Grasim & buy at dips – outlook improves on VSF
Holders of Grasim may hold on to present position and the stock may also be accumulated at price dips. The company is a leading manufacturer of Viscose Staple Fibre (VSF) and the outlook for VSF has turned positive.
Positive outlook on VSF is mainly due to increasing prices of cotton as flood in Pakistan, inventory replenishment and harvest delays are expected to keep cotton prices firm. This may help VSF demand and price level as VSF is a close substitute to cotton.
Company is expected to report stand alone revenue of Rs.1000 crore and operating profit of Rs.320 crore for the second quarter FY11, a growth of 7% each on q-q due to improving VSF realization and flat sales.
However, consolidated performance of the company would be negatively impacted due to lower price realization from cement. Consolidated revenue is likely to be in the range of Rs.4180 crore and operating profit is expected at Rs.920 crore for the second quarter.
Grasim has plans to invest Rs.11500 crore over the next three years for VSF and cement capacity addition. Company is setting up 80000 MT VSF plant in Gujarat, which is expected to be completed by FY13. Total cost is expected at Rs.1450 crore.
In addition, Rs.4500 crore would be invested in its cement subsidiaries and another Rs.5600 crore investment is planned for setting up a clinkerisation plant in Chattisgarh.
Considering good prospects, the stock is recommended to hold on and one may consider accumulating this stock at price dips.
Sector Watch – Cement
Cement companies are expected to report weak performance for the September10 quarter. Checks with dealers have indicated that price has not improved significantly in the north and the east while prices have recovered from the lows in the south. However, demand outlook continues to remain weak.
It seems that sector profitability may remain weak due to lower pricing power on excess capacity and escalating costs.
Ultratech is expected to report 50% q-q fall in operating profit as price realization is expected to decline by 16% q-q.
Sales of ACC is likely to fall by 16.6% y-y during the September quarter and operating profit is expected to decline by 44.6%.
Sales of Ambuja Cement may drop by 2.8% y-y for the September quarter and operating profit may fall by 41% q-q.