March 22, 2023
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GRASIM, VSF segment disappoints; chemicals in line
Call & Research Report by Motilal Oswal
Sector: Diversified
CMP Rs. 1605, Target Rs. 1900 (18% upside potential)
Target Period: 12 Months
VSF’s capacity utilization to be at ~85% in 4Q v/s 71% in 3Q
● Grasim’s 3Q result was a significant miss to our estimates, led by subdued performance of the VSF segment (Operating loss in the quarter). EBITDA stood at INR4.8b v/s estimated INR7b and OPM stood at 7.7% v/s estimated 11.2%. Adjusted PAT (for tax adjustments) stood at INR1.6b (est. INR2.9b).
● Capacity utilization of VSF is estimated to be at ~85% in 4Q v/s 71% in 3Q as there has been a pickup in volumes recently. Pulp prices have fallen to ~US$900/t (v/s average of USD1,180/t in 2QFY23 and USD950/t in 3QFY23). Benefits of lower pulp prices are expected to reflect from 1QFY24 (time lag of ~60days). VSF prices in China are currently stable at RMB13,000/t.
● We maintain our FY23-25 estimates as we expect recovery in VSF segment’s profits in 1HFY24. HoldCo discount for its holding in subsidiary companies has increased to 41%+ v/s average of 37% in CY22. We reiterate our BUY rating with a price target of INR1,900, based on SoTP valuation (Exhibit: 9).
Margin pressure in both VSF and Chemicals segment
● Grasim’s standalone revenue/EBITDA/Adj. PAT stood at INR62b/INR4.8b/ INR1.6b (up 7%/down 48%/down 67% YoY and 0%/down 31%/down 45% v/s our estimate).
● VSF segments’ (including VFY) volume declined 4% YoY (down 5% v/s estimate) and realization declined 1% YoY. EBITDA was down 84% YoY (and 81% QoQ) with 10pp YoY (and 6pp QoQ) drop in OPM to 2%. Due to pricing pressure and higher input costs, VSF registered an operating loss, which was offset by improved performance of VFY business.
● Chemical segments’ volume/realization was up 2%/8.5% YoY, respectively. EBITDA declined 8% YoY with 3.7pp decline in OPM to 19%.
● In 9MFY23, standalone revenue grew 39% YoY, while EBITDA increased 12% YoY. OPM fell 3.4pp YoY to 13.6%. Adj. PAT grew 6% YoY.
Highlights from the management commentary
● Demand for VSF was lower due to subdued market conditions. Capacity utilization of VSF stood at 71%; however, it is expected to be ~85% in 4Q, with an improvement in demand recently. There are signs of VSF prices bottoming out as current prices are unviable for most of the players.
● Commerce ministry has suggested the imposition of anti-dumping duties from Indonesia and there are chances that these duties will be imposed. Import prices are lower than domestic prices, and hence, Indonesian players are offering aggressive prices. The Textile ministry too has suggested quality controls for imported VSF which will be effective from Mar’23.
VSF profits to improve in 1HFY24; reiterate BUY
● Pulp price has softened in the last few months, and currently, the price stands at USD900/t v/s an average of USD1,180/t during 2QFY23 and USD950/t during 3QFY23. As per our understanding, sustenance of pulp price at its current levels should help cost benefits of INR10/kg+, albeit with a lag of about three months.
● We have assumed VSF profitability to be at INR16/INR19 per kg in FY24/25, respectively. FY23 average profits are likely to be at INR10/kg (at a decadal low; in FY15, average profit had declined to INR11.5/kg) v/s an average of INR22/kg over FY13-22.
● We reiterate our 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 into Paints business at 1x of investments (excluding our assumptions of working capital requirements out of announced capex).
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