Grasim's operating margin hit hard by high input costs in Jan-Mar

 24-May-2022

Grasim Industries Ltd's earnings performance in the March quarter was hit by steep fall in operating margin even as revenues showed robust growth. The bottomline was saved by tax write-backs and deferred tax credits.

The Aditya Birla Group Company’s net profit more than doubled to 10.7 bln rupees in Jan-Mar from 4.8 bln rupees in the year ago quarter. Excluding the discontinued fertiliser segment revenues of the year-ago quarter, the net profit rose to 8.1 bln rupees from 4.6 bln rupees.

Grasim’s revenues from operations were up 45% on year to 64.8 bln rupees.

Viscose staple fibre and yarn segment’s revenue rose 46% to 37.7 bln rupees on the back of a 22% growth in sales volume to 179,000 tonne. The segment’s operating profit, however, fell sharply to 2.5 bln rupees in Jan-Mar from 6.3 bln rupees in the same quarter a year ago.

The company’s chemicals segment revenues went up by 69% to 24.9 bln rupees, notwithstanding the low 3% growth in caustic soda sales to 273,000 tonne. The company said the chlor-alkali business reported a strong performance in Jan-Mar.

The chemicals segment’s operating profit surged to 5 bln rupees in the March quarter from 1.9 bln rupees a year ago.

The overall operating margin, however, took a big hit due to surge in key input costs in Jan-Mar. The quarter saw on-year rise of 60% or more in three major expense heads.

The result was a drastic contraction in the operating margin to 11.8% in Jan-Mar from 18.4% a year ago.

Raw material costs rose sharply by 66% on year to 29.9 bln rupees while power and fuel costs surged by 68% to 10.5 bln rupees and other expenses rose by 60% to 10.3 bln rupees.

The surge in operating expenses brought down the operating profit by 7.3% on year to 7.5 bln rupees in the March quarter.

The sharp margin contraction would have led to a highly subdued bottomline performance for Grasim but a tax write-back of 3.2 bln rupees and a deferred tax credit of 1.2 bln rupees that enabled it to show a two-fold rise in net profit.

Grasim’s net cash stood at 5.5 bln rupees as of Mar 31.

The company, today, also announced a normal dividend of 5 rupees per share and an additional special dividend of 5 rupees per share.

Today, shares of Grasim ended 3.7% lower at 1,402.75 rupees on the NSE.

 

SEBI Watch: Focus on liquidity impact on IPOs may yield better result

20-May-2022

In a speech in February, the then Securities and Exchange Board of India Chairman, Ajay Tyagi, remarked that the appropriateness of valuation of new-age, loss-making companies coming out with initial public offerings was being debated intensely among stakeholders.

These debates appear to have picked up pace in recent weeks with the IPO frenzy fizzling out in line with the fall in secondary market equity indices.

Even in the case of the large IPO of Life Insurance Corp of India, the government had to bring down the valuation in order for the issue to scrape through.

The post-issue share performance of recent high-profile IPOs such as Zomato and Paytm have disappointed retail investors.

A report in Mint on Wednesday said that SEBI was currently having internal discussions on why recent high-profile IPOs were trading below their issue price. It said that SEBI was also telling IPO aspirants to reconsider their valuations.

Over the last one year, the stock market regulator has strengthened the disclosure requirements by companies in their red herring prospectuses for IPOs, and also tweaked other norms around exit of large shareholders through the offer for sale route.

These changes have mostly focused on the new-age companies.

The debate inside SEBI on IPO valuations is fine but the fact that they are high is known to investors, including the retail and other individual investors. Even anchor investors who are qualified institutional buyers and for whom a portion of the IPO is reserved are not oblivious to it.

The problem is not that of lack of awareness.

Investors, of all size, are flush with funds to invest and desperate for quick returns from listing gains.

For investors, with not enough funds to subscribe into IPOs, brokerage houses and non-banking finance companies have supplied easy money. 

The IPO market started heating up in the middle of 2020. Since the liquidity in the investment ecosystem was near all-time highs at that time the issues were getting subscribed in high multiples and also delivering significant listing gains.

Investment bankers took advantage of this and prodded unlisted companies and their private equity investors to cash in on the IPO boom.

Ultra-short term return-hunting traders are always on the prowl in secondary market trading on the stock exchanges. During periods of primary market boom they get another market to play in.

Retail investors are lured by the promise of high and quick returns.

These factors have played out in IPOs in the last 18 months.

SEBI has done everything in its capacity to improve measures at the level of disclosures on corporate fundamentals. But it has stopped short of measures to control leverage and liquidity in IPO subscriptions.

SEBI must explore measures to curb recklessness in IPO financing by brokers and NBFCs. Such financing is also seen in the pre-listing IPO grey market.

The leverage available to ultra-short term investors is substantially high. The market regulator will not hurt anyone if this is tempered.

Further, the rush for returns has its own rolling mass effect. Retail investors subscribe to IPOs in larger quantity in order to improve their chances of getting allotment and this feeds on itself leading to higher over-subscription multiples.

SEBI must, therefore, review the allotment process to deter such frantic investments. If there is a way to assure a minimum level of allotment to each subscriber it must be quickly implemented.

SEBI must also consider extending the lock-in period for anchor investors. Their subscription in an IPO, before it opens for public investors, has bearing on the latter.

A longer lock-in period will indicate that anchor investors are committed for a longer time and that will provide a better signalling effect at the time of IPO.

Usually, regulators avoid fiddling with valuations in the market. The market must be let free to decide. The demand-supply dynamics may not always be what the regulator wants.

