Grasim Industries: holding company discount remains a concern
Destocking ahead of GST (goods and services tax) implementation affected Grasim Industries Ltd’s viscose staple fibre (VSF) business in the June quarter. For the quarter, VSF volumes stood at 122,000 tonnes, down nearly 10% sequentially and flat year-on-year.
Lower production at Harihar (Karnataka) captive pulp plant, which was partially shut down due to water shortage, also weighed on volumes and led to a one-time revenue loss of around Rs70 crore, the management pointed out in a post-earnings conference call.
Globally too, this business saw some weakness, hit by subdued demand conditions from downstream firms in China, which kept realizations weak during the first quarter. However, towards the end of the quarter, VSF prices started to recover.
In the chemical business, volumes grew 4% year-on-year. While caustic soda prices remained firm, oversupply of chlorine due to new capacity additions last year continued to impact chlorine prices in the domestic market. Brownfield expansion at Vilayat (Gujarat) is progressing as planned and commissioning is expected by the fourth quarter of fiscal year 2018 (Q4FY18).
In the cement business, surging power and fuel cost remains a worry and volume growth was flat at around 13.2 million tonnes. Grasim Industries owns 60.24% in UltraTech Cement Ltd and that is reflected in the former’s consolidated numbers.
In the June quarter, the VSF business contributed nearly 19% to Grasim’s overall revenue growth and around 11% was contributed by the chemical division.
Though volume growth was lower for Grasim’s business verticals, realizations aided its overall performance. On a consolidated basis, the company exceeded analysts’ estimates both on profit and revenue fronts.
Since the merger of Aditya Birla Nuvo Ltd (ABNL) became effective on 1 July, results of erstwhile ABNL will be included in Grasim’s financials from Q2FY18.
Analysts believe that any upswing in the stock would be short-lived given concerns of holding company discount which Grasim would attract given the merger.
“We believe Grasim post proposed restructuring exercise with Aditya Birla Nuvo Ltd (ABNL) 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,” said an earnings review report by Motilal Oswal Securities Ltd . The Grasim stock trades at a one-year forward price-to-earnings multiple of around 12 times.
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