Grasim Industries
BSE SENSEX
24,900
S&P CNX
7,597
30 March 2016
Update
| Sector:
Cement
CMP: INR3,769
TP: INR4,900 (+30%)
Visit takeaways from its newest asset at Vilayat
Buy
Focus on market leadership, efficiency and brand building
We visited Grasim’s Vilayat asset situated over 550acre of land with 3 core plants (VSF,
Chemical and Epoxy) and 7 auxiliary plants for captive feeding. The assets account for 24%
of VSF and 40% of chemical capacity (~35% and ~60% of segmental capital employed
respectively). We also interacted with top managements of each division to understand
strategic focus areas. We present key takeaways from the visit.
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val ( INR m)
Free float (%)
GRASIM IN
93.3
3,856/3,242
7/13/15
351.8
5.3
238
69.3
Brand building and premiumization in VSF taking center stage
VSF management highlights lack of pull factor in VSF product among end consumers. VSF
offers best combination of strength and comfort compared to cotton and PSF. Therefore,
strategy would be to enhance awareness through “LIVA” brand by extensive marketing
along with downstream partners. There is consistent focus on raising the mix of specialty
fiber viz. modal and micro-modal VSF (having higher tenacity and comfort v/s Grey VSF),
due to (a) untapped and less competitive market (mainly Lenzing – no Chinese players), and
(b) strong resilience in profitability.
Financials Snapshot (INR b)
Y/E Mar
2016E 2017E 2018E
Sales
362.1 421.4 479.7
EBITDA
59.4
73.3
94.2
Adj. PAT
22.0
28.2
35.8
Adj. EPS (INR)
239.1 306.6 389.7
EPS Gr. (%)
25.5
28.3
27.1
BV/Sh. (INR)
2,732 3,014 3,379
RoE (%)
8.8
10.2
11.5
RoCE (%)
13.8
14.5
18.2
EV/EBITDA (x)
9.4
7.3
5.4
EV/Ton (x)
116
93
92
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Dec-15 Sep-15 Dec-14
30.7
17.4
22.8
29.1
25.5
17.4
37.0
20.2
25.5
16.7
37.0
20.8
Fundamental strength intact in VSF; margin resilience to improve
Grasim is well poised with (a) VSF being the best growing fiber (12% CAGR v/s PSF 4% and
cotton -1% over FY09-14), (b) India being the fastest growth market for apparel (8% CAGR
v/s 4% for world), and (c) Grasim being the market leader with 9% global share. Plants are
operating at 95%+ utilizations with rise in domestic demand. Albeit pricing outlook remains
volatile, management expects resilience to profitability from high backward integration,
rising mix of specialty fiber and higher domestic demand which offers better realizations.
Vilayat is the most efficient asset of the company
FII Includes depository receipts
Stock Performance (1-year)
Grasim Inds
Sensex - Rebased
4,100
3,800
3,500
3,200
2,900
Grasim’s Vilayat plant (120,00 TPA, 24% of VSF capacity) is the newest and first fully
automated plant. With straight line layout, it enjoys best in class energy efficiency, waste &
emission management and ~20% lower conversion cost compared to other 3 VSF plants of
Grasim. The plant consumes 40-50% lower water, 15-20% lower pulp and 3% lower caustic
soda on unitary usage basis. Moreover proximity to port aids logistics benefits for pulp
import. Specialty products account for 30-35% of mix. The plant capacity can be doubled
with lower outlay of capex and time, given land and infrastructure already in place.
Gain in market share a key focus area in Chemical, await capex clarity
Post ABCL merger, chemical segment gained 22% domestic market share. Its multi-location
plants and proximity to ports render cost advantage of (a) fragmented chlorine demand,
and (b) cheap availability of salt. Vilayat plant enjoys superior power efficiency
(2,200unit/ton v/s industry average of 2,500unit /ton). On the back competitive strength,
chemical management aims for strong scale up over medium-term to gain ~25% market
share in south-Asia, doubling of Vilayat Capacity (182K TPA now) and de-bottlenecking in
Epoxy plant by 20K TPA (51KTPA now). However capital allocation plan lacks clarity.
Sandipan Pal
(Sandipan.Pal@MotilalOswal.com); +91 22 3982 5436
Aashumi Mehta
(Aashumi.Mehta@MotilalOswal.com); +91 22 3010 2397
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P