Any fizzling out of issues in the primary market ought not to be the regulator’s worry. Markets ebb and flow. It is a natural cycle.

The market regulator must only ensure that the processes that grease the market ecosystem are not gamed and manipulated.

Earnings Review: Shree Cement PAT hit by high input cost and low sales

21 May 2022

A big jump in power and fuel costs and lacklustre revenue growth caused Shree Cement Ltd’s bottomline to fall in the quarter ended March. A decline in some other operating costs, depreciation charge and tax outgo could not offset the impact of power and fuel costs.

The second largest listed cement company, by market capitalisation, recorded an 18% fall in its consolidated net profit to 6.6 bln rupees in Jan-Mar.

Shree Cement’s consolidated revenue from operations went up by 3.1% to 43.6 bln rupees.

At a standalone level, the company’s net profit was down 16% to 6.5 bln rupees, slightly higher than analyst estimates of 6.4 bln rupees. The revenue from operations were up 3.6% to 41 bln rupees and was below analyst estimates of 42.5 bln rupees.

The consolidated operating expenses were pre-dominantly hit by a substantial rise in power and fuel expenses which jumped 76% on year to 12.7 bln rupees. It accounted for one-third of total operating expenses.

Petcoke and coal prices determine the power and fuel costs for cement companies, and prices of both have been on a continuous rise for the last three quarters.

The 76% rise in power and fuel costs was the highest in 12 quarters, data from Informist Corporate Fundamental Database showed. It was possibly the largest increase ever.

It was the main factor that led to a 26% fall in operating profit to 9.2 bln rupees.

The operating margin stood at 21.1% in Jan-Mar, making it the lowest margin level in 14 quarters. It was also significantly lower than 29.4% a year ago.

The change in other primary operating costs in Jan-Mar did not cause pain to Shree Cement’s profitability.

In Jan-Mar, the freight costs were down 1.1% to 9.6 bln rupees while the raw material costs were up 3.3% to 3.1 bln rupees.

The company also cut its staff costs by 19% on year to 2.2 bln rupees.

The bottomline performance would have been hit harder had the tax expenses not fallen sharply by 73% on year to 482 mln rupees and the depreciation charge of 3 bln rupees not been 10.1% lower than the year ago level.

The company, today, also announced a final dividend 45 rupees a share for 2021-22 (Apr-Jun).

TREND: Equity ETF assets growth hinges upon EPFO investments

10 May 2022
 
The four exchange traded fund schemes in which the Employees Provident Fund Organization holds it equity exposure is largely driving the high growth in ETF assets in the domestic funds industry.
 
As of Mar31, the assets under the four broad-based equity market ETFs of SBI Mutual Fund and UTI Mutual Fund which gets the EPFO investments in equities, were 2.51 trln rupees which made up for around 91% of all broad-market equity ETF assets and around 75% of all equity ETF assets.
 
The last financial year, 2021-22 (Apr-Mar), saw the assets of these four ETFs—SBI Nifty 50 ETF, SBI Sensex ETF, UTI Nifty 50 ETF and UTI Sensex ETF — grow by 45%.  In comparison, actively managed equity scheme assets were up by a lower rate of 39%, and all ETF assets grew by 49%.
 
Adjusting for the Nifty 50 Total Returns Index's one-year return of 20.26 as of Mar31, the assets growth of the four ETFs was 21%.
 
EFPO has to invest 5-15% of its incremental corpus every year in the equity ETFs, and around 80% of total assets of the four ETFs are is estimated to be on account of EPFO investments.
 
The EPFO deploys its equity investments between SBI MF ETFs and UTI MF ETFS in the ratio of 75-25.
 
Half-yearly statutory disclosures by SBI MF's Nifty 50 ETF indicated a single investor accounted for 74% of its Nifty 50 ETF assets and 90% of its Nifty Sensex assets as of Mar 31. This, say analysts, is EPFO money.
 
Thus, the total assets of the two SBI MF ETF assets were 1.96 trln assets of which 1.56 trln rupees, or 79.4%, were on account of EPFO investments.
 
Similarly, UTI MF's Nifty 50 and Sensex ETF assets were 545 bln rupees on Mar 31 of which an estimated 85%, or 465 bln rupees, was on account of EFPO's investment.
 
The National Stock Exchange of India recently said that the assets of ETFs and index funds tracking the Nifty 50 crossed a new milestone of 2 trln rupees. Vikram Limaye, the exchange's Managing Director and Chief Executive Officer, said that this due to "efforts put in by all stakeholders including Ministry of Finance, Ministry of Labour & Employment , SEBI, EPFO (Employees Provident Fund Organization), asset management companies, investors, trading members, etc."
 
Clearly, the EPFO investments in equity ETFs has a substantial say in the mutual fund industry's ETF asset growth story.
 
Back- of- the- book calculations indicate that EPFO's ETF investments grew by 21% on year to 2.03 trln rupees and after adjusting for index returns, around 350 bln rupees of fresh inflows took place in the four ETFs.
 
The assured nature of EPFO incremental corpus coming into the Nifty 50 and Sensex tracking equity ETFs have helped enabled share prices of Nifty 50 and Sensex stocks weather recent foreign institutional investor outflows in equities.
 
Going forward, this trend is expected to continue. But there will be pressure on EFPO to book profits in old ETF assets to provide returns of over 8% to its subscribers in the current financial year. EPFO has been investing in equity ETFs since 2015-16 (Apr-Mar).