MOSL: GRASIM INDUSTRIES (Neutral)-Earnings exceed estimates led by better realizations
​Grasim Industries: Earnings exceed estimates led by better realizations
(GRASIM IN, Mkt Cap USD11.0b, CMP INR1109, TP INR1079, 3% Downside, Neutral)
- Strong realization drives profits: Standalone 1QFY18 EBITDA rose 9% YoY (+6% QoQ) to INR5.55b, translating into a margin of 20.3% (+2pp QoQ, -0.93pp YoY), led by realization improvement in the VSF segment. Revenue grew 14.4% YoY to INR27.4b, while PAT rose 8% YoY to INR3.47b, driven by lower interest and depreciation expense.
- VSF - Realization uptick drives profits: VFS revenue grew 11% YoY to INR18.36b (est. of INR17.7b) on realization boost of 11% YoY, despite flat volume growth led by destocking on account of GST, translating into a margin of 19% (v/s 19.5% in 1QFY17). Realization improvement was partially offset by higher pulp and caustic cost.
- Chemical segment: Chemical revenues stood at INR10.84b (+20% YoY) due to higher caustic realizations. ECU realizations increased 2% YoY, with higher caustic prices offset by negative chlorine realization. Volumes increased 4% YoY in 1QFY18, while margins stood at 22.5% (+2.75pp QoQ).
- Valuation and view: We believe GRASIM post proposed restructuring exercise with Aditya Birla Nuvo will be the holding company for multiple diversified lines of business, including cement, finance, chemical and retail. This is likely to attract higher discount than earlier. We thus value its stake in Ultratech Cement and ABCL at 45% discount, and VSF business at 5.5x FY19E EV/EBITDA, arriving at a TP of INR1,079 (downside of 3%.) Maintain Neutral.
Grasim Industries Limited is a holding company. The Company's segments include Viscose Staple Fibre and Wood Pulp; Cement, which includes Grey, White and Allied Products; Chemicals, which includes Caustic Soda and Allied Chemicals, and Others, which includes textiles. Its products include viscose staple fibre, rayon grade pulp, grey cement, white cement and textiles. The Company conducts its cement business through its subsidiary, UltraTech Cement Limited. Viscose Staple Fibre is used in apparels, home textiles, dress material, knitted wear and non-woven applications, and its plants are located at Nagda in Madhya Pradesh, Kharach and Vilayat in Gujarat and Harihar in Karnataka, with an aggregate capacity of over 500 kilo-tons per annum. It also offers fabrics and synthetic yarns through its subsidiary, Grasim Bhiwani Textiles Limited. It caters to international fashion houses in the United States and the United Kingdom supplying fabric to them for manufacturing of garments.
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