Grasim Industries Limited

Ladies and gentlemen, good day and welcome to the Q2NH1 FY21 earnings conference call of Grassum Industries Limited. We have with us today from the management, Mr. Dilip Kaur, Managing Director, Mr. Kalyan Ram, CEO, Global Chemicals and Group Business Head, Fertilizers and Insulators, Mr. Jayant Dua, Chief Executive Officer, Chemical Division, Mr. Ashish Adhukia, CFO. As a reminder, all participants' lines will be in listen-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, CFO. Thank you, and over to you. Thank you. Good afternoon to all the participants. I'm pleased to mention that we've had a good start to this Diwali week with some few positive news. We've announced two important transactions over the last few weeks which is in line with our strategic objectives of one, enhancing focus on core business and two, Increased presence in chlorine derivatives, improving our WAPT contribution. In addition to both these announcements, our financial performance for Q2 witnessed a reversion to normalization from the sequential quarter. So let us start and dwell into the fertilizer transaction first. I think we've got a couple of slides in the presentation as well. It's probably slide 11 and 12. The board of directors of the company have approved the divestment of fertilizer business to Indian subsidiary of Indorama Corporation. Indogulf is one of the largest urea producer in India with a capacity of 1.2 million tons per annum. It is also one of the most energy and efficient plant in the country. We have a strong distribution network spanning across northern and eastern India, and it has a well-known brand called Shaktimaan. The decision to divest the fertilizer business is a strategic portfolio choice. Given the depth and scale of Grassim's core businesses, like fiber and chemicals and textiles, There was limited strategic rationale to stay invested in a non-core business. We ideally like to maintain exposure in businesses that are leading position in addressable market or that have strong growth potential. In addition, payment cycles for large receivables in case of fertilizer are long, which leads to low return on capital employed. Utilize the funds to evaluate growth opportunities in existing businesses of viscose and chemicals and textiles. The business will be transferred to the buyer for a cash consideration of rupees 2,649 crore. This is basically the enterprise value. This consideration reflects the strength and future potential of the fertilizer business. This value has been arrived at on the basis of working capital as on June 30th, 2020. The broadly subject to other conditions, if the working capital changes at closing, which is expected to be in nine to 12 months timeframe, the value will be adjusted to that extent. The second transaction, you know, is the one that we announced a fortnight back, which was a collaboration with Lubrizol. This collaboration is part of our long-term direction to bring in world-class technologies to India and additionally complements our growth strategy of improving our chlorine integration. Lubrizol is a market leader in CPVC globally and in India. Lubrizol would set up a state-of-the-art CPVC plant at Vilayat of approximately 100 kTPA capacity in two equal phases, along with the zero liquid discharge system. Grassium will provide land, utilities, and materials, primarily chlorine and hydrogen, to this plant. Gratium will operate and manage the plant operations for an annual commercial consideration. We expect the plant to be commissioned in the second half of FY23. While Lubrizol brings capital and technology, Gratium brings extensive manufacturing expertise. CPVC present will be transferred to Luprizol on an exclusive basis. Post-commissioning of both phases, we expect our chlorine integration on overall basis to improve by around 5%. Overall VAT EBITDA per ton of chlorine is also likely to improve given this transaction. Now, coming to results with the bounce-back in September quarter and some revival in the business sentiments, the Board of Directors has taken decision to continue with the chemicals project at Vilayat, Rehela, and Balbadhapuram, with the commissioning ranging from quarter four, FY21, to quarter one, FY22. Therefore, we have revised our capex spend to rupees 1,852 crore from rupees 1,615 crore that we had announced in the previous quarter. The capex spend amount stood at 279 crore in half one. of FY21, and the balance will be spent in the second half of FY21. On results, our financial performance witnessed a strong rebound in September 20 quarter, making us confident that the improvement in business fundamentals is here to stay. The capacity utilization of BSF business improved from 26 percent in June quarter to 88% in September quarter. Some of these figures are already there in the presentation, the initial slides. The capacity utilization of our caustic soda plant improved from 49% levels in June quarter to 80% levels in September quarter. The consolidated revenue and EBITDA for the quarter stood at 18,394 crore and 3,660 crore for quarter two. reporting a significant improvement both on quarter-on-quarter basis as well as on YOY basis. On a standalone basis, revenue improved to 3,438 crores from 1,940 crores in Q1. EBITDA also improved significantly to 680 crores in quarter two from negative 46 crore that we saw in quarter one. The sequential deleveraging in consolidated as well as standalone net debt has been on account of reduction in working capital and improvement in EBITDA. Our consolidated net debt stood at 17,295 crore, and standalone net debt stood at 2,325 crore. and 29 crore in quarter two. The net debt to EBITDA stood at a very healthy level of 1.46 times during the quarter on standalone basis. VSF demand witnessed a strong recovery in domestic and overseas market. The demand for grey fibre remained strong with supply falling short of demand. The share of domestic VSF sales have touched the pre-COVID levels. On page 16, the domestic VSF realization witnessed a sharp reversal from start with the demand revival in China. The VSF plant inventory in China fell to 16 days in September from the highs of 45 days in April. The capacity utilization for Chinese VSF plant improved to mid-70s in September from around mid-60s in April. The VFY capacity utilization averaged around 46% for quarter two from the low double-digit number in quarter one, with some demand revival from textile hubs in India. The VFY business generated a revenue of 228 crore and EBITDA of 14 crore in quarter two out of the viscose total EBITDA that you see in the presentation. The fixed cost savings in viscose has sustained. The fixed cost optimization measures led to savings of almost 116 crore in quarter two in comparison to average FY20 cost. Caustic soda operational performance was better in quarter two. The financial performance was driven by better utilization levels, easing of input costs, and strong WAC performance. However, in realization front, Overseas markets have been overwhelmed by excess caustic supply driven by chlorine demand in PVC and other derivatives. Caustic soda price CFR in Asia dipped below $250 level with domestic prices mirroring the weakness. The chemicals business reported an EBITDA of 187 crore in quarter two a significant increase from previous quarter. The caustic soda demand picked up on account of pickup and demand in textiles and paper segment. The chlorine value-added product demand remained upbeat during the quarter, driven by demand from health and hygiene, drinking water, and other industrial segments with EBITDA witnessing a double-digit sequential growth. The chlorine realization remained positive during quarter two and cushioned the fall in the eco-realization on back of easing caustic prices. On page 22, fertilizer business reported an EBITDA of Rs. 60 crore driven by lower fixed costs and better which is non-urea sales. Product business contributed around 32% of overall fertilizer EBITDA in the quarter. On efforts on the sustainability fronts are actually paying off. Grassland was ranked ninth in the list of ET futures case, seventh responsible business ranking on sustainability and CSR. In a very significant outcome in sustainability, BFF business received the number one ranking and has been accorded with dark green shirt in Canopy's Hot Button Report 2020. Our inherent financial strength, our operational excellence, and diverse product portfolio with cement, financial services, viscose, and chemicals We are well poised to sustain leadership across our businesses with rebound in the economic activity. I would now like to hand over to the operator for Q&A, and we've got Dilip, Kalyan, Jayant, and others on the call to answer your questions. Thank you. 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 1 on your touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and 2. 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 followed by 1 on your touch-tone phone now.

We have a first question from the line of Sumangal Nivathia from Kotech Securities.

Please go ahead.