MOSL: GRASIM (Neutral)-Strong demand outlook, margin should improve in 2HFY22
GRASIM: Strong demand outlook, margin should improve in 2HFY22
(GRASIM IN, Mkt Cap USD16.4b, CMP INR1858, TP INR2035, 10% Upside, Neutral)
Beat in VSF business cushions margin miss in the Chemicals business
- Grasim’ 2QFY22 operating profit was 7% below our estimate due to lower profits in the Chemical segment (OPM down 4.9pp QoQ v/s our estimate of a 1.3pp improvement). Volume/EBITDA was 10%/16% above our estimate. The management said the impact of price hikes will be felt in 2HFY22 and margin should improve in the Chemical segment.
- We have reduced our FY23E standalone EBITDA by 7% to factor in higher costs for the Chemical business. We value the standalone business at 6x Sep’23E EV/EBITDA and other listed subsidiaries at a 40% holding company discount to arrive at our TP of INR2,035 per share. We have also assigned a 5% premium to our SoTP-based TP for its entry into the Paints business. We maintain our Neutral rating as the stock has run up 13% in the last one month.
Higher cost in the Chemical business led to a 7% miss on EBITDA
- Revenue/EBITDA/adjusted PAT stood at INR49.3b/INR8b/INR9.5b as against INR29.6b/INR3.3b/INR3.3b (on a like-to-like basis, excluding the Fertilizer business) in 2QFY21 and was +8%/-7%/-2% v/s our estimate. The miss on EBITDA was due to lower margin in the Chemical segment (OPM down 4.9pp QoQ v/s our estimate of a 1.3pp improvement).
- Revenue for the VSF segment improved 79% YoY to INR30.1b, led by volume growth of 22% YoY. EBITDA stood at INR5.8b v/s INR1.9b in 2QFY21, with margin at 19.3% (+7.8pp YoY).
- In VSF, realization rose 47% YoY, leading to 2.5x increase in EBITDA/kg at INR35 (down 14% QoQ).
- Revenue/EBITDA for the Chemicals business rose 44%/24% YoY to INR16.3b/INR2.3b as benefits of realization growth was offset by cost inflations (OPEX/kg up 38% YoY and 13% QoQ).
- Revenue/EBITDA/adjusted PAT stood at INR87b/INR15.4b/INR13.9b in 1HFY22 v/s INR43b/INR1.1b/INR744m in 1HFY21.
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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