Grasim’s Q1FY22 EBITDA came in line with our estimate with greater VSF costs offsetting reduce volumes. VSF organization continues to advantage from robust demand led greater costs whereas chemical margins have began recovering from record lows. Grasim’s VSF and chemical division would see ~30% capacity expansion more than the next 6-12 months, which would drive volume development. Standalone organization is nicely poised to turn out to be net debt no cost by FY2022E with divestment of the fertiliser organization. We improve our Fair Value to Rs 1,675 (from Rs 1,520) on roll more than.
Maintain Add.
Q1FY22—In-line EBITDA with greater costs offseting reduce volumes
Grasim reported standalone revenues of Rs 37.6 bn (+94% yoy, -14% qoq), EBITDA of Rs 7.4 bn (-611% yoy, -9% qoq) and net profit of Rs 4.5 bn (-311% yoy, -8% qoq), against our estimates of Rs 43 bn,Rs 7.2 bn and Rs 3.5 bn, respectively.
VSF— Margins hit new highs but close to peak: VSF volumes enhanced to 120 kt (+173% yoy,-24% qoq) and EBITDA/ton to Rs 40,667/ton (+3% qoq) led by greater costs (+38% yoy, +7% qoq), partly offset by greater expenses (-12% yoy, +9% qoq). Higher exports at 31% (11% in Q4FY21) aided volumes when domestic demand slumped due to Covid-19. However, we see headwinds to margins with increasing pulp expenses and moderation in VSF costs in China.
Chemicals— EBITDA improves on greater costs: Sales volumes declined to 238 kt (+173% yoy, -24% qoq) impacted by weak demand due to Covid-19 associated restrictions. EBITDA/ton enhanced qoq at Rs 11,555/ton (+289% yoy, +67% qoq) on greater caustic soda costs. Caustic costs stay on an uptrend due to short-term provide outages. Management expects costs to directionally move up with modest improvement in demand.
Capacity expansions and sale of non-core assets to strengthen balance sheet
Grasim’s expansion projects would total in phases in FY2022-23E and drive volume development more than the next two to 3 years. VSF capacity would improve by 31% and chemical substances by 27%. Divestment of its fertiliser organization for `26 bn by Q2FY22E would additional support deleverage. We estimate standalone net money of `8 bn in FY2022E versus net debt of Rs 8 bn in FY2021.
Organic investments to cut down capital allocation issues and holdco discount retain ADD
Growing standalone organization, debt no cost balance sheet and disciplined capital allocation ought to contract holdco discount (spot at 55% versus 40-45% historically). We have enhanced standalone EBITDA by 10%/5% for FY2022/23E on stronger VSF margins. We revise Fair Value to Rs 1,675 (from Rs 1,520) on greater market place worth of subsidiaries and roll more than to September 2023E. Maintain Add.