MOSL: GRASIM INDUSTRIES (Neutral)-Margins impacted by weak VSF profitability
GRASIM INDUSTRIES: Margins impacted by weak VSF profitability
(GRASIM IN, Mkt Cap USD6.8b, CMP INR735, TP INR820, 12% Upside, Neutral)
- 1QFY20 standalone revenue increased 4% YoY to INR50b (v/s est. INR55b). EBITDA declined 20% YoY to INR8.4b (v/s est. INR9.4b); margins contracted 5pp YoY to 16.9%. During the quarter, GRASIM impaired its investment of INR3b in its associate, Aditya Birla Idea Payment Bank Limited (ABIPBL), which has been disclosed as an exceptional Item. Adj. PAT for 1QFY20 stood at INR4.9b (-23% YoY; v/s est. INR5.9b).
- VSF segment: Volumes increased 3% YoY with revenues at INR25b (+1% YoY); EBITDA declined 25% YoY to INR4.4b due to higher pulp cost on account of the time lag effect of pulp prices and weaker INR. VSF margins declined 6pp YoY to 17.6% due to cost pressure.
- Chemical segment: Volumes increased 1% YoY for the quarter. Chemical revenue stood at INR15b (-5%YoY). EBITDA stood at INR4.4b (-10%YoY); margins declined 1.7pp YoY to 29.7% as ECU realizations were impacted by negative chlorine prices.
- Key concall highlights: (1) Standalone capex (planned at INR78b) will be given priority over any investment in group companies. (2) No disproportionate investment will be made in Vodafone Idea or any other group company that may jeopardize Grasim's credit rating. (3) Prices in the Fiber and Chemicals business are under pressure due to new capacities being commissioned and the US-China trade war.
- Valuation view: We expect EPS to decline by 18% and ROE to decline by 150bps to 4.7% over FY19-FY21 due pressure on margins as well as higher depreciation and interest cost due to capacity addition (Refer exhibit 6). Given GRASIM's conglomerate business structure, we value it on SOTP basis. Our target price values (a) the standalone business (fiber, chemicals, etc.) at 8x FY21E P/E, (b) UltraTech at 60% holding company discount to target price, and (c) other listed investments (AB Capital, Vodafone Idea, Hindalco, Aditya Birla Fashion) at 60% holding company discount to market prices. Thus, we arrive at a fair value of INR820/share. 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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