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Published on 25/06/2019 11:38:48 AM | Source: Choice Broking Pvt Ltd

Buy Grasim Industries Ltd For The Target Rs.1,017.4 - Choice Broking

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Grasim Industries Ltd.

(Grasim), reported its Q4 FY19 numbers, which was above our expectations. The company reported a bottom-line of Rs. 5,063.2mn (as against our expectation of Rs. 4,228.9mn) on a top-line of Rs. 53,522.7mn (as against our expectation of Rs. 51,855.6mn).

 

Q4 FY19 result analysis:

Robust demand in domestic market led to a 16.1% rise in top-line:

Grasim reported a 16.1% Y-o-Y rise in standalone top-line to Rs. 53,522.7mn in Q4 FY19. The growth was mainly aided by 12.8% and 21.4% Y-o-Y rise in VSF and chemicals sales volume. Higher VSF volume was supported by increased capacity. VSF sales realization remained strong during the quarter and increased by 4.3% Y-o-Y. With VSF sales volume primarily driven from the domestic market, the company was able to withstand realization despite drop in the global VSF prices. Blended chemicals sales realization declined by 3.4% Yo-Y, mainly due to lower realization in the epoxy business. In FY19, standalone top-line increased by 30.2% to Rs. 205,513.1mn. VSF and Chemicals segment reported 23.3% and 28.7% Y-o-Y rise in the business. VSF sales volume and realization increased by 11.2% and 10.9%, respectively, while chemicals sales volume and blended realization increased by 16.7% and 10.2%.

 

EBITDA margin contracted due to lower epoxy realization and higher pulp cost:

During the quarter, total operating cost increased by 18.4% Y-o-Y, thereby leading to a 5.6% Y-o-Y rise in standalone EBITDA to Rs. 8,985.7mn. EBITDA margin contracted by 166bps Y-o-Y to stood at 16.8% in Q4 FY19. Segmentwise, higher pulp cost dented the VSF EBITDA margin, which contracted by around 2ppts to 15.7%. In the Chemicals segment, lower epoxy realization led to a 279bps Y-o-Y contraction in margin to 25.7% in Q4 FY19. In FY19, EBITDA increased by 32.3%, with around 30bps expansion in margin to 19.8%. VSF segment EBITDA margin stood at 19.9% (flat as compared to FY18 level). Positive chlorine realization mainly led to a 237bps expansion in the Chemicals segment EBITDA margin to 28.4 in FY19.

 

Adjusted PAT increased by 26.1% Y-o-Y:

With a increase in capacities over the year, depreciation charge increased by 6.6% Y-o-Y in Q4 FY19. Finance cost declined by 3.7% Y-o-Y. With almost double the effective tax rate, adjusted PAT declined by 14.4% Y-o-Y to Rs. 5,063.2mn in Q4 FY19. PAT margin contracted by 337bps Y-o-Y to stood at 9.5% in Q4 FY19. For the full year i.e. FY19, adjusted PAT increased by 26.1% with a margin of 12.5% (around 40bps contraction in margin over FY18 levels).

 

LIVA usage extension from apparels to home textile - to drive the domestic VSF demand:

Before the launch of the LIVA brand, Grasim’s VSF sales volume increased by 4.4% CAGR over FY10-14. However, post the launch, VSF sales volume increased by 9.8% CAGR over FY15-19. The LIVA brand has well established itself in the textile value chain and is creating a huge pull for viscose fiber in the market. The usage of VSF in women’s clothing has witnessed a steady rise. To further boost the demand of VSF in the domestic market, the company extended the LIVA consumption from apparels to home textile category by launching “LIVA HOME”. Such initiatives with strong client engagement is expected are keep the domestic VSF demand growth in excess of the global VSF demand growth. Thus, with higher domestic VSF sales concentration, Grasim would avoid the volatility in global VSF prices, thereby maintaining the profitability.

 

Cost pressure to ease in coming quarters:

Despite global VSF capacity expansion, VSF sales volume is expected to be robust in the domestic market, but there might to certain pressure on the realization. In the Chemicals segment too, the sales volume is expected to be strong. Going forward, the management has indicated that pulp prices has softened, which would aid in VSF margin expansion in near term. Also higher chemicals sales volume is likely to partially offset the possible drop in the blended chemicals realization. Overall easing cost pressures coupled with various cost reduction initiatives, would help the company in maintaining the margins at current levels.

 

Valuation:

We are anticipating a 6.2% CAGR rise in the top-line over FY19-21 to Rs. 231.9bn in FY21E. Consolidated EBITDA and PAT would increase by 7.4% and 3.5% CAGR, respectively. By demonstrating better operating results in the challenging environment, we increase our FY21E earnings estimate by 12.6% and thus increase the target price from Rs. 1,017.4 per share to Rs. 1,101. Thus we reiterate our “BUY” rating on the stock.

 

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