Core VSF business adds strength to Grasim

Vilayat expansion project and de-bottlenecking at other facilities will increase capacity

Grasim Industries’ March quarter results, especially profit, were driven by the viscose staple fibre (VSF) segment. The latter business contributes about a fifth to consolidated revenues. It saw earnings before interest, tax, depreciation and amortisation (Ebitda) grow 30 per cent over a year to Rs 345 crore. Higher realisation, improved operating efficiency and global prices helped. Due to water shortage, its captive pulp plant at Harihar (Karnataka) remained shut from February. Consequently, Grasim sourced pulp externally; else, Ebitda could have been Rs 45 crore higher. Importantly, pulp prices, which had risen from December, have softened and will benefit it.

The chemicals segment, contributing about a tenth to consolidated revenue, remained under pressure. Lower chlorine offtake by the industry has restricted caustic soda production and, hence, the business recorded a volume decline of six per cent over a year. A 33 per cent volume growth over a year in chlorine-based value-added products, however, came to the rescue and contained the fall in the chemicals segment’s Ebitda, which slipped to Rs 211 crore during the March quarter from Rs 229 crore a year ago.

The cement segment is represented by UltraTech. It remains the largest contributor to consolidated revenue. Although UltraTech had seen three per cent revenue growth, soft demand and rising costs impacted its Ebitda, Nevertheless, at Rs 1,577 crore, this came slightly lower than the Rs 1,605 crore seen in the March 2016 quarter. Operating efficiencies helped UltraTech cushion the pressure on margins; peers (ACC, Ambuja and even Shree Cement) have seen sharper declines in profit.

Overall, Grasim’s consolidated revenue at Rs 11,140 crore grew four per cent over a year and came much higher than the Bloomberg consensus estimate. Even net profit, at Rs 775 crore, was up two per cent over a year, beating the consensus estimate of Rs 745 crore. 

The outlook on the VSF segment remains firm. The Vilayat (Gujarat) expansion project and de-bottlenecking at other facilities will increase capacity from 840,000 tonnes per annum (TPA) to 1,048,000 TPA by end March next year. The management says it expects stable VSF prices, with no major international capacity expansion in sight. The firming of cotton prices, with declining inventory, is also positive for VSF players like Grasim, which has been benefiting from the improving contribution of speciality fibre (from 31 per cent in FY15 to 36 per cent in FY17). Cement demand is expected to be driven by growing infrastructure and housing requirements. Merger of Aditya Birla Nuvo (ABNL) with Grasim is expected to be complete by the September quarter. The biggest concern of the Street on the telecom business has partly receded following the announcement of its merger with Vodafone’s India wireless business. 

While the growth potential of ABNL’s other businesses remains good, the merger will mean Grasim becomes the holding company of many more businesses. Hence, the ‘holding company discount’ (which the Street typically assigns to such companies) is likely to be more apparent. Kotak Securities, while assuming a 40 per cent holding company discount, has a target price of Rs 1,236 for the stock; ICICI Securities’ (assuming a 50 per cent discount) is at Rs 1,240. This indicates an upside of about 13 per cent from the current Rs 1,095.