GRASIMNSEq2fy24November 15, 2023

Grasim Industries Limited

7,897words

126turns

11analyst exchanges

5executives

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Management on call

Harikrishna Agarwal

MANAGING DIRECTOR

Pavan Jain

CHIEF FINANCIAL OFFICER

Himanshu Kapania

BUSINESS HEAD, PAINTS

Jayant Dhobley

BUSINESS HEAD, CHEMICALS, FASHION YARN AND INSULATOR

Rakshit Hargave

CHIEF EXECUTIVE OFFICER, PAINTS

Key numbers — 40 extracted

4.9%

witnessing signs of slowdown. The latest reading of GDP showed that US economic activity rose by 4.9% while it is contracted by 0.1% in Germany and Eurozone and is estimated to have contracted in Jap

0.1%

The latest reading of GDP showed that US economic activity rose by 4.9% while it is contracted by 0.1% in Germany and Eurozone and is estimated to have contracted in Japan and UK as well. Tightening

6.5%

tance as well as on rates. Growth and inflation estimates were also retained at the same level of 6.5% and 5.4% respectively for financial year '24. India witnessed below normal rainfall in 2023 after

5.4%

well as on rates. Growth and inflation estimates were also retained at the same level of 6.5% and 5.4% respectively for financial year '24. India witnessed below normal rainfall in 2023 after a span o

all in 2023 after a span of over four years of normal and above normal rains with a deficiency of 6% below LPA during this monsoon, though in the rain-fed agricultural region, also called as monsoon

101%

in-fed agricultural region, also called as monsoon core zone, the rainfall received was normal at 101% of LPA. During the quarter, most economic indicators showed signs of improvement. CPI inflation i

10%

ating buys. Coming to our financial performance for the quarter, the consolidated revenue grew by 10% Y- o-Y to ₹30,221 crores. Consolidated EBITDA grew by 14% Y-o-Y to ₹4,509 crores. The growth was

₹30,221 crore

oming to our financial performance for the quarter, the consolidated revenue grew by 10% Y- o-Y to ₹30,221 crores. Consolidated EBITDA grew by 14% Y-o-Y to ₹4,509 crores. The growth was driven by cement and fin

14%

uarter, the consolidated revenue grew by 10% Y- o-Y to ₹30,221 crores. Consolidated EBITDA grew by 14% Y-o-Y to ₹4,509 crores. The growth was driven by cement and financial services businesses, as bot

₹4,509 crore

onsolidated revenue grew by 10% Y- o-Y to ₹30,221 crores. Consolidated EBITDA grew by 14% Y-o-Y to ₹4,509 crores. The growth was driven by cement and financial services businesses, as both UltraTech Cement and

Cement and Aditya Birla Capital posted robust results. At standalone level, revenue de-grew by 4% to ₹6,442 crores and EBITDA degrew by 21% Y- o-Y to ₹1,354 crores. The sales volumes in standalone

₹6,442 crore

t and Aditya Birla Capital posted robust results. At standalone level, revenue de-grew by 4% to ₹6,442 crores and EBITDA degrew by 21% Y- o-Y to ₹1,354 crores. The sales volumes in standalone businesses, Vis

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Guidance — 20 items

Pavan Jain

opening

“The ongoing festival season, which also coincides with the harvest time in rural areas, will be crucial.”

Navin Sahadeo

“So does it mean that we can expect further margin improvement in Q3 or costs could, like, come back with the lag and there could not be much further improvement?”

Navin Sahadeo

“Can we take that as a steady state number or in the current scheme of things, like more like ₹20, ₹21 is a fairly stable kind of a margin expectation over the medium term?”

Harikrishna Agarwal

“Like in the long run, yes, we also hope and we aspire that the long-term average should hold, but difficult to tell you whether it will turn out to be good in the next year, three years, four years, as you said.”

Pavan Jain

“The capacity expansions have been recently completed in viscose business and also in the chemical business and chemical business still remaining some part of the capacity expansion capex will be completed in next financial year.”

Pavan Jain

“We are investing in the paints business, large capex we have announced of ₹10,000 crores, part of which will be spent during current year and balance in the next financial year.”

Pavan Jain

“We don't expect this to cross about 3.5 times, even with the full capex of the paints business in the next financial year.”

Pavan Jain

“We expect the valuation should be that should be reflected in the valuation.”

