Retain ‘add’ on Grasim with revised fair value at Rs 875

Strong recovery, bottom of cycle behind. Grasim’s 2QFY21 Ebitda at Rs 4 billion was much ahead of our estimates with a sharp recovery in the VSF business. Both VSF and chemical divisions have passed the low point of the cycle and are seeing both demand and margin recovery. Divestment of the fertiliser business is a welcome step in the direction of exiting non-core businesses. Capacity expansion provides growth visibility whereas capital allocation discipline should reduce holding company discount, currently at 55%. We raise earnings estimates and FV to Rs 875 ( Rs 700 earlier). Maintain ‘add’.

Grasim reported standalone revenues of Rs 34.4 billion (-28% y-o-y, +77% q-o-q), Ebitda of Rs 4 billion (-40% yo-y, Ebitda loss of Rs 1.5 billion in 1QFY21) and net profit of Rs 3.6 billion (-32% y-o-y, PAT loss of Rs 2 billion in 1QFY21), against our estimate of Rs 32.4 billion, Rs 949 million and net loss of Rs 682 million, respectively.

VSF volumes increased to 136 kt (-11% y-o-y, +209% q-o-q) on improved demand post easing of lockdown restrictions. Ebitda/ton was at Rs 14,200/ton (-43% y-o-y, -155% q-o-q) led by drop in costs (-19% y-o-y, – 28% q-o-q) and higher volumes (-11% y-o-y, +209% q-o-q), offset by lower prices (-23% y-o-y, -3% q-o-q). The Chinese VSF industry is showing signs of improvement with higher demand, lower inventory and stronger prices.

Margins should expand in 2HFY21 further led by higher prices. Chemical sales volumes increased to 236 kt (-2% yo-y, +71% q-o-q) on improved demand.

Ebitda/ton increased to Rs 7,920/ton (-30% y-o-y, +167 q-o-q) due to a fall in costs (-11% y-o-y, -17% q-o-q) and higher volumes, offset by lower prices (-15% y-o-y, -6% q-o-q). Strong pick-up in sales volume and cost tailwinds resulted in sharp increase in Ebitda. Caustic prices remain under pressure led by oversupply.