March 14, 2023
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GRASIM INDUSTRIES, Focusing on growth opportunities in core businesses
Call & Research Report by Motilal Oswal
Sector: Diversified
CMP Rs. 1600, Target Rs. 1900 (19% upside potential)
Target Period: 12 Months
VSF demand to see 8-10% CAGR; Chemical business to maintain leadership position
At GRASIM’s analyst meet, the management highlighted growth opportunities in core businesses, near-term challenges, strengths and market positioning, diversified chemical portfolio, sustainability initiatives and progress in high-growth businesses.
VSF segment: ranked #2 in world and #1 in India
● There are three basic fibers available globally – 1) cotton, 2) polyester (PSF), and 3) viscose staple (VSF). In global fiber production, the share of Cotton, PSF and VSF stood at 24-26%, 65-70% and 6-7%, respectively.
● Polyester is a synthetic material, which is durable and easy to maintain. However, it is not biodegradable. VSF and Cotton are used as a blend with PSF. VSF is a factory produce (made from wood pulp), a renewable and 100% biodegradable product.
● GRASIM is the largest VSF producer in India with a total capacity of 824KTPA. GRASIM’s market share in VSF stood at ~90% in India. The management expects to see a CAGR of 8-10% in VSF demand over the next 10 years. The company is also the largest producer of Viscose filament yarn (VFY) in India. GRASIM’s Raysil is the most popular VFY brand.
● GRASIM’s Liva is a well-known VSF brand. The company has also started using VSF in sarees with the ‘Navyasa’ brand. Management noted that 1kg of VSF can make three sarees and currently VSF usage in the saree segment is ~50 tonne per day. There is huge headroom for growth in this segment.
● It has also developed technology for the usage of used cotton garments in place of pulp for VSF production and aims to replace 25-30% of pulp usage. GRASIM focuses on technology development and has received INR2.5b in funds from the Central government for technology development (largest government funding for technology development in textiles segment).
● VSF imports account for ~10-12% of total VSF consumption in India. VSF imports attract 5% basic custom duty. However, imports from Indonesia and Taiwan are duty free because of FTAs — a key challenge.
● Earlier, in Aug’21, the government revoked anti-dumping duty (ADD) on VSF. A representation has been made to the government to levy ADD again on VSF imports as it is not a level playing situation as imports of raw materials (such as Pulp) are not duty free.
● Water consumption by GRASIM for VSF production is the lowest globally. It consumes 17 cubic meter water per tonne of VSF produces (v/s 40 cubic meter per tonne being the best metrics in China). It is implementing zero liquid discharge plans across plants under sustainability initiatives.
● The company generates 10MW power from process waste steam in pulp manufacturing, which leads to savings of 1 lac tonne of coal, annually.
● In 3QFY23, the VSF business reported an operating loss due to macro headwinds as input prices were very abnormal and demand was weak. However, there is a recovery in demand as well as in VSF prices.
Chemical segment: a pan-India player with leading positions in three areas
● GRASIM has leading market position in three areas of the Chemical business – 1) it has a 27-30% market share in caustic soda in India which it aims to maintain; 2) it has the largest chlorine integration capacity of ~60%, which will reach to 72% post the commissioning of ongoing projects; 3) it is the largest Epoxy player with more than 50% market share.
● The company’s revenue mix in the Chemical business in FY22 – 52% from ChlorAlkali business (out of which 27-30% used in backward integration), 30% from specialty chemicals and 18% from chlorine derivatives.
● Average EBITDA margin of the Chemical segment in the last five years stood at 19-22%. This segment has been generating annual free cash flow of INR6-7b for the last few years. RoCE has been in the range of 19-22% for the last five years. The company expects to incur a capex of INR15b in this segment in FY23.
● GRASIM is the largest producer of Epoxy in India. It is doubling the capacity of epoxy polymers from 123KTPA to 246KTPA, which will further strengthen its market share in this segment.
● GRASIM is a major supplier (holds almost entire market share) of Epoxy resin used in manufacturing of blades of wind mills. With a pickup in the pace of construction activity and a thrust on renewable energy, this segment has huge growth potential.
● In the last board meeting, the board had approved a capex of INR3.63b for two new Chlorine derivatives (Chloromethane & Carbon Tetrachloride).
● There is not much import of caustic soda into India. Caustic soda imports attract 7.5% of basic custom duty.
Other highlights
● The company is committed to sustainability and invests in renewable energy. Its renewable energy capacity stood at 650MW, which will increase to 950MW by FY23-end and 2GW by FY24-end. Currently the company’s renewable power portfolio comprises mainly solar power. However, it is also exploring wind energy and hydro power to reach 2GW of renewable power.
● High-growth businesses: The company continues to evaluate new high-growth opportunities. Currently, GRASIM is investing in two high-growth businesses, Paints and B2B e-commerce. The company has committed a total capex of INR100b for Paints (including working capital) and INR20b for B2B e commerce. Plant construction in Paints is progressing across six locations and the commissioning should start from 4QFY24. It expects all capacities to become operational by FY25-end.
View and valuation
● We have a BUY rating on the stock with a TP of INR1,900, as we value: 1) its holding in subsidiary companies by assigning a discount of 35%; 2) standalone business at 6.5x EV/EBITDA, and 3) investments in the Paints business at 1x of investments (excluding our assumptions of working capital requirements out ofannounced capex).
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