Grasim Industries
Valuation and View
Market leadership in capacity and cost to ensure growth
Grasim is the market leader in Cement, VSF and Chemical with all the segments
offering improving demand outlook. We expect Grasim to post industry leading
volume growth across segments over FY16-18, driven by (a) capacity addition in
cement and VSF nearing completion, and (b) doubling of chemical capacity post-
merger with ABCL. Utilization ramp-up in Vilayat plant to near-peak level within
a year of commencement was commendable. Grasim’s cost leadership emerges
from backward integration in VSF and strong brand image, well-spread
distribution network and operating efficiencies in Cement - which makes it well
placed to capture strong earnings growth (consolidated PAT CAGR FY16-18),
cash flow generation and balance sheet strength (consolidated net DER of 0.25x
and S/A 0.05x in 3QFY16).
Value added products and strong utilizations to aid resilience to profitability
VSF realizations and margins, despite being strong in recent past, may remain
elusive. This is owing to (a) overcapacity and resumption of operations at some
of the shut capacities in China and (b) volatility in prices of competing fibres.
However we expect that (1) high value/specialty products contribution from the
Vilayat plant (brand Liva to enhance reach and realizations) and (2) strong
utilization in both VSF and Chemical business should offer resilience to
profitability. Global cotton production is expected to be lower than
consumption (unlike past 2 years), which is incrementally positive despite high
stock in China.
Capital efficacies to sustain strength
Both VSF and Chemical segment have seen strong uptick in RoCEs to 15-18% (6%
in FY15) and 20-23% (10-11% in FY15) respectively. While a part of the
improvement was attributable to better VSF realization (5-8% YoY), more
important aspect was 95-100% operating utilizations in both VSF and Chemical
segments. This, coupled with revival cement demand, should lead to
consolidation RoCE to 15%/18% in FY17/18E (v/s 13.8% now). Even in the event
of minor moderation in VSF prices (we factor in FY17 realization 3% discount to
3QFY16, +2% YoY), high utilizations would keep capital efficiencies healthy.
Attractive valuations, hope of hold co discount contraction continues
UTCEM is our preferred play on cement demand recovery on account of market
leadership, pan India presence and superior profitability. At CMP, Grasim trades
at 12.3/9.7x FY17/18E EPS, 7.3x/5.4x FY17/18E EV/EBITDA and EV/ton of US$92
(40-50% discount to UTCEM’s asset valuation). Historically, the hold co discount
has been inversely related to (1) operational strength in VSF business and (2)
cycle of cement business – both of which render a positive outlook ahead.
Maintain
Buy
with a target price of INR4,900 (SOTP-based, valuing stake in
cement at USD200/ton; 35% hold-co discount, and VSF at 5x FY18E EV/EBITDA).
30 March 2016
2

Grasim Industries
Story in charts
Exhibit 1: VSF business global market share
Chinese players
Lenzing
ABG group(Grasim- 9%)
7%
17%
5.5
3.5
VSF
Source: MOSL, Company
4.8
24.5
58%
2.7
17
25.3
22.2
24.4
26.2
Others
Exhibit 2: VSF fastest growing among competing fibres
FY09
FY14
CAGR-: -1%
15.5
12.6
18%
Capacity Demand Capacity Demand Capacity Demand
Polyester staple
Fibre
Cotton
Source: MOSL, Company
Exhibit 3: Grasim: SOTP based fair value
INR m
Standalone VSF business
UltraTech Cement @ 60.3%
(post 35% hold co discount)
Total EV
Less: Gross Debt (incl pro-rata in subs)
Add: Cash & liquid invest
Add: Group holdings
Total Equity Value
Fair value (INR/sh)
Parameter
EV/EBITDA (x)
EV/Ton (USD)
Multiple
5
200
FY18
84,698
366,630
451,328
114,239
100,338
17,199
454,626
4,900
Source: MOSL, Company
@ 40% discount
Exhibit 4:
Implied Hold-co discount
FY18
CMP (INR)
Market Cap
Add: Net Debt
EV
Less: EV of VSF @ 5x EV/EBITDA
Implied EV of Cement
Implied EV/EBITDA (x)
Implied EV/Ton (US$)
Implied Discount to
UltraTech on replacement cost (%)
UltraTech on EV/EBITDA (%)
3,769
346,226
-3,298
342,928
84,698
258,230
5.5
92
41
43
Source: MOSL, Company
30 March 2016
3

