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Good going; acceleration ahead

Grasim Industries’ (Grasim) Q3FY22 EBITDA at INR9.2bn (up 43% YoY and 15% QoQ) stood in line with our estimate. We retain our earnings estimates given: i) completion of capacity expansion in VSF. ii) Expected recovery in global VSF prices tracking the rising cotton prices. iii) Capex for chemicals being largely on track. iv) Firm caustic prices.

Grasim’s Environment Clearance for two of its plants, identified to foray into the paint business, and a strong balance sheet (debt free post receipt of INR18.6bn from sale of its fertiliser business) will enable capital allocation with ease. We like Grasim for its strengthening standalone business. Maintain ‘BUY’ with TP of INR2,043 (reduced versus INR2,161 earlier owing to change in TP for subsidiary UTCL.

Good quarter; decent outlook

Q3FY22 was a good quarter for Grasim with EBITDA rising 15% QoQ. VSF volumes rose 12% YoY while realisation improved >8% QoQ. While rising cost led to EBITDA/kg coming off 34% QoQ to ~INR22, we expect recovery factoring in the strong cotton as well PSF prices, globally. Our EBITDA/kg estimates are INR29/kg for FY22 and INR31.5/kg for FY23. In Chemicals, volumes rose 8% YoY while realisations surged 31% QoQ. While margins gained ~800bp QoQ, however, we believe the best is yet to come with expected positive contribution from the chlorine business. With capex projects being on track and firm outlook for both the major commodities (VSF and caustic), we retain our earnings estimates

Strong balance sheet to enable investment in paints with ease

Grasim has received INR18.6bn proceeds from sale of its fertiliser business, thereby making its balance sheet debt free. Grasim has also received Environmental Clearance for two of its plant locations and a strong balance sheet will enable significant capital allocation soon. With precise details of initial capital commitment, plant capacity and commissioning timelines awaited, we do not factor them in our assumptions. Nonetheless, entry into paints is keenly watched and a successful foray will have potential of a sharp valuation re-rating, in our view.

Outlook and valuation: On a strong wicket; maintain ‘BUY’

Capex completion in both VSF and chemicals is set to drive robust volume growth going ahead. With Grasim’s continued focus on prioritising capital for organic expansion, we continue to value its stakes in key holdings at 40% holding-company discount each. Maintain ‘BUY/SN’ with an SoTP-based TP of INR2,043.

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