Grasim Industries Limited

Ladies and gentlemen, good day and welcome to the Q2 FY20 earnings conference call of Grassem Industries Limited. We have with us today from the management, Mr. Dilip Gaur, Managing Director, Mr. Kalyan Ram, Business Head for CFI, Mr. Ashish Adhukia, CFO, and other senior management team. As a reminder, all participant lines will be in this and only mode. And there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing start and zero on your touch-tone phone. Please note this conference is being recorded. I now hand the conference over to Mr. Ashish Adhukia. Thank you and over to you, sir.

Good afternoon, everyone. Before I get into the presentation, I would like to welcome Kalyan Ram and Jayant Dua. Kalyan is the business head and looks after chemicals, fertilizer, and insulator businesses. Jayant has joined us as chemical CEO in place of Raj Narayanan, who has now joined our subsidiary, Ultratech. Jayant has been with us with a group for many years, handling various leadership roles. I'll request all of Dilip, Kalyan, and Jayant to take up your questions on their respective sectors. Coming to the presentation, on the consolidated basis, RASM EBITDA grew 7% YOY, mainly due to volume, albeit a slow quarter given monsoon in Ultratech. The standalone results were muted as the quarter witnessed declining realization in most of our businesses. This is primarily the result of global capacity overhangs demand slowdown in some sectors, and continuing U.S.-China trade war, which we had also highlighted all of these in the previous quarter call. However, in the long run, we strongly believe that it is cyclical, and we are well-positioned to capture the upcycle with a planned capacity expansion in the future. Grassland balance sheet remains to be strong. As you will now notice on page eight, I'll just flip through a few pages only. just to highlight three points. Despite the comparative muted earnings, continuing CapEx plan, and one-time dividend payment this quarter, we've been able to maintain our net debt position at 0.5x to EBITDA. On pages 9 and 10, our CapEx plan has remained largely unchanged, and we are closely monitoring the same, given these are critical capacity-enhancing CapEx. Other than the capacity-enhancing CAPEX, we have some maintenance and modernization CAPEX. It constitutes a number of items, including environment-related CAPEX, such as zero liquid discharge, carbon-activated plant to reduce emissions, organic fertilizer plant to utilize phosphate, some small debottlenecking opportunities, et cetera. Our focus on sustainability in all our businesses is one of the pillars to add longevity to our businesses, and to reduce regulatory costs over a longer term. On page 11, we welcome the reduction in tax rates by the government, but we will take until the end of the year to take decision on our preference of the beneficial regime. The difference in the old and new tax rate is 9.77%, which should justify giving up the incentives that we have Currently, we enjoy three kinds of incentives, the weighted average deduction on R&D, accelerated depreciation of about 20%, and ATIA benefits. These benefits are significant enough to add to actually continue in the old regime. However, there are many factors such as profit for the year, one-off incomes, expenses for the balance year, which will eventually help us determine the tax regime to follow. On page 19, in case of viscous business, there has been some correction in the domestic realization based on declining global prices. We've been able to maintain premium overlanded cost through better customer service, brand and marketing, product innovation, and differentiating ourselves to more sustainable products. The domestic VSF demand also got impacted by rise in yarn imports. On the cost side, we got some benefit of pulp prices, partially mitigated by rupee depreciation. However, we are likely to get more visible benefits over next two quarters due to high carrying cost of current inventory. On page 17, in case of chemicals, we have now added a new chart clearly stating the ECU realization. As you can notice, there has been sharp decline in global prices over last few quarters. In line with global prices, our equalization has also corrected due to demand slowdown and excess supply. Chlorine continues to be negative realization given new capacity additions domestically. Moving to page 19, we've been able to reduce power cost through change in source mix. and we are focused on increasing share of renewable power, which is also a cheaper source of power. In our insulator business, recently we executed a JV agreement with MR from Germany to manufacture composite hollow core insulator. This type of insulator is the fastest growing insulator in its segment. MR is one of the world leaders in this segment. The project cost is around 100 crores, and it will be met through mix of debt and equity. Equity will be shared in the ratio of 51 and 49. This year, we participated in Dow Jones Sustainability Index and obtained a score well above the global industry average. The details on areas where we scored high are on page 22. Our endeavor will be to actually get better on this score with objective to improve business resilience through sustainability. Back in business front, over long run, we are focused on what we believe has helped us in the past. We'll continue to add downstream products, either directly or through partnerships. We'll continue to evaluate avenues to reduce costs through backward integration and other sources. Over short run, until the US-China trade war is resolved and industry balance is restored, We cannot be sure of immediate reversal of downturn or downward trend of realization. I would like to open up the questions now. We would endeavor to answer all the questions to the extent possible, and if there are any unanswered, we'll take them subsequent to the call.

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on your touchstone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a question, please press star one. We have a first question from the line of Gunjan Prithane from J.P. Morgan. Please go ahead.

Yeah, hi. Thanks for taking my questions. I have three questions. Firstly, on the VSF business, if I look at the realizations, your realization adjusted for VFI has come down by about 7%. And similar has been the kind of decline that we've seen in the gray VSF. So is that, you know, now the specialty VSF is also seeing a steep hit, you know, rising pressure. And in terms of your mix also, I noticed that it's less of specialty in this quarter from 35%. If I recall correctly, it's come down to about 20%. Any specific reason for that?

