Net debt increased by Rs 34 bn y-o-y to Rs 29.8 bn as of Mar’20-end, mainly led by investment in subsidiaries/associates.

Grasim Industries’ (Grasim’s) Q4FY20 standalone Ebitda declined 56% y-o-y to Rs 3.9 bn, in line with our/ consensus estimates, impacted by weak prices across both VSF and chemical segments. Currently, VSF plants are operating at 30-40% and chemical plants at ~60% utilisation post Covid-19 lockdown relaxations. Company remains focused on optimising costs and preserving cash with capex plans being deferred. Net debt increased by Rs 34 bn y-o-y to Rs 29.8 bn as of Mar’20-end, mainly led by investment in subsidiaries/associates.

Factoring in higher impact of Covid-19, we reduce our standalone Ebitda for FY21e-FY22e by 6-17%. However, factoring in the recent run-up in stock price of various holdings, we increase our tp to Rs 635/share (earlier Rs 585), based on 6x FY22e EV/E, assuming unchanged 60% holdco discount. Maintain Add.

Standalone revenues declined 19% y-o-y to Rs 43 bn: VSF revenues (including VFY) declined 20% y-o-y to Rs 21 bn led by 18% y-o-y/3% q-o-q fall in realisation owing to capacity overhang and 3% y-o-y fall in volumes in Mar’20. VSF volumes declined 2% y-o-y to 136kte in Q4FY20 due to 18% y-o-y volume drop in Mar’20. VSF (including VFY) Ebitda declined 37% y-o-y to Rs 2.6 bn with margin shrinking ~330bps y-o-y to 12.4%.

While VSF prices have stabilised in past two months, recent increase in Chinese inventory levels to 125 days (vs 40-50 days normally), lower demand and capacity overhang may continue to impact VSF prices in the near term. Company intends to push exports and into non-woven markets to ramp-up VSF utilisation.

Chemical business revenues declined 24% y-o-y to Rs 13 bn: Ebitda declined 76% y-o-y to Rs 1 bn (including one-off cost of Rs 230 mn) due to increased domestic capacity and weakness in ECU realisation. While caustic soda volumes declined 3% y-o-y to 252kte, chlorine realisation turned negative for fourth consecutive quarter. Accordingly, Ebitda margin declined sharply by 1,760bps y-o-y to 8.1% as ECU declined 30% y-o-y/4% q-o-q in Q4FY20. Management indicated ECU is likely to remain depressed in the near term till new capacities are absorbed by additional demand over next 12-18 months.

Other business segment (fertiliser, textile and insulator) revenues declined 16% y-o-y to Rs 10.8 bn while Ebitda declined 39% y-o-y to Rs 700 mn in Q4FY20.

Focus on cost optimisation and preserving cash; net debt to increase further: Management expects significant impact in Q1FY21e owing to Covid-19 disruptions, given low utilisation across both VSF and chemicals. Grasim has initiated various measures to optimise fixed costs and preserve cash. Hence, remaining capex of Rs 49 bn (out of total Rs 78 bn) for raising capacities and modernisation has been deferred. Net debt increased by Rs 34 bn y-o-y to
Rs 29.8 bn. We estimate net debt to further increase to Rs 48 bn by FY22e owing to planned capex and lower profitability.