Analysts positive on Grasim’s prospects
Although Grasim’s Q3FY24 results were not exceptional, analysts are interested in the stock due to the imminent launch of the paints division. Grasim’s Q3FY24 operating profit was lower than estimates due to higher losses (up ~47 crore quarter-on-quarter or Q-O-Q to ~90 crore) in the new segments of Birla Pivot and Paints.
The operating profit for the viscose staple fibre (VSF) and chemical segments was in line. The VSF segment posted an operating profit per kg of ~18.7, while the chemical segment had an operating profit margin of 13.2 per cent. A lower tax rate resulted in 47 per cent year-onyear or Y-O-Y growth in adjusted profit to ~240 crore.
Management guidance was that the VSF margin is stable. Even though caustic soda price is down, global prices are likely to bottom soon. The losses in the paints and business-to-business were higher due to a rise in employee strength.
Grasim’s standalone revenue, operating profit, and adjusted net profit stood at ~6,400 crore, ~520 crore, and ~240 crore, respectively rising 3 per cent, 10 per cent, and 47 per cent Y-O-Y.
VSF sales volume rose 32 per cent Y-O-Y, while blended realisation dropped 11 per cent Y-O-Y. Lower costs led to operating profit growth of 6.4 times Y-O-Y (on a low base) to ~400 crore. The operating profit margin rose 9 percent Y-O-Y to
10.8 per cent. The operating profit/kg was at
~19, lower than
~21/kg in Q2FY24.
The chemical segment’s volumes rose 5 per cent Y-O-Y, but realisation was down 27 per cent Y-O-Y. Operating profit declined 23 per cent Y-O-Y to ~200 crore. The margin reduced 5.7 per cent Y-O-Y to 13.2 per cent.
In 9MFY24, revenue declined 6 per cent Y-O-Y, while operating profit dropped 35 per cent Y-O-Y to ~1,790 crore with the chemical segment’s operating profit down 55 per cent.
The operating margin dipped 4.3 per cent Y-O-Y to 9.4 per cent. Adjusted profit was down 31 per cent Y-O-Y to ~1,390 crore during the period.
The management commentary mentioned that Grasim doubled its capacity of specialty chemicals (Epoxy) to 246 KTPA from 123KTPA earlier. This will meet the growing demand in value-added products. Epoxy margins are also better than caustic soda. International Caustic Soda spot prices increased 6 per cent Q-O-Q to $444 per tonne in Q3FY24 but this is lower than $488 per tonne in October 2023. Caustic prices may have bottomed out but there is still oversupply. VSF margins were hurt by cheap imports from China. Viscose filament yarn (VFY) sales witnessed lower demand in Q3FY24.
The production of paints has started at three plants on a trial basis. Each location has a capacity of 200 million litres per annum (mlpa) and one facility also has a capacity of 30 mlpa of solvent paints. The plan is to roll out the paints business gradually, starting with North and a few areas of South, and gradually going nationwide.
The brand architecture of “Birla Opus” paints is complete, and the full range is to be available by Q4FY24 end or Q1FY25. It would offer a full range across the premium, midrange, and mass markets and the dealer network is in place. The total capex is around ~6,000 crore.
Birla Pivot, the B2B E-commerce division, has a monthly revenue run-rate of ~120 crore in December 2023. The private label ‘Birla pivot tiles’ are gaining good responses.
The rights issue has been successful, raising ~4,000 crore with an oversubscription of nearly two times.
Valuation is a complex exercise, since holdings in subsidiary companies have to be assessed and the new paint division is not yet fully operational. But most analysts seemed to be positive and the consensus is mostly ‘buy’.