Sanjeev Singh

“And secondly, how do we expect the demand-supply to be between the sector?”

Sanjeev Singh

“Sir, how do we expect the demand supply to be in the second half?”

Risks & concerns — 15 flagged

Global economic activity and trade are witnessing slowdown, although unevenly across geographies and sectors.

— Pavan Jain

It appears that China is again witnessing signs of slowdown.

— Pavan Jain

As the macro-global environment continues to remain volatile, weakness is seen in realisations of global commodity segments in which we operate like viscose and chlor-alkali.

— Pavan Jain

The impact from global decline of prices, as well as the mismatch in demand supply, which resulted higher imports, had a direct impact on realizations for Viscose and Chlor-alkali businesses.

— Pavan Jain

So international prices for VSF have remained under pressure in Q2 also and currently.

— Harikrishna Agarwal

So these commodities now are very volatile.

— Harikrishna Agarwal

So difficult to predict really whether margins will remain steady.

— Harikrishna Agarwal

We hope that margins remain stable, but then it is anybody's guess about so many volatile factors.

— Harikrishna Agarwal

So if I were to take a view next four years, five years, because as you rightly said, commodities can be volatile in the interim, but if I were to take a slightly longer view, four years, five years, is it fair to assume that ₹25 a kilo can be an average profitability expectation or do you think because anti-dumping duty is no longer there?

— Navin Sahadeo

Like in the long run, yes, we also hope and we aspire that the long-term average should hold, but difficult to tell you whether it will turn out to be good in the next year, three years, four years, as you said.

— Harikrishna Agarwal

Or is the demand in the value chain is really weak?

— Sanjeev Singh

But now again, we see that the Chinese economy is showing some signs of slowdown.

— Harikrishna Agarwal

And that trend is now a little bit uncertain in the same way, because some of the input prices have started to stabilize.

— Harikrishna Agarwal

So difficult to predict with very confidence, much confidence.

— Harikrishna Agarwal

And in the presentation also you have mentioned about pressure on VFY prices due to competition from China.

— Sanjeev Singh

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Q&A — 11 exchanges

Okay. Yes. Thank you for the opportunity, sir. Good to see VSF margins recovering on a Q-o- Q basis. My first question was on VSF that despite the fall sequentially in the realizations, margins have still improved a tad on a Q-o-Q basis. Now, if my observation is correct, since August, I think there has been almost like an 8% to 10% kind of a recovery in global VSF prices, especially China, if I'm not wrong. So does it mean that we can expect further margin improvement in Q3 or costs could, like, come back with the lag and there could not be much further improvement? And just here on this, I w

Harikrishna Agarwal

Good morning, Navin. Thank you for your detailed analysis on VSF profitability. So international prices for VSF have remained under pressure in Q2 also and currently. In China, there was some improvement in Q2 and prices have not improved that much, as you said, but they have been more steady. And of lately, as published information will show that the prices are inching down a bit. Having said that, the margin improvement in Q2 was, though the prices came down, but volume increased significantly. So that gives operational leverage as well as input prices also came down. Caustic soda was the ma

Yes, I think, I just want to thank the team for sharing more granular information about paints, right? Especially, in this call and the last one, right? My question is slightly more long term, right? I think, Grasim as a company serves two functions. First, that it is the holding company of various entities of the Birla Group. And second, it also has operating companies of its own, right? I'm just interested to understand how the management and the Board thinks about capital allocation in the long term because, we have paints that is going on. But in the comments, you mentioned also some other

Pavan Jain

Yes. So, see, first of all, let me try to explain how the company works in the sense that we have at stand-alone level two core businesses, existing core businesses, which is our viscose and chemical businesses. And we have entered into two new businesses, which is paints, decorative paints and B2B e-commerce. And apart from that, we have other businesses like textiles and insulators, etc. So these are the standalone businesses. Right now, the large capex plan is for the paints business. But we are continuing to invest in our core businesses as well. The capacity expansions have been recently

Good morning, sir. I have two questions. First, on the VSF business. So there has been an improvement in utilisation rate in China. It's around 85%. Inventory levels are coming down. So which are the factors which you believe that is keeping the prices subdued in international markets? It is due to better cost. So can you comment something on the spread for Chinese manufacturers? Or is the demand in the value chain is really weak? And secondly, how do we expect the demand-supply to be between the sector?

