 "Grasim: Firing on all cylinders")
Even as cement demand is on the mend, Grasim's Viscose Staple fibre (VSF) and chemicals segments are seeing strong performance. The stock of cement, VSF and chemicals major hit an all-time high of Rs 4,113.10 on Wednesday before closing at Rs 4,072.30. Grasim's exposure to the cement segment is through its 60.25% stake in UltraTech Cement.
During the first nine months of FY16, the company has seen strong volume growth of 19% in the VSF business aided by capacity expansions. What’s more, realisations too have improved by 12% to Rs 132.7 per kg over the year ago quarter’s Rs 118.6 per kg, as per analysts at Religare Institutional Equities. The realisation gains come on the back of shutdown in capacities in China due to environmental issues. Consequently, the company is expected to post good performance in March’16 quarter too.
Grasim's prospects in VSF segment are being supported by fully ramped up 120,000 TPA (tonnes per annum) Vilayat plant in Gujarat. While total capacity of Grasim now stands at 498,000 TPA, the ramped up plant is more efficient and will drive volumes of value-added products. The cost of production is almost 30% lower than older plants and the water consumption is 50% less.
As all this bodes well, analysts at Macquarie say, “Speciality fibres are the focus for VSF but the chemical division looks more primed for growth in the near term”. Post the merger with Aditya Birla Chemicals, this division has become a strong area of growth. The merger effective from April 2016 will lead Grasim’s caustic soda capacity increased to 804,000 TPA from 452,000 TPA. This merger is likely to result in benefits of scale, better profitability and higher cash flow generation as the capex cycle draws to an end, feel analysts.
Both VSF and chemicals segments have seen strong uptick in return on capital employed (RoCE; return per rupee invested in the business) to 15-18% from 6% in FY15 and 20-23% (10-11% in FY15), respectively. Part of this improvement is attributed to better VSF utilisation but analysts at Motilal Oswal Securities say that more important aspect was 95-100% operating utilisations in both VSF and chemical segments. This, coupled with revival in cement demand, should lead to Grasim's consolidated RoCE to 15% and 18% in FY17 and FY18, respectively compared to 13.8% now, they add. The target price of analysts for the stock range Rs 4,500-5,000.