Gunjan, your observation is perfect. But the good news is the specialties have held on. So the Delta variant specialty and grey has gone up. There was a peculiar case because the domestic demand has been unusually good. If you look at the domestic market, it has gone up by almost 16-17% demand for VSF. And we are falling short on the VSF grey capacity for the domestic market. So as a result of that, we have temporarily shifted one of the specialty lines to the viscose market. And that's why you are seeing the specialty has come down to 20%. It should going forward come back to the old levels. So it's basically a production planning issue.

But from a realization perspective, didn't it make sense to just stick to the specialty? Because, I mean, as you say, that specialty hasn't seen as much price. I mean, if you could give me some sense how the specialty price is. sequential versus, you know, 8% gray VSF that has been there.

You have to see in a business, we have a long-term partnership with our customers. If we are committed to service our gray customers, we have to service them. And because they had an unusual surge in demand, we have to, because we are 95% of the market, so you have to meet that demand. In terms of the delta, the modal has almost stayed where it was. So if the gray price is 1.75%, The modal is about 2.6, 2.7, so almost 90 cents premium. Same thing applies to our Excel. So the premiums on the specialities have been better. So it was basically a... I think it's not a loss. It is basically a planning issue. So I think this will ultimately make it up going forward.

And in terms of visibility, as I see, the exit prices have been even weaker, right? So, I mean, if I recollect, Chinese... we had mentioned are not really making money or are in losses and there was lesser risk to the realizations. But the way I see it, it's only been coming down. So is there no base or no visibility yet on the business given the way whole demand scenario and the trade risk are panning out? I mean, how do we think about realizations from here on?

Between the last quarter and this quarter, I think what has happened is the trade war got intensified. See, till the time when we met last time, the textile was not a part of the Trump's duty. On 1st August, he announced that $300 billion worth of goods, it will impose duty from 1st September. And that's why because no, the U.S. guys renewed the contracts from the Chinese suppliers. And that led to a lot of ambiguity in China in terms of where would they sell that product from. So today the prices that are ruling in China 1.3 are, as we saw last time, below their variable cost also. So, I mean, one can't predict what happens going forward, but it is kind of a, it is bottoming out now, more or less. Now, the issues are, as I told you, one is the issue of the Chinese price, second is the currency issue. The Chinese currency was 7.14, 7.15. Now, if the trade war is resolved and the currency goes back to the old level, at the same price level, you can get better realizations in the global market.

Okay, got it. Second question on the chemical business. Now, this steep decline in realization, could you throw some more light on it? Like, what really happened? Because within a span of a quarter, it seems... very steep, and are we seeing any stabilization there?

I think, Gautam, this is Jayant on this side. So, clearly, you know, the prices have got corrected because of the international front. The caustic soda prices have remained weak in China and Asia. And even in India, it actually got compounded with two aspects. One was the fact that a large crunch of capacities came, and there was a slowdown in some of the consuming markets. particularly if you look at pulp, paper, textiles, they've all had a substantial slowdown. And the pressure of demand came onto the business. And with the international prices, as well as a couple of new capacities coming, I think this quarter has been a fairly substantial decrease in the eco-prices. However, I think you need to look at a long-term story here rather than a quarter, because as we move along, the historic average, if you look at it over the last... Decade or so in this business has been around 29,000, 30,000 as an echo, with an aberration in the last couple of years where it went as high as 36,000. And I think as we go forward, the whole cycle will come back, and we expect over the next couple of quarters now, very difficult to say will it happen the next quarter or the two quarters later, but we expect the global averages to stable down and come back to the 30,000, 31,000 level.

Okay, and last question on the balance sheet. Now, if I look at the – we've gone from net cash from mid of last year or end of last year to almost 1,800 crores of net debt now. And we have about 800 crores infusion, which happens in Aditya Birla capital. And we continue to have fairly aggressive capacity expansion plans. on the core business. Now, given the way the cyclicality in the business, there is clearly pressure on the operating cash flow that is visible, that's been visible for the last one or two quarters. So what is the flexibility to reassess or push back some of this CAPEX, or is there any net debt to EBITDA in mind on the standalone business that, you know, we are not going to push the leverage beyond these levels? Because clearly this business is very cyclical. So at some point, if CAPEX is going to continue at these levels and we see realizations coming off, the balance sheet will look, you know, it will look a bit concerning.

So, Gunjan, I can just comment on balance sheet before I would request, you know, Dilip Kalyan or Jain to comment on whether the capex can be deferred or not. Okay. In terms of balance sheet, we are very comfortable at even these levels that you've seen. We have met some significant capital requirement of both the investment in VILs in Azadeh Birla capital as well as the capex of the business in the first half without significantly increasing the debt level. So that's out of the internal cash generation, out of the working capital release. We've got some good inflows that we have received through government subsidies and fertilizer, et cetera, as well that has helped us to meet these obligations. Going forward, yes, we have some CapEx plan. But depending on EBITDA, it depends on where we land up at the end of the year. I think my sense is that there is enough headroom that is available without impacting the rating that we have. You can see, take an example of Ultratech. They're quite comfortable at these leverage levels as well. We're far from our target that we have in mind, but I don't see by the year end or anything, we'll easily be able to meet these CapEx commitments for the next two years.

