Grasim Q3: VSF business drives earnings; Idea-Vodafone merger on radar

Grasim’s consolidated Ebitda surged 7% year-on-year to Rs1,878 crore. This was driven by operating efficiency and better realizations in its viscose staple fibre business


Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

Aditya Birla Group firm Grasim Industries Ltd has recently been in focus for two reasons—December-quarter earnings and the proposed merger of group company Idea Cellular Ltd with Vodafone Group Plc’s India unit .

Talking about results first, Grasim Industries’ consolidated net profit rose 13.7% year-on-year to Rs728.19 crore for the third quarter of fiscal year 2017 (Q3FY17) and consolidated net sales increased 1% to Rs8,601 crore, year-on-year. A Bloomberg poll had estimated consolidated net profit and net sales of Rs770.2 crore and Rs8,806.9 crore, respectively. Consolidated Ebitda (earnings before interest, tax, depreciation and amortization) surged 7% year-on-year to Rs1,878 crore. This was driven by operating efficiency and better realizations in its viscose staple fibre (VSF) business.

VSF realization increased 9% year-on-year. In a post-earnings conference call, the management said VSF pricing in the near term could face some pressure as supply in China, which had gone out of production, is likely to come back into the system. However, in the medium-to-long term, prices are likely to be stable with positive bias since new capacity addition is slowing down. Further, given the surge in pulp prices, margins in this business would be under pressure in 4QFY17.

The performance of the chemical business was muted where caustic soda volume was hit by lower chlorine demand. Volumes slipped 5% year-on-year, but caustic soda realizations were higher. The company said it has received environmental clearance for brownfield expansion at Vilayat plant in Gujarat.

In the cement business, demand slowdown due to demonetization coupled with weak prices hurt volumes. Domestic cement volumes fell 2%, although the impact was lower than anticipated. Grasim Industries owns 60.24% in UltraTech Cement Ltd and that is reflected in the former’s consolidated numbers. Cement demand is expected to revive on the back of steps announced to boost infrastructure in the Union budget.

Updating about the merger of Aditya Birla Nuvo Ltd with itself, the management expects it to be completed by H1FY18.

Meanwhile, a media report said that Aditya Birla Group is likely to infuse $1.5 billion in Idea Cellular before its merger with Vodafone India and the funding could come through Grasim Industries. However, Grasim denied it, saying that no such proposal is under evaluation by its board. As on December 2016, Grasim Industries owns a 4.75% stake in Idea Cellular.

According to HDFC Securities Ltd, the reported reverse merger of Vodafone India’s business may address some concerns related to telecom capex on Grasim Industries’ books.

On the valuations front, the Grasim stock is trading at a one-year forward price-to-earnings multiple of 14.56 times. Going ahead, completion of its merger with Aditya Birla Nuvo and developments related to the Idea-Vodafone merger will be closely watched.

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