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Neutral Grasim Industries Ltd For Target Rs.1,590

Higher VSF exports cushion weak domestic demand

Margin surprises positively

* GRASIM’s 1QFY22 result surprised positively on EBITDA margin, which came in at 19.7% (est. 17.2%), driven by sustained cost reduction and better realization in the Chemicals business. EBITDA stood at INR7.4b v/s a loss of INR2.3b in 1QFY21.

* We raise our FY22E/FY23E standalone EBITDA by 18%/6% to factor in an improved demand outlook and better margin for both the VSF and Chemicals. The holding company discount of 46% is in line with its 10-year average of 48%. We maintain our Neutral rating.

Realization and margin in Chemicals drives 17% EBITDA beat

* Revenue/EBITDA/adjusted PAT (excluding the Fertilizer business in the base quarter) stood at INR37.6b/INR7.4b/INR4.5b as against INR13.4b/-INR2.3b/- INR2.5b in 1QFY21 and was 2%/17%/36% higher than our estimate. The beat was led by better than expected performance in the Chemicals business on the back of higher realization and margin.

* Revenue for the VSF segment improved 277% YoY to INR21b, led by higher volumes (+173% YoY). EBITDA stood at INR4.9b v/s a loss of INR1.1b in 1QFY21, with margin at 23.2% (est. 21%).

* In the VSF business, the management increased the share of exports to 31% in 1QFY22 v/s 11% in 4QFY21, which cushioned the impact of the slowdown in the domestic Textile sector.

* Revenue/EBITDA for the Chemicals business rose 105%/571% YoY (low base) to INR14.4b/INR2.8b, led by better realization (+19% YoY) and higher margin at 19.2% (+13.3pp YoY, est. 13%).

Highlights from the management commentary

* Domestic demand for Fiber is witnessing a gradual uptick, with the easing of restrictions across states.

* VSF expansion at Vilayat has progressed as per schedule, and the first line of 300TPD is expected to be commissioned in 2QFY22. Another line of 300TPD will be commissioned in 3QFY22.

* The management is focused on: 1) increasing the VAP mix to 40% by CY25 in both VSF and Chemicals, and 2) rationalizing cost of production across all businesses.

* Divestment of its Fertilizer business is expected to be completed in 2QFY22. The management has guided at an enterprise value of INR16b as against its earlier guidance of INR26.5b as it has received INR10b of government subsidies, which was due earlier.

Valuation and view

* While the outlook for the Viscose business has improved further, we expect margin for the Chemicals segment to improve. However, it will remain weak due to significant capacity expansion over the next two years.

* Given GRASIM’s conglomerate business structure, we value it on a SoTP basis at INR1,590. Our TP values: a) the standalone business (Viscose, Chemicals, etc.) at 6x FY23E EV/EBITDA, b) UTCEM at a 50% holding company discount to our TP, and c) other listed investments (ABCAP, IDEA, HNDL, and ABFRL) at a 50% holding company discount to its market price. We maintain our Neutral rating.

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