Grasim Industries
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2011
213,183
6.9
47,635
22.3
11,384
36,251
4,068
9,916
0
42,099
9,542
22.7
6,162
26,395
26,395
-3.5
2012
249,836
17.2
53,178
21.3
11,544
41,633
3,140
15,852
0
54,345
13,208
24.3
8,840
32,298
32,298
22.4
2013
276,447
10.7
56,590
20.5
12,521
44,070
3,241
8,841
2,044
51,714
14,672
28.4
9,998
27,044
25,580
-20.8
2014
290,042
4.9
45,946
15.8
14,575
31,371
4,473
8,964
1,247
37,110
8,595
23.2
7,799
20,715
19,757
-22.8
2015
324,376
11.8
47,348
14.6
15,632
31,715
6,674
9,487
-95
34,434
10,159
29.5
6,836
17,438
17,505
-11.4
2016E
362,090
11.6
59,421
16.4
17,743
41,678
8,350
8,500
0
41,829
11,714
28.0
8,152
21,962
21,962
25.5
2017E
421,442
16.4
73,322
17.4
19,809
53,513
10,041
10,000
0
53,472
14,823
27.7
10,478
28,171
28,171
28.3
(INR Million)
2018E
479,652
13.8
94,183
19.6
21,636
72,548
10,476
12,500
0
74,571
21,559
28.9
17,214
35,799
35,799
27.1
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2011
917
144,668
145,586
67,827
19,616
276,542
228,066
83,749
144,316
13,578
79,185
58,797
27,229
14,346
2,844
14,378
43,524
35,753
7,771
15,273
276,542
2012
917
169,768
170,685
70,358
19,790
313,167
245,460
94,933
150,527
24,611
78,758
86,483
30,711
17,288
3,252
35,232
52,176
42,392
9,784
34,307
313,167
2013
918
195,648
196,565
95,614
23,013
377,402
283,322
107,804
175,517
60,843
80,108
94,078
37,408
21,863
2,292
32,515
63,240
49,946
13,295
30,837
377,402
2014
918
215,226
216,144
96,812
28,033
410,347
352,065
122,379
229,686
30,000
76,108
108,787
42,565
25,092
3,967
37,163
67,003
54,266
12,737
41,784
410,347
2015
919
230,479
231,398
119,302
34,103
461,620
426,008
138,011
287,997
25,000
72,553
121,964
47,885
26,474
4,617
42,989
78,728
62,765
15,963
43,236
461,620
2016E
919
250,049
250,967
112,291
34,420
482,648
476,008
155,754
320,254
15,000
62,419
133,973
52,503
28,967
5,431
47,072
81,832
65,176
16,656
52,141
482,648
(INR Million)
2017E
919
275,934
276,853
161,291
35,052
568,644
511,008
175,564
335,445
15,000
121,728
151,719
59,002
33,715
6,322
52,680
88,081
70,802
17,279
63,638
568,644
2018E
919
309,515
310,434
156,291
35,745
615,132
546,008
197,199
348,809
15,000
141,744
170,277
67,151
38,372
7,195
57,558
93,532
75,305
18,227
76,744
615,132
30 March 2016
4

Grasim Industries
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
0.3
0.3
0.4
0.3
0.4
0.3
0.4
0.4
0.8
25
60
65
0.8
25
57
49
0.7
29
62
48
0.7
32
64
49
0.7
30
63
49
0.8
29
63
48
0.7
29
62
46
0.8
29
64
44
18.1
21.6
18.9
23.8
13.0
18.1
9.1
12.9
7.6
11.7
8.8
13.8
10.2
14.5
11.5
18.2
17.5
15.8
1.6
2.1
12.2
0.6
19.8
17.2
1.5
1.9
12.9
0.5
15.8
0.0
1.4
1.6
9.4
0.7
12.3
0.0
1.3
1.3
7.3
0.7
9.7
0.0
1.1
1.1
5.4
0.7
287.8
342.3
1587.3
20.0
7.5
352.1
407.7
1861.0
22.5
6.7
278.7
341.5
2141.5
22.5
8.4
215.1
239.0
2353.5
21.0
10.1
190.5
219.1
2518.7
18.0
9.7
239.1
0.0
2731.8
25.0
10.9
306.6
0.0
3013.5
25.0
8.1
389.7
0.0
3379.1
25.0
6.2
2011
2012
2013
2014
2015
2016E
2017E
2018E
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2011
47,635
9,916
-8,311
-9,984
0
39,255
-23,751
15,504
-16,742
0
-40,493
-4,086
11,835
-4,068
-1,970
1,712
474
2,370
2,844
2012
53,178
15,852
-18,625
-13,033
0
37,371
-28,788
8,583
-347
0
-29,135
-5,016
2,531
-3,140
-2,180
-7,805
431
2,844
3,274
2013
56,590
8,841
2,509
-11,450
2,044
58,535
-73,743
-15,208
-6,483
0
-80,225
2,458
25,257
-3,241
-2,160
22,313
623
3,252
3,875
2014
45,946
8,964
-9,272
-3,575
1,247
43,311
-37,901
5,410
1,328
0
-36,573
1,825
1,197
-4,473
-2,003
-3,454
3,284
2,292
5,576
2015
47,348
9,487
-802
-4,089
595
52,539
-68,943
-16,405
3,489
0
-65,454
-558
22,490
-6,674
-1,694
13,565
650
3,967
4,617
2016E
59,421
8,500
-8,090
-11,398
0
48,434
-40,000
8,434
10,134
0
-29,866
0
-7,011
-8,350
-2,392
-17,753
814
4,617
5,431
2017E
73,322
10,000
-10,606
-14,191
0
58,525
-35,000
23,525
-59,309
0
-94,309
1
49,000
-10,041
-2,285
36,675
891
5,431
6,323
(INR Million)
2018E
94,183
12,500
-12,234
-20,866
0
73,584
-35,000
38,584
-20,016
0
-55,016
0
-5,000
-10,476
-2,219
-17,696
872
6,322
7,194
30 March 2016
5

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Grasim Industries
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Motilal Oswal Securities Ltd
30 March 2016
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