Grasim Industries
BSE SENSEX
27,942
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
S&P CNX
8,638
GRASIM IN
466.8
450.7 / 6.7
1,070/ 648
1/9/27
463
68.7
28 October 2016
2QFY17 Results Update | Sector: Cement
CMP: INR966
VSF margins remain strong
Under Review
Financials & Valuations (INR b)
Y/E Mar
Sales
EBITDA
Adj. PAT
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
Payout (%)
P/E (x)
P/BV (x)
EV/EBITDA(x)
2016
2017E
2018E
365.9
60.2
22.6
48.3
26.8
553.4
9.2
10.0
11.0
20.0
1.7
11.3
396.5
79.5
36.5
78.1
61.7
626.2
13.2
13.4
6.8
12.4
1.5
8.8
443.6
101.5
45.1
96.6
23.6
717.8
14.4
15.9
5.2
10.0
1.3
6.6
Estimate change
TP change
Rating change
Strong realization drives profits:
Grasim Industries’ (GRASIM) standalone
EBITDA rose 58% YoY (and 4% QoQ) to INR5.3b, and EBITDA margin expanded
5.5pp YoY (flat QoQ), driven by realization improvement. Against revenue
growth of 17% YoY to INR24.9b, PAT grew 55% YoY to INR5.92b, led by better
margins and higher other income.
VSF – margin improvement led by better pricing:
VSF revenue grew 21% YoY
to INR17.4b (our estimate: INR17.6b), led by volume growth of 9% YoY (our
estimate: 13% YoY) and realization growth of 12% YoY. The realization
improvement was driven by good demand, particularly from the domestic
market. Higher realization helped achieve (a) margins of 21.3% (v/s 14.7% in
2QFY16), and (b) RoCE of over 20%.
Softer pricing for Chemicals segment:
Chemicals revenue grew 11% YoY to
INR9.2b. Realization declined sequentially due to increase in India’s production
of caustic soda on account of better availability of water in monsoons.. Margins
remained healthy at 23.2% (+2.7pp YoY, -2.5pp QoQ).
Management outlook:
VSF pricing is likely to be stable in the longer term, as
capacity addition is likely to be limited. However, there could be some
moderation in VSF pricing in the near term. Higher share of specialty fiber sales
should push up overall realizations. VSF capacity at Vilayat could be increased
by another 200tpd by debottlenecking. Supply addition is expected to increase
in the caustic soda segment due to commissioning of new capacities.
Aditya Birla Nuvo-GRASIM merger:
The restructuring will result in the listing of
the merged financial services business, which will be 57% owned by post-
merger GRASIM and the balance by its shareholders on a proportionate basis.
Shareholders will receive three equity shares of GRASIM for every 10 equity
shares of Aditya Birla Nuvo, and seven shares of Aditya Birla Financial Services
for every one equity share of GRASIM.
Valuation and view:
At CMP, GRASIM trades at 12.4x/10x FY17/18E EPS,
8.8x/6.6x FY17/18E EV/EBITDA and EV/ton of USD122 (50-55% discount to
UTCEM’s valuation). Considering this proposed merger, we continue to keep
the stock
under review.
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 Capital.
Abhishek Ghosh
(Abhishek.Ghosh@motilaloswal.com); +91 22 3982 5436
Varun Gadia
(Varun.gadia@motilaloswal.com); +91 22 3982 5446

