IGI Logo

VSF’s capacity utilization increased to 93% in 4Q v/s 74% in 3Q

* Grasim’s 4Q result significantly missed our estimates due to weak operating performances of the VSF and Chemical segments. EBITDA stood at INR4.3b v/s estimated INR7b and OPM stood at 6.4% v/s estimated 11.5%. Adjusted PAT (for tax adjustments) stood at INR935m (est. INR3.2b).

* Capacity utilization of VSF improved to ~93% v/s 74% in 3QFY23 and is expected to remain at 90%+ going forward; however, profitability will take time to normalize due to a volatile global macro environment. Average quarterly spot prices (CFR SEA) for caustic soda declined 25% QoQ to USD694/t, which affected the profitability of the chemical segment.

* We cut our EBITDA estimates by 23%/13% for FY24/FY25 given significant margin pressure in both key businesses. Margin in the VSF segment is likely to recover but normalization to the long-term average will take time. We believe that the increased HoldCo discount in the last few months factors in concerns of lower profitability in the standalone business. We maintain BUY on Grasim with a TP of INR1,940 (Exhibit: 9), though, in the current scenario, direct exposure to the cement business (UltraTech) would be preferable.

Margin pressure persists in both VSF and Chemicals segments

* Grasim’s standalone revenue/EBITDA/adj. PAT stood at INR66.5b/INR4.3b/ INR935m (+4%/-43%/-73% YoY and +6%/-41%/-71% v/s our estimate).

* VSF segment (including VFY) volume grew 6% YoY (+8% v/s our est.) and realization declined 6% YoY. EBITDA was down 43% YoY, with a 3pp YoY drop in OPM to 3.8%. In FY23, VSF revenue grew 24% YoY, driven by volume/ realization growth of 17%/6%. EBITDA declined 40% YoY to INR10.3b and OPM contracted by 7.3pp YoY to 6.8% due to higher input and energy costs.

* Chemical segment volume increased 4% YoY, while realization declined 7.6% YoY in 4QFY23. EBITDA declined 26% YoY with a 4.7pp decline in OPM to 15.3%. In FY23, Chemical segment revenue grew 32% YoY led by 10%/11% growth in volume/realization. EBITDA grew by 48% YoY to INR22.7b. ? In FY23, standalone revenue grew 29% YoY, while EBITDA declined 1% YoY. OPM fell 3.6pp YoY to 11.8%. Adj. PAT declined 6% YoY to INR21b.

Highlights from the management commentary

* Grasim expects the VSF business to operate at over 90% capacity utilization. However, margin recovery at previous levels (EBITDA/kg of INR25) is not likely to happen in the near term.

* Major capex in the VSF business was completed with Vilayat expansion in FY22. Now the pending capex for de-bottlenecking of fiber capacity will be completed in 1HFY24. It may plan to increase Lyocell fiber capacity.

* Total capex stood at INR43.07b in FY23, largely for chemical and paints (INR20b) businesses. FY24 will see high capex for future growth plans. To fund capex, Grasim has entered into long-term loan agreements worth INR50b.

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