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Grasim Industries’ (Grasim) Q3FY23 standalone EBITDA at Rs4.8bn (down 48% YoY) was significantly below our / consensus estimates. VSF business reported negative segmental EBITDA owing to elevated input costs (e.g. pulp, caustic
soda, fuel, etc.) and pricing pressures. Chemical division margin also declined from 23% to ~20% QoQ led by ~6% QoQ drop in ECU realisations coupled with soft demand. Capex on the upcoming paint business is on track with the
management aiming for commercial launch by Q4FY24E. Grasim aims to spend ~Rs45bn as capex in FY23, which includes ~Rs23bn on the paint business. Factoring-in elevated costs and expected softness in VSF realisations, we cut our
FY23E-FY24E EBITDA estimates by 20-24%, and reduce our target price (TP) to Rs1,690/sh (earlier: Rs1,820/sh). The TP is based on an unchanged multiple of 9x Sep’24E EV/E and assumes 50% holdco discount to various holdings. Downgrade to HOLD (from Add). Key risks: Lower demand / continued inflation in input prices.

* VSF (including VFY) revenues down 5% YoY and 18% QoQ to Rs32bn. VSF volumes dipped 3%/10% YoY/QoQ to 153kt implying ~73% utilisation. Implied VSF realisation declined 11% QoQ (flat YoY) against cost inflation of 10% YoY, which resulted in negative segmental EBITDA. In Q3FY23, VAP sales contribution increased to 20% vs 18% QoQ and 29% YoY as export markets faced high inflation-led recessionary conditions. Meanwhile, share of domestic sales stood at 88% vs 94% QoQ and 91% YoY owing to strong demand from textile players. As per the management, VSF’s Dec’22 exit price is 4% lower over Q3FY23 and it may remain under pressure due to: 1) subdued cotton prices, and 2) heightened competitive intensity from Indonesian players. As per the management, VSF prices do not mirror the volatility in cotton prices.

* Chemical segment revenues up 10% YoY (down 5% QoQ) to Rs26bn while EBITDAdeclined 8% YoY (down 20% QoQ) to Rs4.9bn. The sequential weakness was on account of lower ECU realisations coupled with soft demand. Global caustic soda prices have improved ~6% QoQ to US$694/te (CFR). Grasim aims to increase the share of renewable energy in electricity consumption from 8.3% in 9MFY23 to ~14% by Q1FY24 in chemical business. Caustic soda sales improved 2% YoY to 284kte implying 88% utilisation. Chlorine consumption in VAPs increased to 60% in Q3FY23 from 56% YoY supported by ramping-up of the new Chloromethane (CMS) facility commissioned last year.

* Balance sheet remains strong; ‘net debt to EBITDA’ likely to rise to ~2x by FY5E: Grasim has guided for capex of Rs45bn in FY23 including Rs23bn for the paint business. We expect Grasim to post 8-12% volume CAGR in both chemical and VSF businesses and factor-in ~18% EBITDA CAGR over FY22-FY25E. Company is likely to generate OCF of ~Rs120bn during FY23E-FY25E. It may incur huge capex of ~Rs185bn over FY22- FY25E including its Rs100bn foray into the paint market over next 3 years and Rs20bn (over 5 years) into B2B digital platform for building materials procurement. The B2B e- commerce business plan is under execution for launch by H1FY24, as scheduled.

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