Grasim Industries
Exhibit 1: Trend in VSF business volumes & realizations
Volumes ('000 Tons)
Realizations (INR/Kg)
36 34
32
39 39
28
26
19
26
22
19 21
Exhibit 2: VSF business EBITDA (INR m) improved QoQ
VSF EBITDA
VSF EBITDA Margins (%)
18 18 19 20
14
10
7
12 11
7
11
15
19
15
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: VSF business performance
Production (ton)
Sales volume (ton)
Net Turnover (INR M)
Avg Realizations (INR/ton)
PBIDT Margin (%)
PBDIT (INR m)
2QFY17
123,994
123,994
17,400
130,713
21.3
3,710
2QFY16
112,263
113,756
14,370
116,708
14.7
2,110
% YoY
10.4
9.0
21.1
12.0
660bp
75.8
1QFY17
121,000
121,000
16,540
128,039
19.5
3,220
% QoQ
2.5
2.5
5.2
2.1
190bp
15.2
Source: Company, MOSL
Exhibit 4: Snapshot of consolidated performance (INR m)
INR M
Net Sales
EBITDA
EBIDT Margins (%)
Adj.PAT
Adj. EPS (INR)
2QFY17
82,928
16,913
20.4
8,460
9
2QFY16
80,755
13,292
16.5
5,625
6.1
% YoY
2.7
27.2
390bp
50.4
48.1
1QFY17
90,041
19,401
21.5
8,303
8.9
% QoQ
-7.9
-12.8
-120bp
1.9
1.9
Source: Company, MOSL
Grasim and AB nuvo merger
Merger of Aditya Birla Nuvo Limited into Grasim Industries Limited.
Restructuring results in listing ofther financial services business 57% owned by
post-merger Grasim and balance being held by its shareholders (post-merger
Grasim) on a proportionate basis.
Merger will provides shareholders with a well-diversified portfolio of Cement,
Textiles, chemicals, insulators, solar, telecom and financial services.
Exhibit 6: Structure after merger
Exhibit 5: Current structure
Source: MOSL, Company
Source: MOSL, Company
28 October 2016
2

Grasim Industries
Highlights of management conference call
VSF:
Pricing in the short term could taper off from present levels given weakness
in global VSF prices. However in the medium to long term prices are expected to
be stable with positive bias as new capacity addition is slowing down. Structural
decline in acreage of cotton should also help VSF prices in the longer term.
Capacity expansion:
The VSF capacity at Vilayat unit could be increased by 200
tonnes per day by way of debottlenecking exercise.
Capacity addition in Caustic soda Industry:
Supplies of caustic soda is likely to
increase due to commissioning of new caustic soda capacity in the industry.
However margins are unlikely to be impacted significantly due to cost reduction
measures by Grasim.
Exhibit 7: Grasim Capital Expenditures H1FY17: ~ Standalone Capex at 1.7b and Cement Capex at 5.8b (INR Crs)
Source: MOSL, Company
28 October 2016
3

Grasim Industries
Exhibit 8:
Grasim
- Operational Results
Y/E March
1Q
VSF
Production (ton)
102,737
Volume (ton)
102,737
YoY Change (%)
18.9
Realization (INR/ton)
113,309
YoY Change (%)
-4.8
Net Sales
12,541
YoY Change (%)
14.6
PBIDT
1,390
PBIDT (%)
11.1
Chemicals
Production (ton)
163,055
Volume (ton)
163,055
YoY Change (%)
69.7
Realization (INR/ton)
25,850
YoY Change (%)
-6.0
Net Sales
7,671
YoY Change (%)
85.5
PBIDT
1,725
PBIDT (%)
22.5
E: MOSL Estimates
(INR Million)
FY16
FY17E
3QE
4QE
123,292
123,292
-5.2
130,867
3.8
16,580
-4.1
3,365
20.3
206,960
206,960
1.5
26,133
0.6
9,123
-4.6
1,994
21.9
468,000
468,000
16.2
121,693
5.0
60,220
21.1
9,244
15.4
759,055
759,055
86.2
26,012
2.0
34,362
102.0
7,483
21.8
491,400
491,400
5.0
130,093
6.9
67,891
12.7
13,832
20.4
804,000
804,000
5.9
26,402
1.5
36,086
5.0
8,289
23.0
FY16
2Q
112,263
113,756
12.7
116,708
-1.4
14,370
13.1
2,110
14.7
190,000
190,000
89.9
26,012
1.2
8,300
99.5
1,698
20.5
3Q
4Q
130,000
130,000
9.7
126,090
13.8
17,295
23.1
2,670
15.4
211,000
204,000
94.3
25,970
6.0
9,567
123.3
2,290
23.9
1Q
121,000
121,000
17.8
128,039
13.0
16,540
31.9
3,220
19.5
187,000
187,000
14.7
27,660
7.0
9,035
17.8
2,320
25.7
FY17
2Q
123,994
123,994
9.0
130,713
12.0
17,400
21.1
3,710
21.3
204,000
204,000
7.4
26,532
2.0
9,200
10.8
2,130
23.2
126,000
120,700
24.4
126,090
8.0
16,020
33.2
3,080
19.2
195,000
202,000
89.6
25,970
6.0
8,700
96.3
1,770
20.3
123,114
123,114
2.0
130,713
3.7
17,371
8.4
3,537
20.4
206,040
206,040
2.0
25,402
-2.2
8,949
2.9
2,065
23.1
28 October 2016
4

