BackCore business growth and expansions keep Grasim’s prospects firm
The growth prospects are also likely to be helped by the expected demand surge from the US looking at the US ban on cotton imports from Xinjiang (China) as per reports
PremiumGrasim Industries Ltd core business prospects in Viscose staple fiber (VSF) and chemicals segments continue to improve. The VSF segment that has been growing well and had reported 22% y-o-y and 47% y-o-y rise in volumes and realizations during the September quarter, is likely to see the momentum continue.
The growth prospects are also likely to be helped by the expected demand surge from the US looking at the US ban on cotton imports from Xinjiang (China) as per reports. Analysts expect restrictions to lead to rising demand for cotton substitutes to meet apparel manufacturers’ needs. As it is, VSF seems more sustainable than cotton, and the same should continue aiding the demand for VSF. Analysts at Motilal Oswal Financial Services Ltd estimate the consumption of wood-based fibres to record a 3-5% CAGR over FY19-25 (higher growth for Lyocell, Modal and Viscose) compared with -1 to 1% growth for cotton. Overall dynamics remain favourable for the rising demand for the VSF segment of Grasim which is part of its core business.
The other core business of chemicals had seen some headwinds during the first half and that was driven by rising costs. The Chemical division margins contracted more than 200bps y-o-y affected by higher power costs, weaker chlorine realizations and a rise in rock salt prices led by cyclones in west India as per analysts. The cost pressure however may be behind. While chemical realizations are improving, the power and fuel costs are also to reduce with prices of coal, crude etc coming off peaks. In the meanwhile, the prices of Caustic soda have been on a rise. The realizations are also to improve looking at more value-added product (VAP) contributions. Analysts say that Grasim has gained a competitive edge by developing higher VAPs from chlorine.
In addition, the likely capacity expansions in both VSF and Caustic soda segments by a third or even more (37% and 33% respectively), should help support growth. The Vilayat VSF brownfield expansion of 300 tonnes per day (out of 2x300TPD) had already been commissioned in November-21. Caustic Soda brownfield expansion of 170TPD at Rehla and CMS plant of 150TPD at Vilayat too had been commissioned in October-21 and November-21 respectively. Analysts at Motilal Oswal Financial Services estimate a 16% and 15% volume CAGR for the VSF and Chemical business, respectively, over FY21-24.
Meanwhile, the company is in the process of venturing into the paints business. The company’s venture into the paints business is expected to yield premium valuation, said analysts at Sharekhan. The venture is expected to help the company diversify from a cyclical business to a better return ratio business.
Further, the outlook for its key subsidiary Ultratech remains strong. It also has stakes in other businesses such as financial services, renewables etc. However, being a holding company valuation discounts apply. The HoldCo discount for Grasim’s holding in subsidiary companies has reduced to 40-45% from 60% plus two years back (when there were concerns of fund infusion in telecom business), which we expect to sustain going forward, said analysts at Motilal Oswal Financial Services.
Not surprising, the stock has been rising and is up more than 10% since the end-December lows.
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