Kotak Institutional Equities maintains add rating for Grasim Industries; raise earnings estimates and face value to Rs 875 (Rs 700 earlier). Capacity expansion provides growth visibility whereas capital allocation discipline should reduce holding company discount, currently at 55%. The Chinese VSF industry is showing signs of improvement with higher demand, lower inventory and stronger prices. Margins should expand in the second half of FY21 further led by higher prices.

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

Strong recovery, bottom of cycle behind:

Grasim Industries Q2 FY21 EBITDA at Rs 4 bn was much ahead of their estimates with a sharp recovery in the VSF ( Viscose Staple Fiber) business. Both VSF and chemical divisions have passed the low point of the cycle and are seeing both demand and margin recovery. Divestment of the fertilizer business is a welcome step in the direction of exiting non-core businesses. Capacity expansion provides growth visibility whereas capital allocation discipline should reduce holding company discount, currently at 55%.

Q2 FY21 EBITDA outperformance on higher volumes and lower costs:

Grasim Industries reported standalone revenues of Rs 34.4 bn (-28% yoy, +77% qoq), EBITDA of Rs 4 bn (-40% yoy, EBITDA loss of 1.5 bn in Q1 FY21) and net profit of Rs 3.6 bn (-32% yoy, PAT loss of Rs 2 bn in Q1 FY21), against estimate of Rs 32.4 bn, Rs 949 mn and net loss of Rs 682 mn, respectively.
Segmental performances were as follows:

VSF - margins increased on lower costs and higher volumes:

VSF volumes increased to 136 kt (-11% yoy, +209% qoq) on improved demand post easing of lockdown restrictions. EBITDA/ton was at Rs14,200/ton (-43% yoy, -155% qoq) led by drop in costs (-19% yoy, -28% qoq) and higher volumes (-11% yoy, +209% qoq), offset by lower prices (-23% yoy, -3% qoq). The Chinese VSF industry is showing signs of improvement with higher demand, lower inventory and stronger prices. Margins should expand in the second half of FY21 further led by higher prices.

Chemicals - higher volumes and lower costs:

Sales volumes increased to 236 kt (-2% yoy, +71% qoq) on improved demand. EBITDA/ton increased to Rs7,920/ton (-30% yoy, +167 qoq) due to a fall in costs (-11% yoy, -17% qoq) and higher volumes, offset by lower prices (-15% yoy, -6% qoq). Strong pick-up in sales volume and cost tailwinds resulted in sharp increase in EBITDA. Caustic prices remain under pressure led by oversupply. However, chlorine and related value-added products are witnessing strong demand and prices.

Capacity expansion on track, divestment of non-core fertilizer division a welcome step:

Grasim’s expansion projects would complete in phases, largely in FY2022E and drive volume growth over the next 2-3 years. VSF capacity would increase by 38% and chemical by 27%. Further, it has announced divestment of its fertilizer business for Rs 26 bn (including Rs 12-14 bn receivables), which would help align capital and focus towards its core VSF/chemical divisions.

See Zee Business Live TV Streaming Below:

Maintain ADD with revised Fair Value of Rs875 (Rs 700 earlier):

Kotak Insti has increased their standalone EBITDA by 9%/9%/6% for FY2021/22/23E mainly led by higher volumes and margins in the VSF division. Their Fair Value is revised to Rs 875 (from Rs 700) based on March 2022E SoTP.