The Factors Responsible for this De-Growth were Industry Specific

Although Grasim Posted its lowest Profit in Five Years, most of The Factors Responsible for this De-Growth were Industry Specific. 

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.

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Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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