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Balancing growth and sustainability

Brand launches accelerating momentum in high-growth businesses

Following are GRASIM’s FY24 Annual Report key highlights: 1) the company commissioned three paint plants in FY24 and started commercial production in Apr’24. It targets to reach INR100b revenue in paints and break even within the first three years of full-scale operations; 2) B2B e-commerce business surpassed INR10b revenue in FY24 and aims to achieve an annual revenue of USD1b in three years; 3) it witnessed an increase in percentage of chlorine integration to 70% vs. 62% in FY24; and 4) it experienced an increase in share of Renewable Energy (RE) to 25% in FY25E vs. 11% achieved in FY24. We reiterate our BUY rating on the stock with a TP of INR3,160.

Pioneering in sustainable fibers

* GRASIM is a prominent producer of VSF and VFY, globally and in India. Its VSF volumes grew 14% YoY to 810KT in FY24, recording the highest volume to date. VSF capacity utilization stood at 96% in FY24 vs. 88% in FY23.

* Despite robust volume growth, the VSF segment revenue declined ~1% YoY to INR149.5b due to lower realization (down 13% YoY). However, EBITDA jumped ~67% YoY to INR17.2b, led by improvement in capacity utilization and lower input costs (pulp, caustic, and coal). EBITDA margin surged 4.7pp YoY to 11.5%.

* The demand for apparel in the domestic market is expected to grow on account of an expanding consumer base, which is attributed to changes in demographics and increased urbanization. Moreover, consumer preference for sustainable products is reshaping the textile industry, with VSF emerging as a favored choice due to its eco-friendly attributes and sustainable sourcing.

A diversified portfolio in the chemical segment

* GRASIM’s caustic soda volumes grew ~5% YoY to 1.2mt in FY24. Specialty chemicals recorded the highest volume of 95 KT with ~26% share of the total chemical segment revenue vs. 23% in FY23, aided by capacity addition during the year. Chlor-Alkali capacity utilization stood at ~88% in FY24, similar to FY23.

* Net revenue for the chemical business declined 21% YoY to INR82b. Lower caustic prices coupled with subdued demand for chlorine derivatives from end-user industries resulted in a lower ECU of INR32,109/ton in FY24 vs. INR47,951/ton in FY23. EBITDA declined 54% YoY to INR10.5b and EBITDA margin contracted 10pp YoY to 12.8%.

* Chlorine integration stood at 62% in FY24. The construction of its ECH plant is slated for completion in FY25. Further, the Lubrizol CPVC plant for Phase I of 50 KTPA at Vilayat is progressing according to the plan. After the completion of these projects, chlorine integration is expected to reach 70%.

Launched high-growth business brands (Paints and B2B E-commerce)

* GRASIM launched its decorative paints business under the brand name 'Birla Opus'. It started commercial production at three plants in Apr’24, whereas the construction of the remaining three plants is progressing well and is likely to be commissioned in phases in FY25.

* Birla Opus aims to offer a wide range of decorative paints, with 145+ products (launched 80% of the product range) and 1,200+ SKUs across product categories. The company targets to reach a revenue of INR100b and break even in the paints business within the first three years of full-scale operations.

* GRASIM launched its B2B e-commerce business under the brand name ‘Birla Pivot’ to provide a one-stop digital solution for construction materials requirements. Birla Pivot offers a wide range of products, with more than 35 product categories and over 18,000 SKUs sourced from 150+ Indian and international brands.

* Birla Pivot surpassed the INR10b revenue milestone in FY24, which was the first year of its operation. Its quarterly run-rate reached over INR5.5b, led by continued revenue scale-up across categories, geographies, and new customers. The company targets to achieve an annual revenue of USD1b in the next three years, leveraging technology to create smarter and more efficient solutions across the value chain.

Subdued performance in FY24; net debt surged due to higher capex

* Standalone revenue declined ~4% YoY to INR258b, whereas EBITDA declined 27% YoY to INR23.2b. EBITDA margin contracted 2.9pp YoY to 9%. Though the VSF and caustic soda business achieved the highest-ever sales volume, the volatility in global commodity prices and reduction from exceptionally high levels resulted in lower realizations and profitability.

* The finance cost rose 20% YoY to INR4.4b due to higher interest rates (average cost of borrowing increased to 7.50% in FY24 from 7.07% in FY23) and an increase in gross debt. Earnings before tax and exceptional items declined 30% YoY to INR19.2b. Adjusted PAT (adj. for tax write-back and INR7.2b write-offs toward the subsidiary, AV Terrace Bay Inc., Canada) dipped 23% YoY to INR16b.

* GRASIM’s standalone net debt rose to INR59.8b in FY24 from INR17.8b in FY23 due to lower profitability in the VSF and chemical segment, which led to lower operating cash flow (OCF) generation and higher capex toward its high-growth business (paints). The net debt-to-EBITDA ratio stood at 2.6x in FY24 vs. 0.6x in FY23. We expect its net debt to further increase in FY25 due to higher capex in the paints business. View and valuati

View and valuation

* In FY24, GRASIM’s core operating businesses (VSF and Chemical) were under pressure due to lower realizations. We estimate a gradual improvement in VSF margin with an improvement in VSF prices. Moreover, we anticipate improvement in the chemical segment margin led by higher caustic soda realization and improved margin of chlorine derivatives.

* In the paints business, the company has successfully launched its initial product campaigning, and its ‘Make Life Beautiful’ advertisement received a positive response from the customers. Furthermore, its B2B e-commerce business recorded a quarterly revenue run-rate of INR5.5b with gradual scale-up across categories, geographies, and new customers. As the company’s high-growth businesses commence operations, it would be crucial to monitor revenue traction in both businesses.

* We reiterate our BUY rating with a TP of INR3,160 as we value its: 1) holding in subsidiary companies by assigning a discount of 35%; 2) standalone business at 7x Sep’26E EV/EBITDA, and 3) Paints business at 1.5x of investments.

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SEBI Registration number is INH000000412