Grasim Industries - Pricing outlook on core business remain weak - ICICI Securities

Grasim Industries' (Grasim) Q1FY21 standalone EBITDA loss stood at Rs1.5bn impacted by lower volumes owing to Covid-19 lockdown and weak prices across both VSF and chemical segments. VSF and chemicals plants utilisation gradually improved to >75% in Jul'20. The board has approved capex plan of Rs16bn for FY21 (out of remaining capex of Rs49bn) for raising capacities. Net debt increased by Rs1.6bn QoQ to Rs31.4bn as at Jun'20-end. We maintain our FY22E EBITDA estimates. However, factoring-in the recent run-up in stock price of various holdings, we increase our target price to Rs665/sh (earlier Rs635) based on 6x FY22E EV/E, assuming unchanged 60% holdco discount. Maintain ADD.

- Standalone revenues declined 61% YoY to Rs19.4bn (I-Sec: Rs20.3bn). VSF revenues (including VFY) declined 78% YoY to Rs5.6bn led by lower volumes and prices. VSF volumes declined 69% YoY to 43kte with realisation declining sharply 22% YoY/ 6% QoQ. Company pushed volumes in exports market to ramp-up utilisation as exports increased 26% QoQ to 38% of total volumes in Q1FY21. VSF utilisation gradually improved to 79% in Jul'20. EBITDA (including VFY) loss stood at Rs1.1bn during the quarter. Increase in Chinese inventory levels, lower demand and capacity overhang may continue to impact VSF prices in the near term.

- Chemical business revenues declined 53% YoY to Rs7bn while EBITDA declined 91% YoY to Rs410mn owing to sharp dip in sales volumes and weakness in ECU realisation. Caustic Soda utilisation gradually improved to 78% in Jul'20. ECU realisation declined 31% YoY/ 4% QoQ in Q1FY21. Caustic Soda prices (CFR) in Asia eased below US$300 level (4-years low) due to oversupply situation, creating pressure on domestic prices. Chlorine VAP demand remained strong and touched pre-Covid levels during Jun'20.

- Other business segment (fertiliser, textile and insulator) revenues declined 42% YoY to Rs7.3bn while EBITDA declined 98% YoY to Rs20mn in Q1FY21. Pulp and fibre JV revenues declined 30% YoY to Rs8.5bn while EBITDA loss stood at Rs230mn in Q1FY21.

- Focus on cost optimisation and preserving cash: Grasim has initiated various measures to optimise fixed costs and preserve cash. It has reduced fixed cost by Rs2.6bn (down 35% from FY20 quarterly average) with some of the cost savings to be structural. The board has approved capex plan of Rs16bn for FY21 (out of remaining capex of Rs49bn) for raising capacities in VSF, apart from ongoing modernisation capex at various plants. Net debt increased Rs1.6bn QoQ to Rs31.4bn as at Jun'20-end. We estimate net debt to further increase to Rs49bn by FY22E owing to planned capex and lower profitability.

Shares of GRASIM INDUSTRIES LTD. was last trading in BSE at Rs.626.95 as compared to the previous close of Rs. 631.9. The total number of shares traded during the day was 161509 in over 3591 trades.

The stock hit an intraday high of Rs. 639.35 and intraday low of 624. The net turnover during the day was Rs. 102250252.

Source : Equity Bulls

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