Grasim is the only stock in the cement sector that has posted earnings growth in the September quarter of FY23 (Q2FY23). The standalone net profit of the firm rose 11 percent to ₹1,052 crore versus ₹947 crore in the year-ago quarter. Its revenue jumped 36.7 percent to ₹6,745 crore as against ₹4,933 crore in the corresponding period last year.
Meanwhile, other stocks including Ambuja Cements, Dalmia Bharat, Ramco Cements and Shree Cements posted an over 65 percent drop in their net profit. JK Cement, JK Lakshmi Cement and UltraTech Cement also posted a decline in their profits between 20-40 percent.
Post the earnings, global brokerage house Jefferies maintained its buy call on the stock and raised its target price to ₹1,980 per share from ₹1,970 earlier. The new target price implies a potential upside of 16.5 percent.
The stock has fallen 4 percent in the last 1 year and added 5 percent in 2022 YTD.
"Grasim's Q2 standalone Ebitda missed estimates on softer margins in both Viscose Staple Fibre (VSF)/chemicals segment and management indicated weakness persisting in Q3. Grasim's capex is slated to increase sharply over the next 18-24 months as the company marches on to new (B2C) businesses. While global macro may weigh on near-term earnings, Grasim's diversification to B2C business and project completion could trigger lowered HoldCo discount. We cut our FY23-FY25 Ebitda estimates by 4-7% while maintaining BUY," said the brokerage.
Capacity expansions in VSF and caustic soda segments to boost volume growth in FY23 and FY24, predicted the brokerage. Despite the aggressive capex, the company has been able to sustain a strong balance sheet and is now also eyeing a leading presence in paints, noted Jefferies.
VSF
The brokerage further pointed out that VSF Margins in 2Q were impacted by lower volumes and higher input costs. VSF EBITDA/kg dipped to ₹12.5 vs ₹20.6 QoQ/ ₹33.4 YoY, it added. VSF volumes grew 10% YoY but were lower by 14% QoQ on weakening demand conditions in global markets (domestic demand was relatively stable).
VSF segment EBITDA declined 59% YoY/ 52% QoQ to ₹212 crore in Q2 and global weakness in demand is leading to cheaper exports from China and Indonesia to India, said the brokerage. Management indicated that VSF profitability is expected to remain under pressure for time being, as prices remain under pressure — on a slowdown in demand in global markets, the report pointed out.
Paint
For the Paint segment, management indicated that first plant is to be commissioned in Q4FY24, and the remaining plants by FY25 in a phased manner (inline past commentary), said the brokerage.
"The construction work is in progress across five locations and will commence at the remaining one location in Q4FY23. Plan for commercial launch is under execution as per schedule. For B2B E-commerce, business plan is under execution for launch by Q2FY24, as scheduled. Product categories to be covered by the platform: cement, steel, doors and windows, kitchen & electricals, paints, sanitary ware, plumbing and tiles. Leadership team to be in place by Q4FY23" listed the brokerage as key positives.
Capex
Another key positive for the stock is that it is amid executing ₹15,000 crore capex over FY23-FY25 towards ongoing operations and new businesses (i.e. Paints, B2B Ecommerce). FY23 Target Capex in ₹6,720 crore, including ₹3,540 crore for the Paints Business (incurred ₹1,524 crore in H1FY23), said the brokerage.
Bull and bear case
In the bull case scenario, the brokerage has a target price of ₹2,205 for the stock, implying an upside of 29 percent.
"In our upside scenario, we estimate VSF/Caustic volume CAGR at 17%/14% over FY22-FY24e and VSF/Caustic unit EBITDA/T at ₹30,626/ ₹15,000 for FY24 vs. ₹26,606/ ₹14,693 for FY22. We expect a much stronger recovery in global and Indian economies post the lifting of Covid-related restrictions. Capacity additions in VSF and Caustic soda should drive strong headline growth. Resultant operating EBITDA should see an EBITDA CAGR at 20% over FY21-FY24e," forecasted the brokerage.
In the bear case scenario, the brokerage has a target price of ₹1,275 per share, indicating a downside of 25 percent.
"In our downside scenario, we estimate VSF/Caustic volume CAGR at 13%/10% over FY22-FY24e, and VSF/Caustic unit EBITDA/T at ₹28,731/ ₹13,000 for FY24 vs. ₹26,606/ ₹14,693 for FY22. We expect the recovery in global and Indian economies to take longer than expected; the demand momentum to slow down as the pent-up demand is exhausted. Resultant operating EBITDA should see an EBITDA CAGR at 10% over FY22-FY24e," it estimated.
Catalysts
Positive catalysts include - 1) volume growth potential in FY23/FY24 through expansion, 2) Company is developing production capacity to increase captive chlorine consumption mix from 29-30% at present to 45% in the medium term, and 3) Scope for improvement in balance sheet strength with increased operating cash from new plants post stabilisation.
Negative catalysts include demand slippage due to unexpected global slowdown and sustained increases in energy prices.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
