Stable realisations, volume expansion to drive Grasim's FY19 growth

Grasim continued its strong show in the March quarter (Q4), with its core businesses viscose staple fibre (VSF), chemicals and pulp as well as fibre reporting an improved profitability. In fact, its standalone operating profit and adjusted net profit (excluding exceptional items — loss of Rs 2.19 billion) saw growth of 70 per cent and 67 per cent, respectively. 

Revenue growth of 60 per cent came ahead of analysts’ estimates. After an initial fall, the Grasim stock closed higher on Wednesday.

VSF, the company’s largest business, continues to benefit from strong textiles demand and Q4 numbers were driven by higher realisations even though volumes declined seven per cent year-on-year. 

Rising domestic sales of specialty fibre and Liva brand continue to drive up realisations. Although the likely increase in China’s capacities may result in some volatility, strong polyester and cotton prices should support VSF realisation, moving forward. Q4 volumes were impacted by delay in regulatory approvals for enhanced capacity, post de-bottlenecking. Since approvals have been received in Q1’FY19, expect volumes to improve.  Chemicals and caustic soda prices, which had moved up from $500 per tonne in June 2017 to $681 by December, consolidated around $635 in March 2018. They are likely to remain stable. 

The limited capacity expansion expected for the industry in FY19 as well as strong alumina and viscose demand are likely to lend support. Chlorine prices, after softening in the past few quarters, have also rebounded and should lend stability to the chemicals segment. Chemicals (a third of core business) grew 35 per cent in revenues and clocked 95 per cent year-on-year growth in profitability in Q4. The segment, which has seen brownfield expansion getting commissioned in May 2018, is likely to drive growth. 

At the consolidated level, the numbers are not comparable year-on-year due to completion of merger with Aditya Birla Nuvo on July 1, 2017. Meanwhile, cement (under UltraTech; over half of consolidated revenues) and financial services (about a fifth) businesses are doing well while telecom (much smaller contributor) remains the weak link. 

Given the positive outlook for Grasim, ICICI Securities and Motilal Oswal Securities had arrived at a target price of Rs 1,280 and Rs 1,187, respectively, prior to results, indicating 13-22 per cent upside from the current level of Rs 1,047.