Grasim Industries
Valuation and view
Market leaders with favorably poised to businesses:
Grasim is market leader in
its operating segments viz. Cement, VSF and Chemical. Its entire segment offers
healthy demand outlook. With significant capacity addition in both businesses
and being low cost producer, Grasim is well placed to capture the growth
resulting in strong earnings growth, cash flow generation and balance sheet
strength.
Capital efficacies to sustain strength:
Both VSF and Chemical segment have
seen strong uptick in RoCEs to 15-18% (6% in FY15) and 19-21% (10-11% in
FY15) respectively. While a part of the improvement is attributable to better VSF
realization (5-8% YoY), more important aspect is 95-100% operating utilization in
both VSF and Chemical segments. This, coupled with revival cement demand,
should lead to consolidation RoCE to 17%/18% in FY17/18E (v/s 13.8% now).
Even in the event of minor moderation in global VSF prices (we factor in flat VSF
prices for 2HFY17), we expect pricing for Grasim to be stable due to higher
proportion of specialty fiber and domestic sales.
High valuation discount offers attractive play:
Grasim, being the market leader,
is a strong play on improving outlook of all its businesses: UTCEM is out
preferred play on demand recovery in demand due to market leadership, pan
India presence and superior profitability. At CMP, Grasim trades at 12.4/10.0x
FY17/18E EPS, 8.8/6.6x FY17/18E EV/EBITDA and EV/ton of USD122 (50-55%
discount to UTCEM’s valuation). Considering this proposed merger, we maintain
our rating on the stock
under review.
Exhibit 9: Implied Hold-co discount
CMP
Market Cap
Add: Net Debt
EV
Less: EV of VSF @ 4x EV/EBITDA
Implied EV of Cement
Implied EV/EBITDA (x)
Implied EV/Ton (USD)
Implied Discount to
UltraTech on replacement cost (%)
UltraTech on EV/EBITDA (%)
FY16
966
450,742
10,071
460,813
87,679
373,134
14.2
143
41
42
FY17E
966
450,742
16,485
467,227
144,161
323,065
9.9
123
FY18E
966
450,742
-1,346
449,396
131,458
317,938
6.9
122
47
46
48
47
Source: Company, MOSL
28 October 2016
5

