Hold Grasim Industries; target of Rs 589: Emkay Global Financial

Emkay Global Financial's report on Grasim Industries

Grasim Industries' Q4 results were ahead of our estimates, with EBITDA of Rs3.9bn vs. estimate of Rs3bn, led by cost savings in the VSF segment and higher profits in the Fertilizers segment. The VSF segment's EBITDA/kg was Rs18.1 vs. estimate of Rs14. Key positives: 1) Lower-than-estimated decline in VSF and Caustic soda volumes and 2) 3% qoq reduction in VSF's opex/kg led by lower pulp prices. Key negative was a 5.5pp qoq decline in the Chemical segment's margin vs. estimated 3.6pp decline. Current capacity utilization of VSF is at 30-40%, whereas capacity utilization of the Chemical segment is at 60%. Management believes that a further fall in VSF prices should be restricted as Chinese players are inuring loss of RMB2,000/ton. However, the situation is likely to improve only in Q3 as China had inventory of 125 days at Mar-end.

Outlook

We believe that the recovery in key Chemicals and VSF segments is two quarters away. We now factor in only a 50% probability of Grasim having to take up Vodafone Idea's (VIL) debt burden as a promoter as management insists that investments in non-consolidating subsidiaries will be the last priority. Maintain Hold/UW in sector EAP.

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