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Better VSF outlook

Grasim Industries’ (Grasim) Q4FY21 standalone EBITDA at Rs8.1bn (up 2.5x YoY) was broadly in-line with our / consensus estimates led by sharp improvement in VSF profitability. VSF EBITDA improved to Rs37/kg from Rs27/kg QoQ as realisation improved from Rs120/kg to Rs144/kg QoQ. However, the spread between VSF and pulp is expected to normalise with increasing pulp prices and some softness in VSF prices. Factoring better VSF profitability, we raise our FY22-23E EBITDA 4-6% and coupled with the recent run-up in stock prices of its various holdings, we increase our target price to Rs1,460/sh (earlier: Rs1,330) based on 7x FY23E EV/E, assuming unchanged 50% holdco discount. Maintain ADD. Key risk: lower demand / pricing in VSF / chemicals.

* VSF revenue (including VFY) rose 20% QoQ and 23% YoY to Rs25.8bn. It operated at 100% utilisation for second consecutive quarter and posted 8% YoY volume growth. Realisation improved 20% QoQ and 16% YoY. In China, VSF inventory declined significantly from 45days in Apr’20 to 13 days in Mar’21 although it increased from 10days in Jan’21. Coupled with strong demand recovery and huge price gap vs cotton, China VSF prices rose sharply from 12,800RMB in Jan’21 to 15,800RMB in Mar’21 and global VSF exit Mar’21 prices were 13% higher than average Q4FY21. VFY utilisation rose from 89% to 98% QoQ in Q4FY21. VSF EBITDA (including VFY) rose 140% YoY and 30% QoQ to Rs6.25bn. VAP share in overall portfolio increased from 22% to 26% QoQ. Domestic markets constituted 89% of the overall volumes.

* Chemical revenue increased 15% both QoQ and YoY to Rs14.7bn, while EBITDA remained almost flat at Rs1.8bn owing to higher costs. ECU realisation improved owing to higher utilisation however rise in imports kept pressure on domestic prices. Caustic soda sales improved 3% QoQ and 6% YoY to 267kte. Chlorine consumption in VAPs stood unchanged at 27% QoQ.

*Net debt declined by Rs20.8bn during FY21 to Rs9.1bn despite incurring capex of Rs15bn, aided by working capital release. Divestment of fertilisers for a consideration of Rs26.5bn is likely to consummate in H1FY22. The company will be augmenting VSF capacity by 38% to 801ktpa and chemicals capacity by 33% to 1,530ktpa by Q3FY22. Besides, the company announced 125ktpa epoxy expansion. Hence, the company expects to incur Rs26bn capex (ex-paints) for FY22. Company announced higher Rs9/sh dividend (including Rs4/sh special dividend) for FY21 vs Rs4/sh dividend for FY20.

* Company had earlier announced strategic choice to enter paints business with Rs50bn capex over the next three years with ambition to be strong no.2 player both in terms of market share and profitability over ‘reasonable’ period. The company is in the process of hiring senior professionals and specialists and is actively engaged in acquiring land for plant locations.

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