Grasim Industries
Financials and Valuation
Consolidated Income Statement
Y/E March
Net Sales
Change (%)
Total Expenditure
EBITDA
Change (%)
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income - Rec.
PBT before EO items
Change (%)
EO Exp
PBT after EO items
Tax
Tax Rate (%)
Reported PAT
PAT Adj for EO items
Change (%)
Margin (%)
Less: Minority Interest
Consolidated PAT
Change (%)
2012
249,836
17.2
196,658
53,178
11.6
21.3
11,544
41,633
3,140
15,852
54,345
29.1
0
54,345
13,208
24.3
41,138
41,138
26.4
16.5
8,840
32,298
22.4
2013
276,447
10.7
219,857
56,590
6.4
20.5
12,521
44,070
3,241
8,841
49,669
-8.6
-2,044
51,714
14,672
28.4
37,041
35,577
-13.5
12.9
9,998
25,580
-20.8
2014
290,042
4.9
244,096
45,946
-18.8
15.8
14,575
31,371
4,473
8,964
35,862
-27.8
-1,247
37,110
8,595
23.2
28,514
27,556
-22.5
9.5
7,799
19,757
-22.8
2015
324,376
11.8
277,029
47,348
3.1
14.6
15,632
31,715
6,674
9,487
34,528
-3.7
95
34,434
10,159
29.5
24,274
24,341
-11.7
7.5
6,836
17,505
-11.4
2016
365,862
12.8
305,664
60,198
27.1
16.5
17,823
42,375
8,027
8,506
42,854
24.1
0
42,854
11,658
27.2
31,196
31,196
28.2
8.5
8,633
22,563
28.9
2017E
396,491
8.4
316,997
79,494
32.1
20.0
18,555
60,939
7,289
13,500
67,150
56.7
0
67,150
18,806
28.0
48,344
48,344
55.0
12.2
11,866
36,478
61.7
(INR Million)
2018E
443,633
11.9
342,132
101,501
27.7
22.9
19,008
82,492
7,385
15,700
90,808
35.2
0
90,808
27,016
29.8
63,792
63,792
32.0
14.4
18,722
45,070
23.6
Consolidated Balance Sheet
Y/E March
Equity Share Capital
Reserves
Net Worth
Loans
Deferred liabilities
Minority Interest
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Investments
Goodwill
Curr. Assets
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liability & Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Appl. of Funds
E: MOSL Estimates
2012
917
169,769
170,688
70,358
19,790
52,334
313,169
245,460
94,933
150,527
24,611
78,758
24,964
86,483
30,711
17,288
3,252
35,232
52,176
26,353
16,038
9,784
34,307
313,167
2013
918
195,648
196,565
95,614
23,013
62,210
377,402
283,322
107,804
175,517
60,843
80,108
30,097
94,078
37,408
21,863
2,292
32,515
63,240
28,811
21,135
13,295
30,837
377,402
2014
918
215,226
216,144
96,812
28,033
69,358
410,347
352,065
122,379
229,686
30,000
76,108
32,768
108,787
42,565
25,092
3,967
37,163
67,003
32,459
21,807
12,737
41,784
410,347
2015
919
230,479
231,398
119,302
34,103
76,818
461,620
426,008
138,011
287,997
25,000
72,553
32,834
121,964
47,885
26,474
4,617
42,989
78,728
37,195
25,569
15,963
43,236
461,620
2016
934
257,373
258,307
128,407
42,255
84,845
513,814
470,891
155,834
315,057
25,000
76,547
33,736
145,884
46,280
31,546
24,247
43,810
82,410
25,026
41,672
15,712
63,474
513,814
2017E
934
291,389
292,323
119,756
43,862
96,710
552,652
515,891
174,389
341,502
15,000
102,543
33,736
142,737
55,509
31,719
5,947
49,561
82,867
40,839
25,772
16,256
59,870
552,651
(INR Million)
2018E
934
334,130
335,066
119,756
46,017
115,432
616,271
550,891
193,398
357,494
15,000
139,058
33,736
157,490
62,109
35,491
6,654
53,236
86,508
43,032
26,618
16,858
70,981
616,269
28 October 2016
6