Is there any leverage ratio in mind that you guys target internally that we don't want to breach this in terms of net debt to EBITDA or Sure.

If I call out that number, it's a very fairly comfortable ratio that I have. Up until almost 2.5, 3x, there will be no impact at all in the financial health and the ratings of the company. But we will end the year far lower than that, less than half of that ratio.

Okay, got it. Thank you so much.

Thank you. We have a next question from the line of Rajesh Lachhani from HSBC. Please go ahead.

Yeah, thanks for the opportunity.

So the question is with regards to the exit prices of both caustic soda and ESF and with the pulp prices coming down, can you throw some light on how could the margins pan out in the coming quarter, that is the December quarter? That would be question number one. And my second question would be, what are our plans with regards to further capital infusion in Vodafone IDEA?

If push comes to shove, we have to infuse something.

Yeah, why don't you? We'll take the first question first.

The good news is, while the VSF prices have come down, the input prices have come down also almost in tandem. So the pulp, if you look at it historically, I mean, if you take the spot pulp prices, they also come down by 22%. I had explained to you last year the problem in our case is it is not reflecting in the bottom line because we have this system where we get our pulp from Canada and Sweden and South Africa where there is a 45 to 50 days transit time. And then our pricing is previous quarter. So we carry a lag of about six months. So the consuming cost of pulp is much higher than the spot price of the pulp. And that is where you are feeling that the results are looking, the EBITDA is looking low, but the time lag effect for quarter two alone is about 106 crores. So that is the kind of inherent EBITDA which has been because of the time lag. So actually, If you look at these prices and the input prices, the business is pretty healthy.

106 crore that Dilip mentioned, if you see on page 14, the average consumption price for us was 62,620, which is a red line. And we've mentioned that number in the box as well. And if you see the pot price average, that was 727 crores. right, and then plus there'll be some small duty for importing the pulp, and then there is some logistics cost from the port to the plant. So including all that, if you just multiply the difference by the sales quantity, you will get the, you know, somewhere around 100 crore kind of a figure, which we will recover over next, maybe, quarter four or something. So it will reflect in the next two quarters or so.

In the context of the margin question which you're talking about, we expect the margin to stabilize because you've also had a quarter which had an extended monsoon. And I think it's only recently now a lot of capacities which had, because of monsoon slowdown, started coming up. My guesstimate is that your margin which we had in Q1, the margin which we got in Q1 similarly has gone down in Q2, but the Q3 margin would be in a similar range which we are currently operating in on that particular front. Also, if the monsoon, the winter coming in the western part of the world or the other parts of the world, the normal tendency of the global prices rising up also comes through. If that seasonality holds through, we could see an upside, but that time will tell us.

Understood. That's quite clear.

I'll answer my next question on the capital infusion in Vodafone idea.

So there I think situation has not changed. VILS has its call tomorrow. So we have to wait and see how the situation is evolving. So there is no comment on that front. So we might increase capital. That's what is required. See, these are hypothetical situations. questions today. So as the situation stands today, there is no new development that I had explained in the last call. And, you know, just to clarify, you know, a few questions that have come after that call on the guarantee, et cetera, we have no guarantee no letter of comfort or no undertake, sponsor undertakings of any sort out from GRASIM to PIL. I just want to clarify that point. Understood, sir.

Sir, do you have any further questions?

No, that's it from my side.

Thank you. We have a next question from the line of Akshay Ajmera from Nizar Securities. Please go ahead.

Thanks for taking my question, sir. I also wanted to add on the previous question that Rup has recently clarified that they are not obligated to fund the losses of Vodafone Idea. Are we by any chance in any capacity obligated to fund the losses that might occur at Vodafone Idea Limited in any capacity?

We want to take any... Yeah. There is absolutely... So we are an equity holder. Right. So we don't – our exposure is nothing beyond the equity that we invested. And like I said, either through an agreement or through corporate guarantee or through anything of that sort, there is no guarantee or any undertaking out to them.

And any – there are no plans as of now to give any corporate guarantee or, you know, infusion? Absolutely not.

Absolutely not.

No loans, nothing, that's all.

We don't give to any of our, you know, associate JV investment or subsidiary any corporate guarantee.

Okay. So we don't want to give any corporate loans also? No. Nothing of that sort. All right.

Thanks. Thank you. So we have next question from the line up. Prateek Kumar from Antics Stockbroking. Please go ahead.

Yeah, hi. Good afternoon, sir. A few questions, firstly, on global capacity. Has there been any change in outlook in terms of any new capacity? We mentioned about 0.4 million tons like last quarter, including 0.23 in Indonesia and another 0.2 elsewhere. So is there a new capacity addition outlook globally?

No material change, I think, in that stage, more or less.

And what would be global operating rates now, which fell to like 65% like last quarter?