Harikrishna Agarwal

Sanjeev, will you repeat your second comment? I could not hear it clearly. Sir, how do we expect the demand supply to be in the second half? So international demand for textiles in general has been subdued for last four quarters or six quarters. The international brands have been straddled with huge inventory for multiple reasons. And they have been trying to correct their inventories by purchasing less. So when the brands purchase less, then the entire value chain also has less activity to work on. And that has been going on for quite some time. But still the inventory levels remain elevated,

Good morning, team. Sir, I have two questions. So one on the chemicals. Sir, in this quarter our ECU was ₹32 a kg and you mentioned that the chlorine demand was slightly weaker because the downstream of chlorine was not doing well. So if you can just help us walk through, how much was chlorine negative this quarter and what was peak Q1 of FY ‘24? And along with it, if you can just clarify that, was there any change in the average power cost per unit this quarter for the caustic soda business? Because I could see that if you just break it down in terms of the cost of production, there was sligh

Jayant Dhobley

So actually, average cost of power has been favorable for us. So I can take that question straight away. The second is we break out ECU, but we do not break out the components of ECU in terms of what is our caustic and our chlorine price. And we, so it's unlikely that I will tell you what exactly the chlorine number is. And look, we are different from many of our local competitors. We are spread all over India, which means that we have different dynamics and different geography. And that makes our ECU picture more balanced over the Indian market than some of our competitors. So I think we are

Yes, sir, thank you for taking my question. Sir, I have one question to start with on the paint business and a conceptual question. As this business has two very important decision makers, one is the consumers and second is the influencers like dealers and contractors. When we think about Birla Opus as the new paints plant coming into market, it's a very conceptual level. What are the levels that this new brand has to influence these two important stakeholders?

Rakshit Hargave

So thank you for asking this question. And I would want to give a slightly generic answer that for influencing both the consumers and contractors, there are established practices in the market. And we will also look at to do some new things, which you will come to know when we launch. But obviously, we take both these consumers sets and these contractor influencer sets very, very seriously. And we have a very defined plan in terms of how to address that. Got it. Okay. How should we think about the profit pool of the paint industry over the next two years, three years? Well, if you take a look

Yes, good morning, sir. My first question is clarification on textile demand in India. So you had mentioned like VSF demand benefited from strong festive demand, probably in textiles. But for VFY, we are saying that the demand is slow and that has also hurt the segment profitability and prices. So are these different segments which we serve for both these products?

Jayant Dhobley

Yes. So this is Jayant Dhobley. I'll take this question. So as you know, VFY is a filament yarn. And within that, you have multiple categories, pots spun, spool spun, continuous spun. The particular market, which has not been picking up really is the embroidery market, what you would call for occasions, right, which is a very different segment than, for example, where staple fibre goes and then it subsequently spun into yarns. So the VFY demand issue is mostly related to ethnic wear, which is used in the occasions, right, engagement, marriages, etc. That is where the demand gap is. The textile

Yes. A couple of questions. One is that you have launched the paint home consumer thing in eight cities. What has been the response so far?

Rakshit Hargave

Okay. So are you referring to PaintCraft? Yes. The PaintCraft. Okay. So PaintCraft is a test launch. And like we said last time, it is to take the SOP and the processes. And we have put this in eight cities and the feedback is satisfactory. As you would know, we don't have our own products. So we are using products from the market, and it is of a pilot nature. Got it. Got it. Sir, and if you look at the paint industry, it's -- if I just have the listed companies, it's around ₹53,000 crores is the approximate revenues and they generate close to around ₹7,000 crores profit after tax, right? Now

Sir, what is the dividend distribution policy?

Pavan Jain

So our dividend distribution policy is that we will have the distribution of about 25% to 45% of the net profit is dividend distribution by the company. And we have also stated that, we will see that whatever we get from our subsidiaries as dividend, we at least that much we distribute to our shareholders as a dividend. Okay. So the higher of this stand-alone 25% to 45% of standalone net profits or the dividend amount received from the subsidy? Not exactly higher of, but yes, what we are saying is the range is the 25% to 45%. Within that, we will see that at least we distribute whatever we get

Most questions answered, just one on chemicals. I wanted to understand our capital allocation plan going forward, given the volatility in the chemicals business, is the base product, chlor- alkali, which is still a focus segment. And how is the market expected to grow in the next five to seven years?

