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Earnings improve led by a recovery in the VSF segment

But margin remains a drag in the Chemicals segment

* GRASIM’s 4QFY21 result exhibits the benefits of higher VSF prices and sustained cost reduction as EBITDA grew 106% YoY (26% QoQ) to INR8.1b.

* We cut our FY22E/FY23E standalone EBITDA by 7%/17% to factor in weak margin outlook for the Chemical business. The holding company discount of 44% is in line with its 10-year average of 48%. Maintain Neutral.

VSF pricing boosts EBITDA

* Revenue/EBITDA/PAT (excluding the Fertilizer business in the base quarter) rose 18%/149%/5x YoY to INR43.9b/INR8.1b/INR4.9b, and was 4%/5%/28% higher than our estimate. The beat was led by better than expected performance in the VSF business on the back of higher volumes and pricing.

* Revenue/EBITDA for the VSF segment improved 23%/139% YoY to INR25.8b/INR6.2b led by higher volumes (+8% YoY), better VSF pricing (+16% YoY), and sustained cost reduction. EBITDA margin at 24.2% is the highest in a decade.

* Revenue/EBITDA for the Chemicals business rose 14%/78% YoY (low base) to INR14.7b/INR1.9b. Caustic soda volumes rose 6% QoQ to 267kt. EBITDA margin at 12.6% was much lower than its last five-year average of 22.5%.

* Net debt declined by INR11.8b QoQ to INR9.1b in 4QFY21 (FY20 - INR29.7b).

* For FY21, revenue/EBITDA/adjusted PAT (excluding the Fertilizer business) fell 23%/27%/27% YoY to INR124b/INR15.6b/INR8.9b due to lower volumes.

* While OCF declined 32% YoY to INR24b in FY21, FCF grew 49% to INR12.1b due to lower cash capex of INR11.8b (v/s INR27b in FY20).

Highlights from the management commentary

* The management expects near term VSF margin to have peaked out as the price of pulp (a key raw material) has increased substantially.

* Sale of the Fertilizer business should be completed by Sep’21 (earlier Jun’21).

* The company plans to increase its epoxy capacity by 125ktpa via brownfield expansion at Vilayat, Gujarat. In the Chlor-Alkali business, it is planning ~200TPD brownfield expansion at Vilayat.

* Capex guidance for FY22 (excluding the Paints and Fertilizer segment) stands at INR26b.

* GRASIM is in the process of acquiring land for its Paints facility. It has not guided at capex allocation for the Paints business in FY22.

Valuation and view

* While the outlook for the Viscose business has improved, we expect margin for the Chemicals segment to remain muted due to significant capacity expansion over the next two years.

* Given GRASIM’s conglomerate business structure, we value it on a SoTP basis at INR1,475. Our TP values: a) the standalone business (Viscose, Chemicals, etc.) at 6x FY22E EV/EBITDA, b) UTCEM at a 50% holding company discount to our TP, and c) other listed investments (ABCAP, IDEA, HNDL, and ABFRL) at a 50% holding company discount to its market price. Maintain Neutral.

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