78%. It varies from 75% to 80% kind of a thing.

So it has actually improved versus Q1 because of closure of capacity? Yeah, slightly. Okay. And regarding this pulp prices, the chart on page 14, as you mentioned, So the spoil price already has, I mean, for our consumption has already seems fallen from 66 to 62,000. So to that extent, benefit is visible in our numbers. But that 62 falling to 52,000 per ton, is it something, 15% fall is something which we should expect in Q3, Q4.

And it is further falling. So I mean, the price today is now $640 per ton, the spot price is. So pulp is right now at the lowest historic level.

And I would just clarify that I think the more visible benefit will be in Q4 rather than Q3. That's right.

Thereafter it will continue. It will stabilize, hopefully. There will be no more lack more or less.

But as you mentioned, our return profitability probably should remain similar in Q2 Q3, in Q3, similar to Q2.

It's difficult to say, but there are so many factors in profitability. Pulp is one part of it. The realization issues are there, the other inputs are there, but I think the benefit of pulp, you can presume, will come in Q4. Let's take it that way. This 15% of what you are seeing, that should come in Q4.

Okay, and sir, can you give this ABNL, sorry, VFI segment revenue and EBITDA?

It's already there on page 15. If you see 443 crore is the, yeah, and 80 crore is the EBITDA. 443 is the revenue.

440, correct. And just one question on this domestic business. You mentioned that

domestic business is growing at like 16-18% so our business in domestic grew by 9% so there is penetration of Chinese in domestic market as well who are probably taking shares there is an inventory in the system so there is destocking happens there is no fiber, fiber imports have not happened they have remained there so instead of the yarn imports are happening that is where the struggle is ok Yarn imports have increased and that is where I think the spinners are now trying to work on the pricing to make sure that the imports stop.

Just on this capital, another question there. There were a few credit rating agencies have come out with revised rating for that company. So, which mentions that they are assuming likely support from Ayutthaya Birla Group to VIL. As their statement, obviously, it is something they are assuming. So, I mean, but as you mentioned, we are not looking to have any corporate guarantee.

We have not given any such communication to rating agency or any such comfort either verbally or written on supporting VIL to them.

That's correct. That clarifies. Thanks, sir. I'll get back to you.

Thank you very much. So we have next question from the line of Tarun Makija from Bank of America. Please go ahead.

Hi. Thanks for taking my question. Just one question from my end. The APT mentioned that the chlorine realizations in India have been now negative for two quarters. Could you give us some more color about the additional chlorine supply utilization levels and your outlook for chlorine prices?

So, Tarun, chlorine prices continue to be negative as of now. And going forward, we do not see any material change in that. If you look at it, chlorine prices historically have been negative, except for the last financial year when they turned positive after a long time. The current scenario of chlorine is that there's a fair amount of capacity addition which has happened in the industry, which has put a temporary kind of a gap between what was the consumption of chlorine chlorine production today, and we expect over the next about a year or so that will ease out to an extent. But I think the question leads to another point in terms of what is the way we are looking at chlorine consumption in our own business, which gives us a value addition proposition of increasing and improving our numbers. And that is something. So in 2017, we were internally consuming about 26% of our own chlorine, which has gone up to 28% in this year. expected to hit about 30% to 32% in these coming years. I think that's the journey which we are going through of foolproofing the business on chlorine going forward. And that, I think, in the next couple of years, you will see that this business actually has a different perspective on chlorine of what currently it is being seen today.

Got it. That's helpful. Just to follow up on that, what are your margins on chlorine VAP products? And what's your negative margin on chlorine realizations?

Chlorine is negative. So I think, yeah, and it comes under the EQ as a formula. So I think that's where the stresses come, both on the caustic and chlorine. But in terms of, yeah, in terms of WAP EBITDA per tonne, It is seeing a gradual increase going upward quarter on quarter, and the volumes are also increasing quarter on quarter.

So can you give the exact number of your VAP EBITDA margin? That would help us understand better how your margin trajectory would improve with the increasing VAP.

It's quite integrated with the business, because you have to see the entire chain to determine what the EBITDA, et cetera, is. So it's, you know, it's needed to say that instead of realizing negative EBITDA in chlorine, if you consume it and create derivative and then sell it, it's an additional margin that you get in the business over and above what you're getting anyways in your chemical business.

Since in your value-added products, the basket of products is such a large basket, And, you know, you really can't do a summation of all of them to come out with a number. But the trend line is positive both in terms of consumption and in terms of the EBITDA margins over there.

Okay. Got it. Thank you.

Thank you. So, we have next question from the line of Sumangal Nivathia from Kotak Securities. Please go ahead.

Thanks for the opportunity. So, first question on the VSF spreads. Just to clarify, your previous answer, you said in 3Q the spread should be stable versus 2Q levels and then start improving from 4Q onwards. Is that the right understanding?

That means the pulp? Fiber or pulp, I guess. Is that what you think?

Fiber or the lag. Yeah, yeah. So the difference will get equalized by Q4 and thereafter we believe pulp also like viscose is bottoming out now. 630, 640, even the The best of them is they're not making money. So it has to either flatten or maybe improve after that. So hopefully this should stay on after that.