Jayant Dhobley

You've asked a somewhat broad-ranging question. So look, the chlor-alkali market more or less grows in line with GDP because it's such a basic material that is used across all industrial segments. You can always go back testing to see, you will see usually depending on which particular year will be GDP plus or minus some range, but that's the order of magnitude. If you look at our capital allocation policy, what we have declared so far is we are continuing to invest in chlorine derivatives. We are running epichlorohydrin project, which will be completed in calendar year '25. We are continuing

I had a question on the VSF business. So this quarter, we have seen our speciality VSF volumes going up. So that was one. And secondly, if we see our results bucket, there are two cost line items. So 1 is power. So if we see on a Y-o-Y basis from ₹1,202 crores, it has come down to ₹1,018 crores, and other expenditure, which was like ₹963 crores, has come down to ₹900 crores. So this increase in the VSF profitability when you mentioned that there was a benefit of the input cost. But was it also because that our specialty volumes were better and there was the decrease in the other expenditure an

Pavan Jain

This number you're referring to, can you repeat those numbers? Yes. So if we see a stand-alone results for this quarter, there is there's a power cost, power and fuel cost, which was ₹1,203 crores in September quarter last year. And this September quarter, it is ₹1,018 crores. And other expenditure, which was ₹963 crores last quarter last year, this quarter, it is ₹900 crores. So if you can just help us explain that was this decrease in the power and fuel cost and the other expenditure predominantly for the VSF business, and that's why we have seen the improvement in the profitability, coupled

Sir, two questions. One, I would just want to inquire about the working capital requirement for the B2B e-commerce. So then initially, the announcement of Grasim flooring into B2B commerce was made, the capex allocation given was about ₹2,000 crores. And I understand that a large part of it will be for working capital and also heartening to know you're crossing the ₹100 crores per month kind of a revenue run rate. So, at the current run rate, and of course, it's growing, but I wanted to understand how much can we pencil in or estimate a broad net working capital requirement of current run rate

Pavan Jain

So I don't think we can give you the exact number of working capital of the B2B as a business separately. But let me again repeat that we have not crossed ₹100 crores monthly revenue rate. We are inching towards that. What we are saying is that ₹100 crores for the quarter we have crossed Q2 and as we are moving from month-on-month, we are inching towards ₹100 crores of monthly revenue rate. And for the working capital number, I think the number is not readily available right now. We can give you separately, Ankit can share if required. Sure. And sir, just one last question on VSF, current util

Speaking time

Pavan Jain

Harikrishna Agarwal

Jayant Dhobley

Nirav Jimudia

Moderator

Rakshit Hargave

Navin Sahadeo

Dheerish Pathak

Prateek Kumar

Sanjay Elangovan

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Opening remarks

Ankit

Thank you. I wish everyone on the call a very happy and prosperous Samvat 2080. Thank you for joining us today to discuss Grasim Financial Results for second quarter of financial year 2024. The financial statements and presentation are available on our website as well as on the website of stock exchanges. For safe harbor, kindly refer to the cautionary statement highlighted in the last slide of our presentation. Our leadership team is present today on this call to discuss our results. We have with us Mr. H.K. Agarwal, Managing Director and Mr. Pavan Jain, Chief Financial Officer, Grasim Industries. Also joining the call, we have our business leadership team. We have Mr. Jayant Dhobley from Chemicals, Fashion Yarn and Insulator Business and Mr. Himanshu Kapania and Mr. Rakshit Hargave from Paints Business. I would now welcome Mr. Pavan Jain for his opening comments, post which we will open the floor for Q&A. Over to you, sir.

Pavan Jain

Good morning. Hope you all had a joyful and sparkling Diwali celebrations. We from Grasim Management wish everyone on the call a very happy and prosperous new Samvat. It is a pleasure to be with you all for discussing our Q2 results on this call. First, I would give some highlights on macro and business environment and then would cover our financial performance for the quarter under discussion. Global economic activity and trade are witnessing slowdown, although unevenly across geographies and sectors. While in the US, economy is showing sign of resilience with tightness in labour market, better than expected Q3 GDP and stable domestic consumption, there exists tough economic scenario in Eurozone. It appears that China is again witnessing signs of slowdown. The latest reading of GDP showed that US economic activity rose by 4.9% while it is contracted by 0.1% in Germany and Eurozone and is estimated to have contracted in Japan and UK as well. Tightening financial conditions in response

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