Grasim Industries
Financials and Valuation
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
P/BV
EV/ EBITDA
Dividend Yield (%)
EV/Ton (US$)
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2012
70.4
81.5
372
4.5
6.7
2013
55.7
68.3
428
4.5
8.4
2014
43.0
47.8
471
4.2
10.1
-0.8263
2015
38.1
43.8
504
3.6
9.7
-0.3643
-0.17395
2016
2017E
48.3
57.9
553
5.0
11.0
78.1
87.7
626
5.0
6.8
-0.26685
2018E
96.6
109.4
718
5.0
5.2
25.3
1.9
15.7
0.4
178
20.0
1.7
11.3
0.5
143
12.4
1.5
8.8
0.5
123
10.0
1.3
6.6
0.5
122
20.4
19.1
15.4
25
0.8
13.9
14.2
12.4
29
0.7
9.6
10.2
8.0
32
0.7
7.8
8.8
6.5
30
0.7
9.2
10.0
8.1
31
0.7
13.2
13.4
10.8
29
0.7
14.4
15.9
13.3
29
0.7
0.4
0.5
0.4
0.5
0.5
0.4
0.4
Consolidated Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Interest/Dividends Recd.
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
EO Items
CF frm Op. incl EO
(inc)/dec in FA
Free Cash Flow
(Pur)/Sale of Invest.
CF from Invest.
Issue of Shares
(Inc)/Dec in Debt
Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
2012
53,178
15,852
-13,033
-18,625
37,371
0
37,371
-28,788
8,583
-347
-29,135
-5,016
2,531
-3,140
-2,180
-7,805
431
2,844
3,254
2013
56,590
8,841
-11,450
2,509
56,490
2,044
58,535
-73,743
-15,208
-6,483
-80,225
2,458
25,257
-3,241
-2,160
22,313
623
3,252
3,875
2014
45,946
8,964
-3,575
-9,272
42,063
1,247
43,311
-37,901
5,410
1,328
-36,573
1,825
1,197
-4,473
-2,003
-3,454
3,284
2,292
5,576
2015
47,348
9,487
-4,089
-802
51,943
595
52,539
-68,943
-16,405
3,489
-65,454
-558
22,490
-6,674
-1,694
13,565
650
3,967
4,617
2016
60,198
8,506
-3,505
-608
64,591
0
64,591
-44,883
19,708
-4,896
-49,779
6,823
9,105
-8,027
-2,476
5,425
20,237
4,617
24,853
2017E
79,494
13,500
-17,200
-14,696
61,098
0
61,098
-35,000
26,098
-25,996
-60,996
1
-8,651
-7,289
-2,463
-18,401
-18,299
24,247
5,949
(INR Million)
2018E
101,501
15,700
-24,861
-10,404
81,936
0
81,936
-35,000
46,936
-36,515
-71,515
2
0
-7,385
-2,330
-9,713
708
5,947
6,655
28 October 2016
7

Grasim Industries
Corporate profile
Company description
Grasim is a diversified company with cement and
VSF being core business, accounting for 65% and
35% of revenues. Its other business includes
chemicals and textiles. Post-acquisition of Jaypee’s
Gujarat plant by UltraTech Cement, it would be in
number one position in the Indian cement industry
with total capacity under control of 70mt.
Exhibit 1: Sensex rebased
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%)
Sep-16
Promoter
DII
FII
Others
31.3
15.1
26.3
27.4
Jun-16
31.3
16.8
22.9
29.0
Sep-15
25.5
17.4
37.0
20.2
Source: Capitaline
Exhibit 3: Top holders
Holder Name
LIC of India
Citibank N.A. New York Nyadr Department
Europacific Growth Fund
ICICI Prudential Life Insurance Company Ltd
Aberdeen Global Indian Equity Limited
% Holding
5.4
5.3
5.1
4.5
3.2
Source: Capitaline
Note: FII Includes depository receipts
Exhibit 4: Top management
Name
Kumar Mangalam Birla
Dilip Gaur
Sushil Agarwal
Hutokshi Wadia
Designation
Chairman
Managing Director
Whole Time Director & CFO
Company Secretary
Exhibit 5: Directors
Name
Kumar Mangalam Birla
Dilip Gaur
Rajashree Birla
Shailendra K Jain
Arun K Thiagarajan
B V Bhargava
Cyril Shroff
Name
M L Apte
N Mohan Raj
Om Prakash Rungta
Thomas M Connely
K K Maheshwari
Sushil Agarwal
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
BNP & Associates
D C Dave & Co
Deloitte Haskins & Sells LLP
G P Kapadia & Co
Type
Secretarial Audit
Cost Auditor
Statutory
Statutory
Source: Capitaline
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY17
FY18
MOSL
forecast
78.1
96.6
Consensus
forecast
68.3
83.8
Variation (%)
14.3
15.3
Source: Bloomberg
28 October 2016
8

Grasim Industries
NOTES
28 October 2016
9

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Grasim Industries
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Analyst ownership of the stock
Served as an officer, director or employee -
GRASIM INDUSTRIES
No
No
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10