Result review: Grasim shares hit a new 52-week low, despite strong Q4 earnings

Shares of Grasim Industries hit a 52-week low of ₹1,348 on the NSE in Thursday’s trade. The stock has slipped 6.50 per cent in the past two trading days despite a 62% rise in net profit. 

On May 24, Aditya Birla Group firm Grasim Industries Ltd. reported a net profit of Rs. 2777 crore, a 62% increase from Rs. 1715 crore in Q4FY21.

The company's revenue from operations rose 18% to Rs. 28,991 crore in the quarter under review from Rs. 24,523 crore in the same quarter last fiscal.

Grasim Industries reported an EBITDA of Rs. 4647 crore for Q4FY22, down from Rs. 5142 crore in Q4FY21, a decline of 10%.

The company reported sales of ₹95,701.13 crore in 2021-22. This is a 25.25 per cent increase over the previous year's figure of ₹76,404.29 crore.

For the fiscal ended March 2022, Grasim Industries' consolidated net profit was up 60.39 per cent to ₹11,206.29 crore. It reported a net profit of ₹6,986.70 crore in the financial year ended March 2021.

Revenue from its subsidiary and the leading cement maker, UltraTech Cement, was up 9.45 per cent to ₹15,767.28 crore, as against ₹14,405.61 crore in Q4/FY2020-21.

In a meeting held on Tuesday, the Board of Grasim also recommended a dividend of ₹5 per equity share for the year ended March 31, 2022, and a special dividend of ₹5 per equity share, taking the total dividend to ₹10 per equity share.

Viscose Business

In Q4/FY2021-22, Grasim Industries' revenue from viscose-pulp, viscose staple fibre and filament yarn segments was up 45.79 per cent to ₹3,766.49 crore, as against ₹2,583.40 crore a year ago.

The Viscose Filament Yarn (VFY) business recorded a volume growth of 9 per cent YoY. Higher input and fixed costs in Q4FY22 impacted financial performance.

The growth in the global demand for textile products in the US and Europe also led to a positive demand environment for viscose staple fibre (VSF), Grasim said.

Chemical Business

Revenue from the chemicals segment increased by 68.88% to ₹2,486.52 crore, compared to ₹1,472.28 crore in Q4/FY 2020–21.

Global caustic soda prices have risen due to supply chain disruptions caused by COVID-led restrictions and the ongoing conflict between Russia and Ukraine. Domestic caustic soda prices increased in line with global caustic soda prices and improved demand, the company said.

Financial Services

Revenue from the financial services segment Aditya Birla Capital Ltd (ABCL) was up 19.01 per cent to ₹6,622.35 crore, as against ₹5,564.30 crore a year ago.

"ABCL remains focused on maximising the value of the active customer base of 31 million, whilst continuing to drive customer acquisition at scale," said Grasim.

"The gross disbursements for the NBFC business stood at ₹9,891 crore in Q4 FY22, up 51 per cent YoY and 49 per cent QoQ, with the focus on growing its portfolio of retail, SME, and HNI segments," it said.

Other segment revenue increased 28.84 per cent to ₹705.17 crore from ₹547.31 crore.

Margins impacted by higher costs

Demand trends in the overseas textile sector remained marginally muted, with COVID-related restrictions enforced in China. The Russia-Ukraine war is already impacting the textile sector as Russia is a major importer, according to Kotak Securities report.

Cotton prices maintained their north-bound movement, driven by multiple factors such as logistic bottlenecks in the supply chain, high sea freight rates, and cotton consumption exceeding production by about 2MTPA in 2020 and 2021. The spread between cotton and VSF widened to an all-time high of US $1.3/kg in March-2022, the report said.

Higher sales volume, better product mix, and an increase in realisation could not fully offset the increase in the input costs in VSF (pulp, caustic soda, coal, and others). The report noted that this resulted in a substantial decline in margins in 4QFY22.

Further, the report said, caustic soda prices in India increased sequentially on the back of improvement in demand and higher global caustic soda prices.

Capex acceleration

Grasim plans to double its CAPEX in the paint business to ₹100bn. This upward revision factors in the project’s cost inflation (due to higher material prices) and the company’s aim to accelerate its participation in the growing market for paints.

It expects to build a capacity of 1,332 million litres of paint per annum and launch a nationwide campaign starting in Q4FY24. The company will try to mitigate inflationary pressures through economies of scale and backward integration. Grasim aims to accelerate capacity implementation given the changing market structure and optimistic industry growth prospects.

Financials

Grasim's total expenses increased by 23.45 per cent to 24,344.4 crore from 20,416.7 crore. The company's margins have been harmed by high input costs. Grasim said it has zero net debt with net cash of ₹553 crore as of March 2022.

Brokerage Views

Motilal Oswal said that Grasim is likely to benefit from capacity expansions in VSF and the chemical segments. It expects an 11% volume CAGR in both VSF and Caustic Soda over FY22–24.

"We reduce our FY23 and 24E EBITDA by 5% each, considering the cost pressures that lead to a 7%/8% cut in our EPS estimates, respectively." "We expect the company to benefit from its Capex plans," said Motilal Oswal.

The brokerage house maintained a "BUY" rating on Grasim with a revised target price of ₹1,875/share from ₹1,950, implying an upside of 34% from the current CMP.

ICICI Securities has maintained its 'ADD' rating for Grasim and reduced its target price to ₹1,580/share from ₹1,732/share based on 9x FY24E EV/E. Further, it cut FY23E-FY24E EBITDA by 7-8%.

On the other hand, Kotak Securities said that Grasim will benefit from strong volume growth in FY2023-24E driven by new capacity, whereas margins should improve with stronger prices and cost deflation.

Kotak Securities keeps its 'ADD' rating with a revised target price of ₹1,500/share, down from ₹1,850/share earlier on lower earnings and market value of subsidiaries.

An average of 7 analysts polled by MintGenie have a 'buy' call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.