Grasim Industries on a strong growth trajectory, Kotak Institutional Equities rates its ‘add’

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Published: April 9, 2018 12:27 AM

Grasim expects both legs of its standalone operations — vsf and chemicals — to see strong volume growth led by improved underlying demand and expanded capacities.

Grasim, Grasim rating, Kotak Institutional Equities, markets, industry newsGrasim expects both legs of its standalone operations — vsf and chemicals — to see strong volume growth led by improved underlying demand and expanded capacities.

Grasim expects both legs of its standalone operations — vsf and chemicals — to see strong volume growth led by improved underlying demand and expanded capacities. the capacity expansion for caustic soda (+37%) is expected to be commissioned soon while vsf expansion (+58%) will be complete by fy2021 — these expansions are mainly at its vilayat plant. beyond ongoing projects, management has large growth plans especially for its caustic soda business.

vsf — strong demand drivers; company to tap increasing market size through expansion

Grasim is raising its india viscose staple fibre (vsf) capacity to 788 ktpa by fy2021 from 498 ktpa in fy2017 led by debottlenecking and brownfield expansion at the vilayat plant (230 ktpa). the management highlighted that vsf is gradually gaining scale globally and in india with increased demand share (as % of total fibre demand) — vsf now accounts for close to 5.4% of the global fibre demand (up from 4.75% in 2012) and it can to increase to 6% by 2022; the global demand growth for vsf is high at close to 6% per annum versus 1% for cotton, 2% for polyester. the strong underlying demand for vsf is helped by the following factors:

o vsf has advantages given (i) cotton requires more resources — such as making of a cotton t-shirt requires 2,600 litres of water, 99 gms of fertiliser and 4.5 gm of pesticide, whereas, (ii) the other fibre, polyester has issues such as a long biodegradability period of 200 years, high human toxicity, etc. the management highlighted such factors have contributed to a shift in crop acreage from cotton to other crops.

o grasim is the only producer of vsf in india and continues to engage in business development efforts to stimulate demand. the company has invested in the vsf brand liva which is gaining scale — the number of liva outlets has increased to 37,420 from only 2,035 in 2016. these initiatives have helped domestic vsf sales volumes, which have increased by 9% cagr between 2016 and 2018e. moreover, the downstream manufacturers of the fabric are able to charge a premium from this branding exercise — grasim expects to eventually benefit as well.

Caustic soda—large opportunity to displace imports on the east coast

Grasim is expanding its caustic soda capacity to 1.15 mtpa by fy2019 from 840 ktpa through brownfield expansion at vilayat and debottlenecking. the management believes that it can expand capacity to as much as 2.1 mtpa in the next five years — though these plans are still on the drawing board. the management highlighted that caustic soda demand in india is close to 4 mn tons and growing at close to 7% annually. there is large demand on the east coast from aluminum companies — this region accounts for 80% of caustic imports in india. the low caustic soda capacity in the east is mainly due to difficulties in handling chlorine — close to 0.9 tons of chlorine needs to be handled for every ton of caustic soda. grasim believes it can expand its footprint in the east given its expertise in handling chlorine — the company already has forward integration through value-added-products such for as water treatment, polymers, etc.

Maintain add rating with target price of Rs 1,275/share

our sotp-based tp of Rs 1,275/share comprises (i) Rs 534/share value for 60% ownership in ultratech valued at 30% holding company discount on our fair value of Rs 3,050/share, (ii) vsf (Rs 187/share) and chemicals (Rs 144/share), valued at 6x ebitda on fy2020e earnings, (iii) Rs 215/share for aditya birla capital valued at 30% holding company discount to cmp for grasim’s 56% ownership, (iv) Rs 128/share for investments held in equity of group companies (at 30% discount to cmps), (v) Rs 29/share for net cash held in standalone entity. we value other smaller operations at Rs 36/share (these include textile, rayon, fertilisers, insulators, etc).

Other notes from mgmt meeting

Vsf operations: the management highlighted that close to 80% of the costs in the vsf operations are backward integrated. this includes (i) 55-60% of dissolving grade pulp (pulp accounts for 50% of the costs), (ii) 17% in caustic soda which is fully captive, (iii) 10% power & steam which is fully captive, and (iv) 3% in carbon disulphide which is also captive. the company has cost advantage over non-integrated names. the cost has declined led by various efficiency projects including 1% reduction in pulp consumption between fy2015-2018, 7% reduction in sulphuric acid, 7% reduction in consumption of caustic soda.

o As per management, there is a large scope for demand improvement in india—at close to 1,000 tons per day, it is only 10% of the china demand. grasim is the only vsf producer in india.

o The prices set by the company are steadier when compared to large volatility in international prices — this is done to ensure predictability for downstream industries and consumers. caustic soda operations: grasim is largest player with 29% market share in india. the caustic soda industry in india is fragmented with 23 companies operating. the other large competitors are (i) dcm (12% market share), (ii) gacl (11%), and (iii) meghmani (4%).

o Grasim has seven plants in india; two more sites can be added. the company’s seven plants in india include (i) vilayat, (ii) veraval, (iii) nagda, (iv) renukoot, (v) rehla, (vi) ganjam, and (vii) karwar. there is a proposal to add two more sites including one on the east coast (closer to the port).

o In caustic soda manufacturing, power is consumed in the electrolysis process. power accounts for close to 60% of the manufacturing cost. the input material largely consists of common salt largely sourced from maliya in gujarat for the company’s vilayat plant.


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