IGI Logo

Chemical segment leads to better-than-estimated quarter

Highest-ever quarterly EBITDA; focuses on paint business execution

* Grasim’s 1QFY23 result was above our estimate with EBITDA at INR13.2b (v/s estimated INR11.7b) and OPM at 18% (v/s estimated 17%). Chemical segment’s OPM stood at 29.5% (up 9pp QoQ) v/s estimated 24%. VSF segment’s OPM was at 11.6% (up 5pp QoQ) v/s estimated 13.8%. Profit stood at INR8.1b (v/s estimated INR6.7b) in 1QFY23.

* Recent decline in VSF prices in China coupled with reduced orders by the US and European retailers in anticipation of a demand slowdown can hurt the company’s near-term margins. Caustic soda prices too have declined in the global markets and hence, chemical segment margins may see some pressure going forward

We raise our FY23E EPS by 8% factoring in the strong 1QFY23 performance; however, we largely maintain our FY24 estimate. We expect the company to benefit from its capex plans and remain positive on its foray into the Paints business (launch expected in 4QFY24). Maintain BUY.

Sequential recovery in margins of both VSF and Chemical segments

* Standalone revenue/EBITDA/PAT stood at INR72.5b/INR13.2b/INR8.1b (+93%/ +78%/+81% YoY and 8%/13%/21% above our est.), respectively, in 1QFY23.

* VSF segment posted a strong volume/realization growth of 73%/18% YoY. However, EBITDA growth was muted at 2% YoY (98% QoQ) on cost pressures (up 36% YoY). OPM contracted 11.6pp YoY (but up 5pp QoQ) to 11.6%.

* Excluding VFY, VSF’s volume/realization improved 76%/20% YoY, respectively. However, EBITDA declined 9.8% YoY with 48% decline in EBITDA/kg to INR20.6.

* Chemical segment’s revenue increased 90% YoY driven by the highest-ever ECU realization (up 2x YoY). EBITDA surged 2.9x YoY, while OPM improved 10.3pp YoY and 9.4pp QoQ to 29.5% in 1QFY23.

* Capex for the ongoing business segments was INR3.5b in 1QFY23 and budgeted capex for FY23E is likely at INR31.2b. Capex incurred for the Paints business was INR2.1b (total capex INR8.3b to date) and estimated capex in FY23 is likely at INR35.4b.

Highlights from the management commentary

* Caustic soda prices have softened to USD650/t as of now v/s USD769/t in 1QFY23 in the global markets. Price increase globally was led by geopolitical issues as well as higher Covid-19 cases in China. Coal prices still remain at the higher side and there could be some pressure on margins going forward.

* Project execution is on track for the Paints business and production should start by 4QFY24E. Land possession has been completed at all six sites and civil construction has commenced at four sites.

Foray into the Paints business augurs well; maintain BUY

* 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.

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

* We value the standalone business at 6.5x FY24E EV/EBITDA and other listed subsidiaries at a 35% holding company discount to arrive at our TP of INR1,880 (v/s INR1,715 earlier). Increase in our TP for Grasim is primarily driven by an upgrade in UTCEM’s TP recently. We maintain our BUY rating on the stock.

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