IGI Logo

Core business performance improves.

Diversified portfolio offers long-term growth opportunities GRASIM’s FY22 Annual Report highlights integration across the value-chain and diversification into new businesses. The key strategic elements are: 1) capacity expansion to cater to the growing demand across businesses; 2) increase in percentage of chlorine integration to 40% by FY25; 3) improving share of renewable energy (RE) in the overall power mix; 4) setting up zero liquid discharge (ZLD) plants to reduce emissions; and 5) foray into high growth businesses – Paints and B2B e-commerce. We maintain our Buy rating on the stock with a TP of INR1,880.

Standalone performance improved in FY22

* Standalone revenue grew 68% YoY to INR209b. EBITDA grew 105% YoY to INR32b. EBITDA margin increased by 2.8pp YoY to 15.4%. The improvement in performance was led by higher sales volume and better realization, which was partly offset by a rise in raw material and input cost in 2HFY22, amid a volatile external environment.

* Earnings before tax and exceptional items grew 191% YoY to INR30b, led by improved EBITDA and an increase in other income (up 74% YoY to INR9b backed by higher dividend from UTCEM). Adjusted PAT (adjusted for the prior period tax reversal and exceptional items) grew 150% YoY to INR22b.

GRASIM holds numero uno position domestically in VSF; outlook positive

* VSF volumes grew 30% YoY to 602KT in FY22, albeit on a low base. However, the same was higher by only 9% as compared to FY20 levels. VSF capacity utilization stood at 97% in FY22 v/s 76% in FY21.

* Net revenue/EBITDA for the VSF business grew 75%/45% YoY to INR122b/ INR17b. However, EBITDA margin declined by 3pp YoY to 14% due to a sharp increase in raw material and input costs in 2HFY22.

* VSF demand in India is expected to grow at 10% CAGR over CY21-25, led by rising Textile consumption due to population growth, rising urbanization, and improved standards of living.

The Chemical business reports a strong performance in FY22

* Caustic soda volumes grew 16% YoY to 1.04mt in FY22. However, it was higher by only 5% as compared to FY20 levels. Caustic soda capacity utilization stood at 88% v/s 78% in FY21.

* Net revenue for the Chemical business grew 72% YoY to INR79b. EBITDA grew 160% to INR15b. EBITDA margin surged 6.6pp YoY to 19%, led by a significant improvement in realization and improved sales volumes.

Capacity expansions and a foray into new business to aid growth

* GRASIM commissioned its 600tpd brownfield expansion in two phases in 2HFY22 at Vilayat, Gujarat, taking its total VSF capacity to 824ktpa. It aims to raise its VSF capacity by 48tpd through debottlenecking across three plants.

* GRASIM has expanded its caustic soda capacity by 12.5% YoY to 1,290ktpa. It added a capacity of 142ktpa across Rehla, Jharkhand (91ktpa) and Balabhadrapuram, Andhra Pradesh (51ktpa) in FY22.

* The company commissioned a chloromethane plant with a capacity of 55ktpa (Phase I) at Vilayat, Gujarat, which will help improve chlorine integration.

* Looking at the strong demand growth in advanced materials, the management is doubling its existing capacity (to 246ktpa from 123ktpa) through brownfield expansion at its existing location by FY24.

* The management’s focus is on integration across the value chain and diversifying into new segments. It has forayed into two businesses: Paints and B2B e-commerce. Both businesses will be the growth engine to its existing portfolio of businesses.

Deleverages its Balance Sheet; supports capex needs of new ventures

*  GRASIM turned net cash positive, partly backed by proceeds from the divestment of the Fertilizer business. The latter was completed as of 1st Jan’22 for a total consideration of INR18.7b. Its net cash balance (standalone) stood at INR8.5b v/s a net debt of INR9.1b. Its standalone net debt-to-EBITDA ratio stood at (0.3x) in FY22 v/s 0.6x in FY21.

* It has been generating strong cash flows, with the cumulative OCF at INR84b in FY20-22 (v/s INR72b over FY17-19). FCF fell over FY20-22 as cumulative FCF stood at INR20b (v/s INR36b over FY17-19) owing to a higher capex. Going forward, capex will remain high, given the capacity expansion in its existing businesses and foray into new businesses, which is likely to turn FCF negative

Foray into Paints augurs well; maintain our Buy rating

* GRASIM, via its holdings in UTCEM, is a quasi-play on the Cement space. In our SoTP valuation for GRASIM, UTCEM contributes 65%. We are positive on the Cement business, with UTCEM being our top pick in the largecap space.

* GRASIM’s plan to invest INR100b in the Paints business indicates its intent of entering this space on a large scale. We view its entry into this business as a positive step as this marks its diversification into the high-growth, high-RoCE segment from cyclical and non-core (divestment of its Fertilizer business has been completed) business segments.

* The distribution network for Birla White and Putty consist of 54,000 dealers, with a 70% overlap between Paints and Birla White dealers. This, coupled with a strong brand recall for the Birla group, will help it succeed in the Paints business.

* We value the standalone business at 6.5x FY24E EV/EBITDA and other listed subsidiaries at a 35% HoldCo discount to arrive at our revised TP of INR1,880.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer