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Margins dip QoQ; recovery imminent

Grasim Industries (Grasim) posted a ~340bps QpQ drop in Q2FY22 EBITDA margin (300bps below estimate) owing to a rise in input costs. However, factoring in the recent price hikes (in both VSF and chemicals), margins are set to improve in ensuing quarters. Assuming improved prices as well as benefits of capacity expansion, we are revising up FY22E/FY23E EBITDA by 9%/7%.

Given improved outlook for subsidiary UltraTech Cement and Grasim’s focus on pursuing organic expansions (over investment in group companies), we maintain ‘BUY’. A successful foray into paints will be the next trigger for the stock FY24 onwards. Rolling over the valuation to Q4FY23, our revised TP works out to INR2,161 (INR1,952 earlier).

Cost hurt margins; price hikes to drive recovery

Grasim’s EBITDA at INR8.0bn (up 8% QoQ; doubled on a low base of last year) missed our estimate by >9%. Even as revenues were >7% ahead of expectation, the surge in costs dragged margins ~340bps QoQ to 16.2%. On a low base, VSF volumes rose 38% QoQ/22% YoY while blended realisation improved 3.3% QoQ. While EBITDA/kg dipped 14% QoQ to ~INR34, we expect recovery factoring in the recent price uptick in China as well as surging cotton prices. EBITDA estimates stand at INR36/kg for FY22 and INR34.5 for FY23 (versus INR36 in H1FY22). In Chemicals, while volumes and realisations rose >6% QoQ, margins slipped ~500bps owing to rising cost. With current caustic prices being >25% versus Q2FY22, we expect decent margin recovery.

Capex on track; investment in paints gaining traction

In VSF, Grasim completed its 300tpd expansion at Vilayat, Gujarat, while the balance 300tpd too is set to get commissioned within Q3FY22. In Chemicals, caustic soda expansion of 170tpd at Rehla and chloromethane of 150tpd at Vilayat were completed recently. Another 400tpd of caustic soda expansion is on course to get commissioned in H2FY22. In Paints, INR2.67bn has been spent so far, mainly towards land acquisition at five locations across India. Grasim has moved for Environmental Clearance at these locations. Plant commissioning timelines are awaited.

Outlook and valuation: Positives intact; maintain ‘BUY’

Factoring in improved outlook for cement subsidiary UltraTech Cement (rising demand/prices and cost peaking-out) and Grasim’s continued focus on prioritising capital for organic expansion, we continue to value its stakes in key holdings at 40% holdco discount each. Maintain ‘BUY’ with an SoTP-based TP of INR2,161.

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