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In-line performance of core segments; eyes on Paints rollout… …by the end of 4QFY24

* Grasim’s 3QFY24 EBITDA was ~10% below our estimates, primarily due to higher losses (up INR470m QoQ to INR900m) in the new businesses (Birla Pivot and Paints) and the insulator segment. EBITDA for the VSF/Chemical segments was 5%/4% above our estimates. The VSF segment posted an EBITDA/kg of INR18.7 (est. INR17.6), while the Chemical segment clocked an OPM of 13.2% (est. 12.3%) during the quarter. The lower tax rate resulted in a 47% YoY growth in adjusted profit to INR2.4b (vs. estimate of INR2.0b).

* Management indicated that the margin in the VSF segment is stable. Even though the caustic soda price is declining, global prices are likely to bottom out soon, and then prices should remain stable or rise. The losses in the Paints and B2B businesses were higher due to the rise in employee strength.

* We largely retain our EPS estimates for FY24-26. Reiterate BUY with a TP of INR2,670 as we value its: 1) holding in subsidiary companies by assigning a discount of 40%; 2) standalone business at 7x EV/EBITDA, and 3) Paints business at 1x of investments.

Low base helps VSF segment; margin contracts in the Chemical segment

* Grasim’s standalone revenue/EBITDA/Adj. PAT stood at INR64.0b/INR5.2b/ INR2.4b, (+3%/+10%/+47% YoY and -1%/-10%/+19% vs. our est.) in 3QFY24.

* Sales volume in the VSF segment rose 32% YoY, while blended realization dipped 11% YoY. Lower costs led to EBITDA growth of 6.4x YoY (on a low base) to INR4b. OPM surged 9pp YoY to 10.8%. EBITDA/kg stood at INR19 vs. INR4/INR21 in 3QFY23/2QFY24.

* The Chemical segment’s volumes rose 5% YoY, though realization was down 27% YoY (ECU realization dipped 33% YoY). Lower realization offset the benefits of lower costs, and EBITDA declined 23% YoY to INR20b. OPM dipped 5.7pp YoY to 13.2%.

* In 9MFY24, revenue declined 6% YoY, while EBITDA dropped 35% YoY to INR17.9b as the Chemical segment’s EBITDA was down 55%. OPM dipped 4.3pp YoY to 9.4% as the Chemical segment’s OPM dropped 10pp YoY to 14%. Adjusted profit was down 31% YoY to INR13.9b during the period.

Highlights from the management commentary

* Grasim raised the capacity of specialty chemicals (Epoxy) to 246KTPA from 123KTPA earlier. This will enable the company to meet the growing demand in value-added products and specialty chemicals.

* VSF plants’ operating rate in China improved to 88% vs. 85% in 2QFY24, with a decline in inventory days (10 days vs. 12 in 2QFY24). The realization was further hurt by cheaper imports from China. VFY sales (applied in embroidery and home furnishing) witnessed lower demand in 3QFY24.

* Trial production of Paints has started at three plants; Ludhiana, Cheyyar, and Panipat. The brand architecture under Birla Opus is complete, and the full range of products will be launched in FY25E.

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