Okay. But earlier you said even the spot prices, they continue to fall. So just wanted to understand, I mean, I understand the lag benefit on VSF spreads, but is falling pulp prices comforting or it's more a sign of further downside as to VSF prices because the cost support is, I mean, it continues to fade?

Yeah, so the issue is in case of pulp, the only buyer is VSF. If the VSF doesn't have the ability to pay, the pulp cannot come on that price. So because in sympathy with VSF, the pulp has fallen. But we believe that both of them now should turn around, hopefully.

Okay, okay. And just understood. Just one question to Ashish. I mean, just in a hypothetical situation, in case VIL defaults, I wanted to understand, is there any impact on the group credit rating and cost of debt?

No, see, I think it, again, should be directed to the group rather than to Gresham. But each of our businesses, we don't fund, you know, the other businesses. it's unlikely that if there is an impact in one business, it has an impact on the other businesses. We will continue to enjoy and retain the ratings, et cetera, that we have at Grasim and Ultratech. Understood. All right.

Thanks and all the best.

Thank you, sir. We have next question from the lineup. Risha Parikh from Suniti Securities. Please go ahead.

I just wanted to, you know, get a little more perspective on Vodafone idea. So, you know, typically, historically, what you guys have been saying is that it represents an interesting opportunity and you would participate in any fundraising with the, you know, with the aim of maintaining your stake. This was what was communicated to investors during the rights issue. Where does that stand line now? hypothetically, should there be a fundraise, would Gratium still participate to maintain its 11.5% holding? Or, you know, because there's no clarity on the use from Gratium's balance sheet anymore. So I just wanted to get a sense of where you stand philosophically on maintaining a stake in Vodafone.

No, sure. You know, first of all, I would like to correct that statement. I think in the last quarter call, I had very clearly stated that The order of preference in terms of capital allocation, the first call for the money goes to the businesses of Gratham itself, which is VSS Chemicals and allied businesses that are there. The second call of money goes to the consolidating subsidiaries, which is ABCL and Ultratex. And there I had very clearly said that we would like to maintain the consolidating stake with some cushion so that if they raise money independently and if we get diluted, we are not going below 51. And then there is non-consolidating investments, and VIL is part of that. And there, frankly, we will take a call when any such proposal would come. And there is no compulsion to maintain stake out there at all.

So from what I understand is should your target of debt to EBITDA that you all spelt out earlier in the call, if that is not met, despite funding all of the other priorities that you listed out and there is still some headroom left, you would be open to funding Vodafone IDF?

This is a very hypothetical question. I don't think we can comment on that.

Okay, thank you.

Thank you, sir. We have next question from the line of Swagato Ghosh from Franklin Templeton. Please go ahead.

Yeah, thanks. I have a question on Vodafone Idea. I just want to understand your thoughts around – so if there is a capital infusion – to put that proposal to vote for minority shareholders, even if the materiality of the transaction might not require that, but as a good governance practice, can we do that, put it to vote?

Again, it's a hypothetical question whether it will be put to vote or not. I think you have a... example in the past where the rights was done, there's no regulatory requirement as such to put to vote. Okay, so again, it's a hypothetical question, and I don't think I'll be able to comment on a question like this.

Okay, no, so I totally understand there's no regulatory requirement, but we have seen companies like before on their own put certain important strategic decisions to vote to minority shareholders. I'm just thinking, is that option open? I obviously don't expect you to commit anything as of now, because as you said, the situation is hypothetical. But because this is extraordinary circumstances, and you have seen how the stock has reacted post the last infusion also, the graph in stock. Hence, can we keep that as an option? That's my question.

There is, you know, management and board of the company that takes decisions, okay, and there is also shareholders on certain matters that take decisions. So wherever, in whichever category it falls, that authority will take decision on that matter.

Okay, thanks.

Thank you. Participants, to ask a question, please press star and 1 on your touch-tone phone now. We have a next question from the line of Deepak Malhotra from EPG Consultancy. Please go ahead.

Hi. My question is again actually on Vodafone IDEA itself because at the end of the day, if we see, I mean the group has 27% stake in Vodafone IDEA. and you are the single largest promoter shareholder in the group. So, first of all, this is the only forum available to us, you know, to understand that what's the group thinking on the investment going forward. Secondly, my question is that at the end of the day, when we look at it from the credit rating agency's point of view, definitely the support from group companies is taken in consideration when arriving at a credit rating profile. Now, in case of, as you say, it's a hypothetical situation, but if we see the track record in the past, the group has, I mean, Gresham as part of the group has contributed, you know, to its share of putting in money into Vodafone Idea. So if push comes to show, I mean, as, you know, it may happen, in that case, you know, it may impinge... it may impinge basically on the financial flexibility, you know, of Grossin itself, and also on the CapEx program, you know, which you alluded to in the sense that although Grossin would may have its first right, but in the past, if the track record is to be seen, you know, then you have ended up supporting Moda for an idea. So the question is that, you know, how is this issue really going to be resolved? Because this is really a concern for us as investors. Thank you. Thank you for the long talk.

