Standalone Q1FY18 EBITDA rose 9% y-o-y (+6% q-o-q) to Rs 5.55 bn, translating into a margin of 20.3% (+2pp q-o-q, -0.93pp y-o-y), led by realisation improvement in the VSF segment. Revenue grew 14.4% y-o-y to Rs 27.4 bn, while PAT rose 8% y-o-y to Rs 3.47 bn, driven by lower interest and depreciation expense. VSF – Realisation uptick drives profits: VFS revenue grew 11% y-o-y to Rs 18.36 bn, (est. of Rs 17.7 bn) on realisation boost of 11% y-o-y, despite flat volume growth led by destocking on account of GST, translating into a margin of 19% (v/s 19.5% in Q1FY17). Realisation improvement was partially offset by higher pulp and caustic cost. Chemical segment: Chemical revenues stood at Rs 10.84 bn (+20% y-o-y) due to higher caustic realisations. ECU realisations rose 2% y-o-y, with higher caustic prices offset by negative chlorine realisation. Volumes increased 4% y-o-y in Q1FY18, while margins stood at 22.5% (+2.75pp q-o-q).
Valuation and view: We believe GRASIM post proposed restructuring exercise with Aditya Birla Nuvo will be the holding company for multiple diversified lines of business, including cement, finance, chemical and retail. This is likely to attract higher discount than earlier. We thus value its stake in Ultratech Cement and ABCL at 45% discount, and VSF business at 5.5x FY19e EV/Ebitda, arriving at a TP of Rs 1,079 (downside of 3%.) Maintain Neutral.
The merger of Aditya Birla Nuvo Ltd with Grasim Industries Ltd: Restructuring results in listing of other financial services business 57% owned by post-merger Grasim and balance being held by its shareholders (post-merger Grasim) on a proportionate basis. Merger will provides shareholders with a well-diversified portfolio of cement, textiles, chemicals, insulators, solar, telecom and financial services.
Highlights of conference call
VSF: Revenue increased 11% y-o-y, with volumes remaining flat due to destocking led by GST. Production at Harihar was impacted by partial shutdown due to water shortage to the extent of loss of revenue of ~Rs 700m. Realisation improvement led by specialty fibre. Ebitda up 8% y-o-y partially offset by higher pulp and caustic cost. Chemical business: Volumes up 4% y-o-y. Realisation increased by 2% on account of higher caustic prices, offset by negative chlorine realisation.
Business outlook: For chemicals business, brownfield expansion at Vilayat from 220K TPA to 365K TPA expected to be commissioned by Q4FY18. Grasim’s caustic capacity to increase from 840K TPA to 1139K TPA post ongoing expansion and ABNL merger. For VSF business, focus will be on expanding usage and application of VSF in domestic textile market. Investment plan for capacity expansion under finalisation.