Grasim Industries reported better than expected standalone operational performance for Q3 FY21 led by strong OPM for its Viscose business led by higher realization, lower fixed costs and input cost benefits. Grasim Industries presented restated numbers excluding fertilizer business (under process of transferring the business post the sale agreement in November 2020) for Q3 FY21 and previous periods. Grasim Industries standalone net sales rose 24.5% qoq (down 4.8% yoy) at Rs 3672 cr led by strong rise in both Viscose (up 27.8% yoy) and chemical (up 13.8% qoq) revenues. The current share price of Grasim Industries is Rs 1230 down Rs 13 or 1%.

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The other businesses of Grasim Industries (textile and insulator) saw a 37.6% qoq rise. The strong surge in domestic demand for VSF (capacity utilization of 100% in Q3) along with a sharp rise in VSF prices (China VSF prices up 23% qoq to RMB 10500 in Q3) led to strong sequential jump in Viscose revenues. Likewise the chemical division too saw a sequential improvement in demand with revenues reaching pre-COVID levels.

Grasim Industries outperformed significantly on the OPM front with Viscose division recording OPM of 22.5%, which was up by almost 1100bps both yoy and qoq.

Chemical OPM declined by 279bps qoq to 13.8% as ECU remained weak despite strong demand. Overall, the standalone operating profit jumped 90% qoq (up 68% yoy) to Rs 646 cr. Strong operational performance led to standalone net profit growth of 84% yoy to Rs 359 cr (almost flat qoq on account of lower other income and higher effective tax rate).

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Grasim Industries expansion plans in VSF and chemical is on track with two subsequent lines of VSF expected to commence during Q2FY22 and Q3FY22 while chemical expansion is expected by Q1FY2022. The company’s board is yet to approve the capex plan for FY2022. Grasim Industries is expected to complete the sale and receive the proceeds from fertilizer sale in June-July 2021.

Grasim Industries management has not yet disclosed the details regarding capital expenditure and other details with respect to its plans in decorative paints business (initial investment of Rs 5000 crore over three year period) while the same is expected after a quarter. It has reduced its consolidated and standalone net debt by Rs 7994 cr and Rs 882 cr respectively during 9MFY21.

Sharekhan have increased their standalone net earnings estimates for FY2021-FY2023E factoring higher OPM for Viscose business. Sharekhan assigned a premium to valuation multiple for Grasim Industries for its foray into paints business revising our SOTP based price target to Rs 1430. Sharekhan retains Buy on the stock.