I think whatever you have said just now, we've already, in the last two, three questions, answered those questions. What I would request is that if there are questions pertaining to Crescent's performance and business, happy to take that. In Vodafone IDEA, whatever I have said is what stands... And we really don't have anything additional to add out there. And I would appreciate if you guys understand that.

Okay. Okay. Fair enough. Okay. I'll leave it at that. Thanks.

Bye. Thank you. We have next question from the line of Saket Kapoor from Kapoor Company. Please go ahead.

Sir, I'm coming in the queue. My line is on a weak note. This is coming again. Please give it to the next participant. I'm telling you a new number.

Thank you. We have a next question from the line of Kunjan Prithyani from J.P. Morgan. Please go ahead.

Yeah, hi. Thanks for the follow-up. I just wanted one clarification from you, Ashish, essentially on some of the holdings that you have, let's say the Hindalco and the Aditya Birla fashion, even Ultratech. I mean, these stakes have been there at these levels for a long time. Now, when you look at these businesses and you're looking at some capital infusion or CAPEX program internally, is there any relook or revisiting? Like, where do we want these stakes to be? Like, Aditya Bidya Fashion has been at 11% or Hindalco at 3.9% or 4%. Can some of these be, you know, is there something you look at that you can monetize these to fund? I mean, whatever. I mean, I don't want to drag on Voda idea. Because this is more from a clarification, what is the thought process around keeping these stakes where they are? I mean, for that matter, even in Ultratech at 60%, do we stick with 60% assuming there is no cap rate from Ultratech? Do we stay at 60% or could we look to bring this down also?

Sure. First of all, all these stakes that are lying with Grasim is due to historical reasons. And as a group, We have substantially tried to resolve some of these cross-holdings over a period of time, and at least we've been following a philosophy of not adding to these cross-holdings. And if they exist, if there is no compulsion to monetize these stakes, then we don't need to, because Grasm is generating cash on a standalone basis. the data beta is very, very comfortable. So we really don't, there's no compulsion to do so.

So, you know. Specifically on Ultratech, I mean, we are at 60% and you did mention that, you know, if we will try to keep a cushion over 50% level so that, you know, if there is a fundraise there, we don't want to go below 50% level. Let's say there is no cap raises. I see it at Ultratech right now. So at 60%, we don't intend to change this holding at all, right? I mean, I'm just trying to get comfort around Ultratech's holding. Where do we stay?

So there is no need to do so. If there's no need to do so, then Ultratech is actually performing extremely well. So there is no reason to actually... If you see the performance of the company, it has done extremely well in the last four or five years. There's no reason to do that. And in fact... They are quite acquisitive. They use their stock also to acquire, and we are no more 60%. We have come down to 57% already after the acquisition. In fact, I have many avenues for cash if I need to. We still have some stake in L&T that is lying with us. We can monetize that. So we look at other avenues to do so, but frankly speaking, I don't see in foreseeable future for us having to touch some of our investments to actually generate cash when our businesses are actually at these levels also generating cash.

No, fair enough. Thanks for that clarification. My understanding is that if at all there is need also, there is enough that you can look at before touching Ultratech or Aditya Birla Capital, right? Because those are more core to you, you know, than the others which are at, let's say, below majority.

Absolutely right.

Okay. Got it. Thank you so much.

Thank you. We have a next question from the line of Amit Murarka from Motilal Oswal. Please go ahead. Mr. Amit Murarka, your line is unmuted, sir. Please go ahead.

Hi, good evening. Just on the CAPEX, I wanted to understand that you give a break up on CAPEX as basically growth CAPEX and modernization CAPEX. So how should we see the modernization CAPEX? Like what kind of margin improvement will it bring along?

So like I said, some of the examples of modernization CAPEX, a lot of them are sustainability in nature, Some of them are de-bottlenecking, so it will help increasing the capacity as well. So, like we have zero liquid discharge, which we are implementing across all plants and chemicals and in VSF. That itself could be somewhere in the range of 100 crore plus Then in VSF, we have the carbon-activated plant, which we'll be implementing, I think, in two plants this year. So, you know, that's another 100-plus crore. There is some de-bottlenecking possibility that is there at Karach VSF facility that will entail some capex. There is water recycle reuse schemes that we are looking at. There is also some capex out here which involves using seawater because the water consumption is high. So we are anyway reducing the water consumption from sustainability target point of view. But also look at alternate use. So if we are looking at seawater intake and how we can desalinize and use that. Even that is included in normal modernization that we talk about. So it's a large number of items of small amounts which totals up to this capex. But if you notice, you know, out of 3,800, roughly 3,700, 3,800 crore for this year, okay, you know, about 2,600 is actually going towards capacity enhancement. And only about 1,000 crore is towards such cases of modernization and maintenance. And, you know, sustainability, we can't, you know, understate how important it is becoming. And your longer-term cost on sustainability will increase. So therefore, if you take steps today, you will be far ahead of your competition. And in fact, it will help you in reducing cost as well.

And improve the margins also. Like you may know, we have launched a product called LeviEco. It's basically a sustainable platform, a green product, and it gives you premium over the normal product. So that's how we're adding value to the conventional previous course. Sustainability is now a big idea in the fashion industry.

