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Our Take:

GHCL hasrecently approved the demerger of its Textiles business through a Scheme of Arrangement into a separate company. This demerger would deliver various operational and strategic benefits to each of the company’s business segment, leading to focused growth, concentrated approach, synergies and increased operational and customer focus. We expect value unlocking in both the businesses, considering they both have different business dynamics and risk/return profiles. The positive demand outlook for both soda-ash and home textile businesses reinstates our positive view on the company.

GHCL continues to derive strength from its integrated position in the domestic soda-ash industry. It has a healthy operating performance in its soda-ash division, led by strong clientele, cost competencies (mainly on the back of its captive mines of lignite and limestone along with availability of salt), and favorable demand-supply dynamics of domestic soda ash industry in the medium term. GHCL’s performance is expected to moderate in FY21 compared to that in FY20, mainly on the back of subdued demand for soda ash from glass segment due to lower off-take by construction, real estate and auto industries. We expect a 14.6% revenue decline in FY21E and 19.8% revenue growth in FY22E.

In the Home textiles segment, yarn has witnessed robust domestic demand, especially from low/medium value garments. There has also been growth in profitability on account of reduction in employee costs, third-party work allowing higher plant utilization levels, and yarn prices increasing more than cotton prices, thereby improving the spread. We expect growth momentum for spinning and yarn in the near to medium term and company has guided EBITDA margin at 14-15%, which would be sustainable, going ahead.

Valuations & Recommendation: GHCL has an established position in the domestic soda ash industry, which is oligopolistic in nature with three top players. It has captive source of raw material for lignite, limestone and salt, leading to cost competencies. Further, its soda-ash division meets most of the power requirement through captive sources. Thus, given its consistent ability to generate cash and sustainable demand across sectors, we are positive on the soda ash business. The outlook for Home Textile business has also enhanced substantially, given the improving margin profile, led by firm pricing and cost initiatives.

Management believes that pricing pressure would remain on soda ash due to the rejection of antidumping duty application for exports from USA and some producers of Turkey (refiling expected in the near term). Better outlook for growth rate and stable profitability, reasonable valuation, healthy balance sheet and company's aspiration to reach industry growth level makes our view on the stock optimistic.

The demerger of the Textiles division could result in value unlocking and giving each segment the valuations they deserve. The process of demerger could get over in the next couple of months. We think once the record date for the demerger is announced, the stock price could begin to perform anticipating value unlocking. Soda Ash business, though a commodity one, generates steady absolute profits period after period, while Textiles margins are volatile depending on many factors. We believe the base case fair value of the stock is Rs 272 (5.5x FY23E EPS) and the bull case fair value of the stock is Rs 298 (6.0x FY23E EPS) over the next two quarters. Investors can buy at LTP and add further on dips in the Rs 217-219 band (4.4x FY23E EPS). At the LTP of Rs 234, the stock is trading at 4.7x FY23E EPS.

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