Grasim: High pricing drives Q1

Business prospects remain strong though holding company discounts post ABNL merger may widen

Grasim Industries has reported a yet another strong standalone performance in the June quarter, with the prospects of its businesses remaining equally good. Improved realisations boosted the viscose staple fibre (VSF) segment, even as volumes were impacted (flat) due to the goods and service tax (GST)-led destocking and water shortage at its Harihar (Karnataka) facility.
 
However, an 11 per cent increase in realisations pushed up revenues in the same proportion. Earnings before interest, tax, depreciation and amortisation (Ebitda) grew eight per cent, helped by a better product mix (boost realisations) and improved operating efficiency. Part of the gains was offset by higher pulp and caustic costs. Hence, Ebitda margins at 19 per cent were slightly lower than 19.5 per cent in the year-ago quarter. With the captive pulp plant at Harihar having resumed operations, it should perk up the company’s profitability. Grasim said global VSF prices have gained momentum towards the end of the quarter.
 
The chemicals segment witnessed a four per cent increase in volumes. Higher caustic soda realisations boosted revenue by 20 per cent despite lower chlorine prices. Higher volumes and realisations helped the segment report it's highest-ever Ebitda (up 5 per cent year-on-year). Brownfield expansion at Vilayat to 365,000 tonnes per annum (TPA), from 220,000 TPA is scheduled to be commissioned by the end of FY18. Phosphoric acid capacity is also set to increase to 54,000 TPA by the end of December quarter, from 25,000 TPA. Caustic soda capacity will increase to 1,139,000 TPA, from 840,000 TPA following the ongoing expansion and the merger of Aditya Birla Nuvo (ABNL) with Grasim.
 
At the consolidated level, the cement business represented by UltraTech (about 60 per cent stake held by Grasim) provided some impetus. Though cement has seen softer volume growth, better realisations and cost efficiencies drove up Ebitda by 11 per cent y-o-y. While the cement capacities are being enhanced, the completion of acquisition of Jaypee Associate assets should drive growth.
 

The Grasim stock has risen over three per cent to Rs 1,104.30 after the company announced its financials on Monday.
 
However, the merger of ABNL with Grasim, effective July 1, 2017, will result in the company becoming a holding firm to more businesses, attracting higher holding company discount.
 
Thus, depending on the discount estimates, analysts will have varying target prices for the stock. Motilal Oswal Securities values stake in UltraTech and Aditya Birla Capital at a 45 per cent discount to arrive at a target price of Rs 1,079. Kotak Institutional Equities is assigning a 30 per cent discount for the cement and group companies to arrive at a target price of Rs 1,255, while Sharekhan’s assigning a 40 per cent discount and has a target price of Rs 1,165.
 
Analysts at Sharekhan say listing of Aditya Birla Capital (financial services business) over the next six to eight weeks will be something to take note of.