I think even within chemicals, we strongly believe sustainability will become a competitive advantage. What we have seen in China with the closures and all that, I think we believe that being ahead and then being competitive is not just about investing in more capacity, but making the existing business robust and sustainable.

No, why I ask the question was basically if I try to calculate an ROCE of the expansion that is going on. So it gives about roughly 12% to 13% pre-tax ROCE for VSF and for about 80-odd percent on chemical, and this is based on the long-term EBITDA margin that I'm assuming for those two segments. But if I load up the modernization KPEX, then this declines to about 8% to 9%. So that is the context I was trying to understand. Will there be instrumental benefits also coming through from the modernizing KPEX or not?

I don't know. How did you compute these numbers? Because modernization has multiple elements to it. We are going into a bigger machine with better speed and lower cost of production. We are building a flexibility to produce gray and non-woven in that. So product mix is going to be different.

So I think we... That's what I was trying to understand.

All these are very, very highly attractive IRR products. And you have to do over 10 to 15 years. You can't take the current exit price of Visco. So to do a last 10 years average Visco's price and do an IRR is much more attractive.

Okay. Thank you. Thank you, sir. We have next question from the line of Madhav Marta from Fidelity. Please go ahead. We lost the line of Mr. Marta. We have next question from the line of Prateek Kumar from Antique Stockbroking, Cisco.

A few follow-up questions. Firstly, so this NVFI segment also, we have seen some compression of margins. So how do we understand this segment in terms of profitability?

Yeah, perfect. So in VFI, I think one of the key products that we have is tire cord, which is coming out of Century VFI business. And in case of tire cord, because of the slowdown in the auto sector, it's running at probably about 50% capacity utilization. So therefore, there has been impact in VFI as well. There is some realization pressure in VFI otherwise as well, other than the tire cord.

But we are the only manufacturers of this product in India and so I mean because the volume number doesn't seem to be impacted generally in the range of 10,000, 11,000 per quarter. The pricing has come down and profitability has come down.

So VFI as a business is a niche business in the sense we want to really compete with silk, closest to silk. So it's not like fiber. It's not about volume. It's developing market in segments like chiffon and georgette. And as we plan to do that, we have created capacities for the future. And also we wanted to make sure that we create, unlock the latent demand. So there is a lot of demand where you can, being a 2% or 3% of the market, it has a much bigger potential to grow up to 10% of the whole textile market. So it's about then creating that new fashion element and the new opportunities. And it is a slow game, but it is a very high margin game. And that's what we are playing there. And each time, every six months, you will see fashions changing. We are focusing on how do we really bring new fashion into the play and then new opportunities created. So what we will see in this is over a period of the next few years, this percentage going up in the textile market, and that's where the value unlocking will take place. And to just clarify quickly a volume question, there are, you know, four products out there, and the product mix determines the profitability rather than the volume because the margins of each of those products are very, very different. PSY, CSY, SSY, and TileBot, these would be the four broad product categories, and the margins are very different in those. So where the volume is coming from determines the margin rather than it being a secular kind of a movement.

Tire court would be a higher margin segment.

Tire court and SSY. SSY is a very high margin. I think another point which you need to remember is the whole market here is around 57,000 tons for VFY. We may be the largest market share player. But the Chinese capacities are almost around 200,000 tons, and they export almost 100,000 tons. So there's been a lot of pressure even from China. And then earlier there was also a question, and it is very relevant. There are a lot of imports that are coming into the country. And so it's also balancing between keeping high margins and at the same time deflecting all the imports. I think that's the challenge now.

Correct. And in terms of VSS capacity expansion, we are online to commission that in 3QS521?

Yeah, yeah. The first line in third quarter, second line in fourth quarter.

Okay. And just one thing on pricing. So I agree pricing both the segments is lower versus average. So how much would that be lower versus average in both segments?

The pricing is very difficult, hazardous to get any trend. Because I'm telling you, the effect of U.S.-China trade war, the day that vanishes, you will see the market taking a totally different shape. So we can't predict what will happen in that area. So I think let's see as it comes. But the prices at which we are, at these prices, Chinese are losing 2,000 RMB per ton. So they can't go any lower, I mean, logically. So the average loss is about $2,000. That means about $250 per ton. That's the kind of money they're losing. All right. Thanks and all the best, sir.

Thank you. We have a next question from the line of Saket Kapoor from Kapoor Company. Please go ahead.

Yes, sir. Thank you again for the opportunity. Sir, just to understand the... What are the structural changes that have happened in the caustic soda market and what have been the imports for the first half into the country?

The imports have substantially increased in the first half. The reason being that of the first half, particularly the first quarter, the India prices were far more attractive than the global prices. So that has led to the current exports are kind of because this is the prices at par with the global market. So I think that's the – and going forward, we expect that this parity would continue.

Sir, is there some certification that was due from some countries? I think from Japan and all, they got the certification, and now the major imports are being from the Japanese itself?

Sir, Japan is one of the countries which is sending material to India. There are also countries from Middle East and there are also countries from Bangladesh. But Japan is one of the larger ones, sure.

