Grasim, the diversified major in the Aditya Birla Group, has posted impressive results for the fourth quarter and full year ended 31st March 2004. While net sales have increased by 13% in FY04, excluding the extraordinary adjustments in both the years, net profit has risen by 40%.

This impressive numbers have come about on account robust growth in cement sales in 4QFY04 combined with significant improvement in operating margins. With the steel cycle also in favour of producers, both sales and realisations have increased significantly during 4QFY04.

(Rs m)	4QFY03	4QFY04	Change	FY03	FY04	Change
Net sales	12,192	15,532	27.4%	46,233	52,333	13.2%
Other income	557	721	29.3%	1,158	1,803	55.7%
Expenditure	9,755	11,120	14.0%	36,034	39,383	9.3%
Operating profit (EBDITA)	2,437	4,413	81.0%	10,199	12,950	27.0%
Operating profit margin (%)	20.0%	28.4%	-	22.1%	24.7%	-
Interest	406	351	-13.6%	1,684	1,539	-8.6%
Depreciation	658	682	3.7%	2,541	2,731	7.4%
Profit before tax	1,931	4,101	112.4%	7,132	10,484	47.0%
Extraordinary items	(1,686)	-	-	(1,686)	289	-117.1%
Tax	240	1,280	433.3%	1,770	2,980	68.4%
Profit after tax/(loss)	5	2,821	-	3,676	7,793	112.0%
Net profit margin (%)	0.0%	18.2%	-	8.0%	14.9%	-
No. of shares (m)	91.7	91.7	-	91.7	91.7	-
Diluted earnings per share (Rs)*	0.2	123.1	-	40.1	85.0	-
P/E ratio (x)	-	-	-	-	14.0	-
(* annualised)	-	-	-	-	-	-

The turnover growth in 4QFY04 is among the highest in FY04 at 22%. One key factor, which we believe has led to this robust growth is the recovery in cement prices. The growth is much higher compared to a 8% growth in sales in 3QFY04 on a YoY basis.

Though sales volumes for FY04 grew by 7% accompanied by a marginal rise in realisation, much of it has come about in the last quarter of the fiscal year. After growing by just 4% in 1HFY04, the cement sector grew at a faster rate of 7% in 2HFY04. This was accompanied by an estimated 5% to 7% improvement in price realisation. Grasim, being the market leader, has reaped the benefit of the same.

Revenues of the sponge iron division have almost doubled in 4QFY04, led by increased price realisation. Infact, for FY04, while volumes sales are higher by 11%, price realisation has jumped by 44%. This is primarily on account of a favorable steel cycle. Given the fact that steel prices could soften in the next one year or so, this division could witness an erosion in PBIT margins in the medium term.

The VSF division (viscose filament yarn) continues to grow at a slower rate (1% volume growth and a 6% value growth) and is in line with expectations.

As is evident from the graphs, the improvement in operating margins has to viewed with respect to the performance of the cement, sponge iron and textile businesses. In 4QFY04, for instance, PBIT margin of the sponge iron division stood at 43%, which is at the historic high level.

We believe that this kind of margins are not sustainable and one could see a reversal as early as in FY05 itself. However, the cement division is in for good times in the future, as the pricing environment seems to be on the favorable side. The company has clearly outperformed our estimates on the margin side. Net profit, excluding the extraordinary adjustments in FY03 and FY04, has increased by 40% in FY04. The loss in FY03 was on account of sale of stake in MRPL to ONGC.

The stock currently trades at Rs 1,191 implying a P/E multiple of 14x FY04 earnings. The company's performance in FY04 was above our estimates.

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