Investor's Eye: Update - Grasim Industries (Price target revised to Rs3,405), Banking (CDR restructuring cases continue to rise)

 

Investor's Eye [September 26, 2012]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE   Grasim Industries Cluster: Apple Green Recommendation: Hold Price target: Rs3,405 Current market price: Rs3,237 Price target revised to Rs3,405 Key points VSF prices increase in September 2012  The price of viscose staple fibre (VSF) has increased in September 2012 and with that the average price for Q2FY2013 is expected to be higher by around Rs3/kg on a quarter-on-quarter (Q-o-Q) basis. The VSF realisation of Grasim Industries (Grasim) was Rs128/kg in Q1FY2013. Now, as per the current price, the average realisation for Q2FY2013 is expected to be around Rs131/kg. The recent price hike is supported by a better demand environment and an increase in the prices of the competing fibres like cotton (whose price has increased by Rs8-10/kg).  VSF volume in Q2FY2013 to be higher on Y-o-Y as well as Q-o-Q basis The better demand environment for VSF products in the domestic as well as the international markets will help the company to register a higher volume in Q2FY2013 as compared with Q2FY2012. The VSF volume is also expected to be higher on a sequential basis as the VSF plant was shut for about 27 days in Q1FY2013. Therefore, the likely growth in the realisation and the volume is expected to support the stand-alone revenues of the company in the coming quarter.  Government authority recommends de-allocation of Grasim's coalfield in Chhattisgarh As per media reports, the Inter-Ministerial Group looking into coalfield allocations has recommended taking back coal blocks from Grasim. Grasim and Electrotherm jointly hold a coal block in Bhaskarpara, Chhattisgarh. The government panel has recommended that the block be cancelled. Grasim acquired the coal block in Chhattisgarh to produce cement and reduce its dependency on imported coal. However, the block is not operational and is not contributing to the coal requirement of the company at present. Therefore, the likely move will not have any direct impact on the earnings of the company. Further, the de-allocation of the coal block is just a recommendation made by the panel and needs to be finalised by the government.  Cement prices increased by Rs5-6/bag to offset the diesel price hike; the average cement price remains lower compared with Q1FY2013 On account of the recent hike in the diesel prices by Rs5/litre, the cement manufacturers have increased cement prices by Rs5-6/bag to offset the cost inflation. However, cement prices corrected significantly in August and early September 2012. Therefore, the average price of cement in the major Indian cities has corrected by around Rs10-12/bag compared with the Q1FY2013 level. Further, as per our channel check with the cement dealers, the price correction has been relatively high in the southern region and less in the northern and western regions. On the demand front, most of the regions in India have witnessed a slowdown on account of slower than expected execution of the infrastructure projects and a sluggish demand from the real estate segment. Therefore, the revenues of Grasim's cement business would decline sequentially in the coming quarter. However, the revenues from the cement business are expected to be higher in Q2FY2013 on a year-on-year (Y-o-Y) basis.  Outlook and valuation We continue to prefer Grasim to the other large players due to its strong balance sheet, comfortable debt-equity ratio (0.32x Q1FY2013), attractive valuation and diversified business. On the valuation front, we continue to value the stock using the sum-of-the-parts valuation method and arrive at a revised fair value of Rs3,405 per share. However, on account of a sharp run-up in the stock price of the company in recent times (Grasim has appreciated by 27% in the past three months), we maintain our Hold recommendation on the stock with a revised price target of Rs3,405. At the current market price, the stock trades at a price/earnings ratio of 11.5x and 10.4x, discounting its FY2013 and FY2014 estimated earnings per share respectively.   SECTOR UPDATE Banking CDR restructuring cases continue to rise We recently met the deputy general manager of the Corporate Debt Restructuring (CDR) cell to understand the asset quality scenario and the reasons for a rise in the restructuring cases.  Restructuring proposals rising rapidly  Due to weakness in the macro economy there has been a significant increase in the number of bank loan restructuring proposals. In the first five months of the fiscal, around 60 cases amounting to Rs31,000 crore were approved by the CDR cell. Going ahead, the cumulative restructured loans could inch up to Rs3.25 lakh crore by FY2013 end (~6.1% of the system's advances) as projected by rating agency CRISIL. Iron & steel the largest contributor so far; infrastructure's contribution could rise The iron & steel sector is the largest contributor (23%) to the restructured loans followed by the infrastructure, textiles and telecommunications sectors. As per the CDR cell, the proportion of restructuring proposals from the infrastructure sector is expected to increase due to the ongoing issues in the power and road segments.  RBI committee's recommendations on restructuring largely positive for the sector The Reserve Bank of India (RBI) committee's recommendations on restructured loans are positive for the banking sector. The committee recommended increased provisions and higher promoters' contribution in sacrifice in cases of restructuring of loans. Banks have submitted the feedback and the final guidelines are expected by October end. ...but two points of contention emerge The banks have a difference of opinion over mainly two points, ie on the regulatory forbearance and the calculation of the sacrifice amount. According to them, doing away with the regulatory forbearance on standard restructured loans would result in a sharp increase in the non-performing assets (NPAs) and provisioning. The banks want clarity on the calculation of the diminution in the fair value of the restructured advances. Further, the banks also want some relaxation in the right to recompense which is 100% at present. Private banks better placed vs PSBs  The number of restructuring proposals continues to rise at a scorching pace and the public sector banks (PSBs) have seen a faster growth in the number of restructuring proposals. The sharp increase in the CDR referrals and even in the non-CDR restructuring cases suggests rising stress on the asset quality of banks. Going ahead, we believe the restructuring proposals would increase, albeit at a slower rate, since most of the big-ticket accounts, Air India etc, have been restructured. Further, the RBI's final guidelines on restructuring (expected by October end) will also discourage the non-genuine cases. The private banks are better placed as for them the proportion of restructured loans (1.6% of advances vs 5.7% for the PSBs) remains much lower than the PSBs'. Though we are cautious on most PSBs because of their high exposure to the troubled segments and higher proportion of restructured loans, we prefer Bank of Baroda, Punjab and National Bank, and State Bank of India due to their reasonable valuation and stronger earnings profile which shall help them to withstand asset quality pressures. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

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