Grasim Industries Ltd’s viscose staple fibre (VSF) business has been a problem area thus far this fiscal year. The business accounts for about 80% of the company’s stand-alone revenue. And the segment’s Ebit (earnings before interest and tax) margin, a measure of operating profitability, has continuously declined on a year-on-year (y-o-y) basis in the last three quarters. Things became worse in the December quarter, with the segment’s Ebit falling by 37% on y-o-y basis to Rs.158 crore.
The operating environment for Grasim’s VSF business has been challenging, with global VSF prices falling 14% y-o-y in the last quarter. Surplus VSF capacity in China and depressed cotton prices made the situation worse. What offers consolation is that in the domestic market, the rupee’s depreciation has offset the impact of lower global prices to some extent.
According to the company, prices are hovering at near-bottom. Nevertheless, outlook on the business is not really encouraging. Signs of weakness in the global economy and the excess capacity in China may mean that the problems of the VSF business are likely to continue. Grasim derives most of its remaining stand-alone revenue from its chemicals business (caustic soda and allied chemicals), which performed comparatively better.
The company’s overall stand-alone revenue fell by 3% while net profit declined at a sharper pace of 27% because of weak operating performance, and relatively higher depreciation and interest costs. Operating performance was weak on account of higher other expenses, employee benefit expenses, and power and fuel costs. Moreover, raw material costs as a percentage of revenue also increased.
Meanwhile, the Grasim stock has declined by 14% from its highs in mid-October. At Rs.3,007, the stock trades at around 8.3 times its estimated earnings for the next fiscal year. While valuations appear attractive at current levels, weak outlook of the VSF business could keep near-term appreciation limited. Additionally, margins in the cement business (part of Grasim’s consolidated financials) could come under pressure on account of surplus capacity and sluggish infrastructure activity in some sectors.