Grasim Industries Rating ‘add’; Ebitda was in line with estimate in Q1

Natural investments to scale back capital allocation issues and holdco low cost; preserve ADD

Grasim’s Q1FY22 EBITDA got here in step with our estimate with increased VSF costs offsetting decrease volumes. VSF enterprise continues to learn from robust demand led increased costs whereas chemical margins have began recovering from document lows. Grasim’s VSF and chemical division would see ~30% capability growth over the following 6-12 months, which might drive quantity development. Standalone enterprise is effectively poised to develop into web debt free by FY2022e with divestment of the fertiliser enterprise. We improve our Truthful Worth to Rs 1,675 (from Rs 1,520) on roll over. Preserve Add.

Q1FY22—In-line Ebitda with increased costs offseting decrease volumes
Grasim reported standalone revenues of Rs 37.6 bn (+94% y-o-y, -14% q-o-q), Ebitda of Rs 7.4 bn (-611% y-o-y, -9% q-o-q) and web revenue of Rs 4.5 bn (-311% y-o-y, -8% q-o-q), in opposition to our estimates of Rs 43 bn,Rs 7.2 bn and Rs 3.5 bn, respectively.

VSF— Margins hit new highs however close to peak: VSF volumes elevated to 120 kt (+173% y-o-y,-24% q-o-q) and Ebitda/ton to Rs 40,667/ton (+3% q-o-q) led by increased costs (+38% y-o-y, +7% q-o-q), partly offset by increased prices (-12% y-o-y, +9% q-o-q). Increased exports at 31% (11% in Q4FY21) aided volumes when home demand slumped as a consequence of Covid-19. Nonetheless, we see headwinds to margins with rising pulp prices and moderation in VSF costs in China.

Chemical substances— Ebitda improves on increased costs: Gross sales volumes declined to 238 kt (+173% y-o-y, -24% q-o-q) impacted by weak demand as a consequence of Covid-19 associated restrictions. Ebitda/ton elevated q-o-q at `11,555/ton (+289% y-o-y, +67% q-o-q) on increased caustic soda costs. Caustic costs stay on an uptrend as a consequence of momentary provide outages. Administration expects costs to directionally transfer up with modest enchancment in demand. Capability expansions and sale of non-core belongings to strengthen steadiness sheet

Grasim’s growth initiatives would full in phases in FY2022-23e and drive quantity development over the following two to 3 years. VSF capability would improve by 31% and chemical compounds by 27%. Divestment of its fertiliser enterprise for `26 bn by Q2FY22e would additional assist deleverage. We estimate standalone web money of Rs 8 bn in FY2022e versus web debt of Rs 8 bn in FY2021.

Natural investments to scale back capital allocation issues and holdco low cost; preserve ADD
Rising standalone enterprise, debt free steadiness sheet and disciplined capital allocation ought to contract holdco low cost (spot at 55% versus 40-45% traditionally). We’ve elevated standalone Ebitda by 10%/5% for FY2022/23e on stronger VSF margins. We revise Truthful Worth to Rs 1,675 (from Rs 1,520) on increased market worth of subsidiaries and roll over to September 2023e. Preserve Add.