Grasim: Accelerating core businesses key driver

Healthy prospects of financial services, cement arms will help

Grasim Industries, which lagged the S&P BSE Sensex in recent months, will be a part of the Nifty50 index from April 1, a move that could lead to some buying as money managers tweak their portfolios to adjust for the changes.

On the fundamental side, too, robust prospects of its businesses can provide some permanent triggers.

Grasim’s December quarter (Q3) standalone net profit grew 41 per cent, led by its core businesses of fibre and chemicals, even as operating profit margins slipped 180 basis points year-on-year (y-o-y) to 19.7 per cent. Sales growth of 75 per cent y-o-y in Q3 and 50 per cent during the first nine months of 2017-18 indicate the company is gaining traction.

Its viscose staple fibre (VSF) segment, helped by 100 per cent capacity utilisation, clocked 24 per cent revenue growth. Despite the onset of winter and environmentrelated capacity shutdowns in China, prices remained firm on account of buoyant domestic demand. A 5 per cent increase in realisations cushioned the impact of rising input costs, leading to 15 per cent y-o-y operating profit growth.

Analysts expect realisations to remain largely stable, given its monopoly in the VSF segment and focus on valueadded products. This segment clocked profit margins of 21 per cent in Q3. Analysts at Edelweiss Securities see limited risk to the 19 per cent margin estimate over FY18-20. To ensure volume growth, the firm is raising its VSF capacity by 58 per cent by FY21.

In the chemicals business, firm caustic soda prices, driven by supply-related issues in China and Europe, helped revenues surge 42 per cent and operating profit by 93 per cent, despite oversupply in the chlorine business. Demand for caustic soda is expected to remain robust, led by major consuming segments such as alumina. A brownfield expansion in caustic soda capacity of 144,000 tonnes per annum (commissioning due next month) will aid near-term volumes. Volume growth, along with focus on value-added products, was likely to improve Grasim’s standalone operational performance, said Sharekhan analysts.

At the consolidated level, prospects of the cement business, represented by Grasim’s 60 per cent stake in UltraTech, remain strong. India’s largest cement producer should benefit from a demand recovery, led by housing, infrastructure and rural development.

UltraTech is also reportedly ahead in the race to acquire Binani Cement’s assets. Financial services, too, rode high on the back of the financing and insurance verticals. But telecom remains a weak link, given intense competition, though much of the pain is priced in Grasim’s stock price. With prospects improving in the majority of its businesses, analysts are positive on Grasim. Edelweiss said with the outlook for key subsidiaries, UltraTech Cement and Aditya Birla Capital, remaining robust, they stay positive on Grasim. Kotak Securities, Sharekhan and Edelweiss, while attributing a 30-40 per cent holding company discount, have target prices ranging from ~1,275 to ~1,416, indicating a potential upside of 15-28 per cent.