Grasim Industries Rating ‘add’; Ebitda was in line with estimate in Q1

Organic investments to reduce capital allocation concerns and holdco discount; maintain ADD

Grasim’s Q1FY22 EBITDA came in line with our estimate with higher VSF prices offsetting lower volumes. VSF business continues to benefit from strong demand led higher prices whereas chemical margins have started recovering from record lows. Grasim’s VSF and chemical division would see ~30% capacity expansion over the next 6-12 months, which would drive volume growth. Standalone business is well poised to become net debt free by FY2022e with divestment of the fertiliser business. We increase our Fair Value to Rs 1,675 (from Rs 1,520) on roll over. Maintain Add.

Q1FY22—In-line Ebitda with higher prices offseting lower volumes
Grasim reported standalone revenues of Rs 37.6 bn (+94% y-o-y, -14% q-o-q), Ebitda of Rs 7.4 bn (-611% y-o-y, -9% q-o-q) and net profit of Rs 4.5 bn (-311% y-o-y, -8% q-o-q), against our estimates of Rs 43 bn,Rs 7.2 bn and Rs 3.5 bn, respectively.

VSF— Margins hit new highs but near peak: VSF volumes increased to 120 kt (+173% y-o-y,-24% q-o-q) and Ebitda/ton to Rs 40,667/ton (+3% q-o-q) led by higher prices (+38% y-o-y, +7% q-o-q), partly offset by higher costs (-12% y-o-y, +9% q-o-q). Higher exports at 31% (11% in Q4FY21) aided volumes when domestic demand slumped due to Covid-19. However, we see headwinds to margins with rising pulp costs and moderation in VSF prices in China.

Chemicals— Ebitda improves on higher prices: Sales volumes declined to 238 kt (+173% y-o-y, -24% q-o-q) impacted by weak demand due to Covid-19 related restrictions. Ebitda/ton increased q-o-q at `11,555/ton (+289% y-o-y, +67% q-o-q) on higher caustic soda prices. Caustic prices remain on an uptrend due to temporary supply outages. Management expects prices to directionally move up with modest improvement in demand. Capacity expansions and sale of non-core assets to strengthen balance sheet

Grasim’s expansion projects would complete in phases in FY2022-23e and drive volume growth over the next two to three years. VSF capacity would increase by 31% and chemicals by 27%. Divestment of its fertiliser business for `26 bn by Q2FY22e would further help deleverage. We estimate standalone net cash of Rs 8 bn in FY2022e versus net debt of Rs 8 bn in FY2021.

Organic investments to reduce capital allocation concerns and holdco discount; maintain ADD
Growing standalone business, debt free balance sheet and disciplined capital allocation should contract holdco discount (spot at 55% versus 40-45% historically). We have increased standalone Ebitda by 10%/5% for FY2022/23e on stronger VSF margins. We revise Fair Value to Rs 1,675 (from Rs 1,520) on higher market value of subsidiaries and roll over to September 2023e. Maintain Add.