I was just looking for the volume, sir. Do you have the volume with you? What was the imported quantity for the last quarter of the first half in totality?

Yeah, we have the numbers.

We'll just give you the... And secondly, sir, for negative chlorine, which you have... mentioned, sir. This means that we have to pay a price to evacuate chlorine? That is what... Yes. And this trend has happened for Q1 and Q2 both?

This trend has happened for Q1 and Q2 both.

No, but this trend has been for many years historically. The situation had actually changed last year, so now it's again negative, but As business, we are looking at many ways, like Kalyan and Jayant had pointed out, on how to increase either chlorine derivatives or to actually find other ways to evacuate chlorine. And there are many such examples to make sure that we don't lose money on evacuation of chlorine.

Can you quantify how much it has been negative for the first half? Chlorine?

Typically, you can take the transportation cost to move to the customers is the negative that you have. So it could be, if we are moving it all the way to the south versus west, it could be anywhere between 500 to 4,000 rupees a ton. So I think we need to be careful The minute it's, depending on which customer it is and which location it is, that can change.

Lead distance is there, but average for us, we are the biggest place. But I think so.

I think we need to be careful there. So when we provide EQ, what we say is it is the consolidated number between all the employees. We don't try and then show you a huge price increase in costing and then something else in chlorine. What you see as a number is a consolidated number. And it has to eventually, you know, somewhere one becomes a byproduct for the other. I would also say that our direction is, I think one difference in India versus the rest of the world is, in the majority of the rest of the world, chlorine is consumed in some of the largest... derivatives like PVC and TDI. Capacities are not much in India, and that's going to happen. And when large petrochemical players start to invest in PVC, this situation can change. The way we are looking... Hello?

Sir, kindly stay connected. We lost the line of the management. Assistant, kindly stay connected. We will be connecting back to the management. Please stay connected. Thank you. Back in the call. Sir, we're back in the call. Please go ahead.

Yeah. No, sir, I think I'm not too sure where we lost you guys, but I think what Kalyan was trying to say is that over a longer term, we will increase chlorine derivatives. Yes. to ensure that we profitably evacuate chlorine.

And today the mix of value added is 28% as of now. And with the capping that will happen, what would be the value added proportionate for March 20 and 21?

The percentages will go up on value added production. Our expectation in these next five years, we will get closer to 43%, 45%.

It's a long five-year project.

But I think the other thing which we're doing actively, as I said earlier, is bringing customers next to our plant.

Correct.

And hence, we don't have to build on the transportation, et cetera. And majority of these two days, We expect to help. In the meantime, we are working with very large petrochemical majors to see whether they are putting up world-scale capacities on PEC and others. That continues to be our focus area.

And lastly, sir, caustic soda prices have declined even for 45 days of this quarter also, or are they stabilized if it will give some color on the sale?

At the moment, the spot prices on caustic soda are continuously on a decline.

Okay. Even they are lower than what September was. How much has been the reduction, sir? Can you quantify?

I guess at this point of time, we can't quantify that, but the trend is downwards.

Trend is downward. But utilization levels are in the high 90s for all our plants, or we are also having problem with demand?

Not having substantial issues with demand. I think on demand front, we are fairly comfortable.

Right, and going forward also, what factors will reverse this trend for caustic soda prices? According to you, what factors can lead to the change?

It's a clump of capacities which have come in a short period of time. As they will stabilize in the market, you will see stabilization of prices happening. The timing of that is not at the moment.

I think one of the ways we look at it strategically is not quarter by quarter. Our approach is over a period of next few years, each year the market is growing closer to 7% to 8%. What do you mean? In a 4 million ton market or a 3 to 4 million ton market. We need capacities almost, you know, 300,000, 400,000 tons every year. And that's the basis based on which we grow and we plan our growth. Quarter to quarter, we have seen this is one of the most cyclical businesses, and hence it creates a huge barrier to entry for many, because it can be highs and lows. But we plan over a period of long term.

Sir, can you quantify the capacity addition? You articulated about huge capacities coming on stream. So for the first half, how much have been the new capacities that have been on stream and any new capacities that will be going on stream in the second half?

I think it's all captured on page 9. Okay, sir.

Sir, thank you for all the elaborate answers. Thank you, sir.

Thank you. We have the next question from the line of Kevin Kuriakos from Alphaline Wealth Advisors, Bitcoin.

Good afternoon, sir. I just wanted to know what would be our capacity utilization for the expansion in FY21 for the VSF?

Look, as I always told you, if you look at the history of VSF, we always have almost 100% capacity utilization. The only issue is how much is the domestic in that. So what happens is today my capacity is fully stretched. I have 88% domestic, 12% is value-added export. And when the new plant comes up, we will maximize the domestic sale and whatever it means we export. The plant will be fully utilized because there is a huge global demand for the product.

Okay. Okay, that is all my time. Thank you.

Thank you. If there are no further questions, we would like to close the call. Ladies and gentlemen, on behalf of Grassland Industries Limited, that concludes this conference call. Thank you for joining with us. You may now disconnect your lines. Thank you, everyone.