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Expansions to drive volume growth

Grasim Industries’ (Grasim) Q1FY22 standalone EBITDA at Rs7.4bn was above our / consensus estimates led by improved profitability across both VSF and chemicals. VSF EBITDA improved to Rs40/kg from Rs37/kg as realisation improved 9% QoQ, while chemical EBITDA margin improved to 19% from 12% QoQ as ECU realisation improved 12% QoQ. The company will be augmenting VSF capacity by 38% to 801ktpa and chemicals capacity by 33% to 1,530ktpa by H2FY22, providing strong volume visibility.

Factoring better profitability, we raise our FY22-23E EBITDA by 3-4%, and coupled with the recent run-up in stock prices of its various holdings, we increase our target price to Rs1,610/sh (earlier: Rs1,575) based on 8x Jun’23E EV/E (earlier: 7xMar’23E), assuming unchanged 50% holdco discount. Maintain ADD. Key risk: Lower demand / pricing in VSF / chemicals.

* VSF revenue (including VFY) rose 2.8x YoY and declined 18% QoQ to Rs21.0bn. The performance was impacted by lower domestic sales volume due to covid-led restrictions; the impact of which was partially mitigated with business stepping up exports (31% in Q1FY22 against 11% in Q4FY21). The Harihar plant maintenance shutdown in May’21 also led to lower volumes in VSF business. The value added share in the overall portfolio increased to 26% in Q1FY22 as against an average of 22% in FY21. Realisation improved 9% QoQ and 35% YoY.

In China, VSF inventory increased from 13days in Mar’21 to 24 days in Jun’21, while utilisation dropped from 84% to 69% QoQ. Lower VSF demand in China was primarily on account of deceleration in pipeline restocking witnessed in Q4FY21 and other seasonal factors. As a result, VSF prices moderated to 12,871RMB in Jun’21 from 15,805RMB in Mar’21. VSF EBITDA (including VFY) stood at Rs4.9bn in Q1FY22 against EBITDA loss of Rs1.3bn in Q1FY21; declined 22% QoQ.

* Chemical revenue doubled YoY and declined 2.5% QoQ to Rs14.4bn, while EBITDA increased 5.7x YoY and 49% QoQ to Rs2.75bn. Improvement in ChlorAlkali business was driven by higher sales volume, better ECU realisation and lower power cost with QoQ performance driven by higher realisation and lower fixed cost. Caustic soda sales improved 71% YoY and declined 11% QoQ to 238kte implying ~85% utilisation.

* Net debt increased by Rs9.0bn QoQ to Rs18.2bn owing to higher working capital needs. Net debt/EBITDA (on an annualised 12M basis) stood at 0.56x. Grasim spent Rs3.8bn in capex in Q1FY22 and expects to incur Rs25bn capex (expaints) in FY22. Divestment of fertilisers division for a consideration of ~Rs16bn is likely to consummate in Q2FY22.

* Grasim achieved EU’s best available technology (BAT) compliance (verified by independent 3rd party) at VSF Vilayat site. This technology is expected to drastically reduce sulphur-to-air emission by 85%. The Nagda plant is likely to be the first to achieve zero liquid discharge (ZLD) in viscose industry which is expected to complete by Q2FY22.

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