Grasim Industries rating – Add: Strong revenue growth in quarter

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Grasim Industries’ (Grasim’s) Q3FY22 standalone Ebitda at Rs 9.2 bn (up 42% y-o-y) was broadly in line with our/consensus estimates. VSF Ebitda declined to `20/kg from Rs 33/kg q-o-q despite 9% q-o-q increase in realisation owing to higher input costs of pulp, caustic, fuel etc. However, the same was offset by higher margins in caustic Ebitda which increased from 14.5% to 23.4% q-o-q led by sharp 62% q-o-q increase in ECU realisation. The company recently augmented VSF capacity by 37% to 810ktpa and chemicals capacity would increase by 33% to 1,530ktpa by Q1FY24, providing strong volume visibility over FY23-24e. Factoring in stock price correction in its various holdings, we reduce our TP to Rs 1,732/sh (earlier Rs 1,965/sh) based on 9x FY24e EV/E and assuming unchanged 50% holdco discount. Maintain Add. Key risk: Lower demand/pricing in VSF/chemicals.

VSF revenue (including VFY) rose 55% YoY and 11% QoQ to Rs 33.4 bn. VSF volumes grew 2% q-o-q and 11% y-o-y to 157kt implying >90% utilisation. Realisation increase of 9% q-o-q and 46% y-o-y was short of sharp costs escalations, resulting in Ebitda/kg declining to Rs 20/kg. VAP sales contributed 29% vs 27% q-o-q and 22% y-o-y. Share of domestic sales increased to 91% in Q3FY22 vs 84% q-o-q owing to strong demand from textile players.

With global VSF utilisation improving to >80%, lower Chinese plant inventory days (18 in Jan’22 vs 32 in Sep’21) and increasing competing fibres (cotton, polyster etc) prices, mgmt expects prices to inch up further. Besides, costs have likely peaked out in Q3FY22 with correction in pulp and caustic prices and hence, VSF margins are likely to improve going ahead. VFY segment reported revenues of Rs 5.7 bn and Ebitda of Rs 0.8 bn. Pulp JVs volume and revenues were down by ~15% q-o-q.

Chemical revenue rose 83% y-o-y (up 44% q-o-q) to Rs 23.4 bn, while Ebitda grew 198% y-o-y and 127% q-o-q to `5.3 bn led by sharp 87% y-o-y and 62% q-o-q rise in ECU realisation. Global caustic prices rose sharply owing to energy consumption policy of China and maintenance shutdown in a few US caustic plants. Chlorine consumption in VAPs stood at 28% in Q3FY22. Caustic soda sales improved 8% y-o-y and 10% q-o-q to 279kt implying ~93% utilisation. Chlor-alkali business expects to increase the share of green power from 3% in 9mFY22 to 10% in FY23.

Standalone Grasim turns net cash company with balance of Rs 4.3 bn in Jan’22 post receipt of Rs 18.6 bn proceeds from divestment of fertiliser business. Net cash is likely to further increase over FY23-24e even as we factor in capex of Rs 54bn over FY23-24e. Grasim spent Rs 14.8 bn in capex in 9mFY22 and expects to incur Rs 26 bn capex (ex-paints and fertilisers) in FY22. It has received EC for Panipat and Ludhiana paints plants and has incurred capex of Rs 5.05 bn in paints business in 9mFY22.