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Weak quarter; capex in Paints to be 2x of the earlier plan

VSF segment’s performance below our estimate; Chemical in line

* Grasim’s 4QFY22 result was significantly below our estimates with EBITDA at INR7.5b (v/s estimated INR9.1b) and OPM at 11.8% (v/s estimated 14.2%). VSF segment’s OPM stood at 6.7% (down 5pp QoQ) v/s estimated 10.5%. Chemical segment’s margin, at 20.1%, was in line with our estimate of 20.5%. Adjusted Profit stood at INR3.5b (v/s estimated INR4.7b).

* The planned capex in the Paints business has been raised to INR100b from INR50b earlier and the installed capacity will be 1.33m kl. The rise in capex is due to higher capacities and cost inflation. Production is likely to commence from 4QFY24E. The management targets an IRR of 20% from this business.

* We reduce our FY23/24E EBITDA by ~5% each considering the cost pressures that lead to a 7%/8% cut in our EPS estimates, respectively. We expect the company to benefit from its capex plans; maintain BUY.

Margins under pressure in VSF; improve in the Chemical segment

* Grasim’s standalone revenue/EBITDA/Adj. PAT stood at INR63.8b/INR7.5b/ INR3.5b (+45%/-7%/-28% YoY and nil/-17%/-26% v/s our estimate), respectively.

* The VSF segment posted a volume/realization growth of 21% YoY each. However, cost pressure (up 48% YoY) led to 60% YoY dip in EBITDA of this segment with 17.5pp YoY drop in OPM. EBITDA/kg at INR13.2 fell 67% YoY.

* The Chemical segment revenue increased 69% YoY as ECU realization improved 2x YoY. This led to 2.7x YoY increase in EBITDA, while OPM improved 7.5pp YoY (but down 2.5pp QoQ).

* In FY22, EBITDA rose 106% YoY with 2.8pp improvement in OPM to 15.4%. EBITDA of the VSF and Chemical segments rose 45%/160% YoY, respectively. Adj. Profit increased 150% YoY in FY22.

* CFO was at INR26.6b v/s INR24b in FY21; whereas, capex stood at INR25.4b v/s INR11.9b in FY21. FCF was at INR1.2b v/s INR12b in FY21. Net cash increased to INR8.5b from INR1.2b in FY21.

Highlights from the management commentary

* Investments in the Paint business would now be at INR100b, 2x of the earlier plan. According to the earlier plan, the recently announced capacities (1.33m kl) would have been achieved in six to seven years v/s three years now. Demand growth in this sector seems to be very strong.

* Grasim has launched a brand “Navyasa” for sarees. The India saree segment consumes ~1m tons of fiber with VSF’s current share being only 1% of the saree market. The aim is to increase this VSF share to 7% in the next five years.

Valuation and view

* Grasim is likely to benefit from capacity expansions in VSF and the Chemical segments. We expect 11% volume CAGR in both VSF and Caustic Soda over FY22-24.

* Grasim’s large capex plan in Paints indicates its commitment towards becoming a serious player in this segment. We expect the company to leverage the strong distribution network of Birla White (UltraTech).

* We value the standalone business at 6x FY24E EV/EBITDA and other listed subsidiaries at a 40% holding company discount to arrive at our TP of INR1,875 (v/s INR1,950 earlier). Our TP for Grasim includes a 5% premium to its underlying SoTP in order to capture the potential upside from its Paints business. We maintain our BUY rating on the stock.

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