Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Grasim Industries Ltd (Grasim). Also, CRISIL Ratings has withdrawn its rating on non-convertible debentures worth Rs 500 crore (see 'Annexure - Details of Rating Withdrawn' for details). The withdrawal is based on independent confirmation of redemption of these instruments and at the company’s request, in line with the CRISIL Ratings withdrawal policy.

 

The ratings continue to reflect the leading position of Grasim in the viscose staple fibre (VSF) and chemical businesses, its strong financial risk profile and financial flexibility derived from being the holding company of UltraTech Cement Ltd (UltraTech; 'CRISIL AAA/Stable/CRISIL A1+') and Aditya Birla Capital Ltd (ABCL; ‘CRISIL A1+’). These strengths are partially offset by susceptibility to cyclicality in the core business.

 

For the first nine months of fiscal 2023, revenue (standalone) rose 39.5% year-on-year, driven by higher volumes and realisations across the VSF and chemical segments. Despite better realisations, rise in input cost resulted in moderation in operating margin to 13.6% during the first nine months of fiscal 2023 from 17% in the corresponding period of the previous fiscal. Healthy cash accrual aided fall in net debt to Rs 485 crore as on December 31, 2022, from Rs 1,428 crore as on December 31, 2021. Grasim had earmarked capital expenditure (capex) of Rs 3,500 crore in fiscal 2023 (excluding paints capex), of which Rs 1,370 crore was spent during the first nine months of fiscal 2023. The capex is for expansion of VSF and caustic soda capacities apart from regular modernisation and maintenance capex in existing businesses.

 

Furthermore, Grasim’s entry in the decorative paints business with overall capex of Rs 10,000 crore (over fiscals 2023 to 2025) and business to business (B2B) e-commerce segment with total outlay of Rs 2,000 crore (over the next five years) will add size and diversity to its existing standalone business. While this is likely to result in higher leverage, expected healthy cash accrual and a strong balance-sheet lend comfort. However, ability of the company to execute the projects within timelines and cost, and successfully market its products to gain the envisaged market share, will be key monitorables.

 

CRISIL Ratings takes note of the order issued by Competition Commission of India (CCI) dated March 16, 2020, imposing penalty of Rs 301.6 crore with respect to the VSF turnover of the company. This matter is currently subjudice. Crystallisation of demands and its impact on the financial risk profile will be a key monitorable.

 

CRISIL Ratings also takes note of the company announcement dated November 30, 2022, which states that The Income Tax Appellate Tribunal, Mumbai, has held that the demerger of the financial services business was a qualifying merger under the provisions of the Income Tax Act, 1961, and therefore provisions of deemed dividend are not applicable. As per the order, the demand of DDT was not sustainable and hence quashed. CRISIL Ratings understands that the contingent liabilities related to these matters are now nil. 

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Grasim, its subsidiaries and joint ventures (JVs) in the VSF and related chemical, pulp and fibre businesses, as all the entities have similar business operations and will remain core to Grasim. CRISIL Ratings has also combined the business and financial risk profiles of renewable assets under Grasim to factor in the extent of financial, operational and managerial support available to them from Grasim.

 

CRISIL Ratings has not combined the business and financial risk profiles of UltraTech, Vodafone Idea Ltd (VIL), Hindalco Industries Ltd (Hindalco; 'CRISIL A1+'), ABCL and their subsidiaries as they are in different businesses that have no significant operational linkages. It has treated them as financial investments.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Leadership position in the VSF and chemical businesses

Grasim is the largest producer of VSF and has sizeable share in the global man-made fibre market. Operations are highly integrated, with a pulp plant and caustic soda capacity in India, two global dissolving pulp JVs and captive thermal power plants, providing strong control over production cost. Moreover, ramp-up of operations at the Vilayat plant (Bharuch, Gujarat) and leveraging of the Liva brand have strengthened the market position. The company will maintain its leading position and benefit from expected growth in demand.

 

Also, it is a leader in the caustic soda and epoxy resins segments in India. Captive application of caustic soda and presence of leading paint companies and electrical machinery manufacturers as clients benefits the epoxy resins segment. Focus on expanding the existing set of value-added products from chlorine (by-product of caustic soda) should improve realisations. Furthermore, the business risk profile is diversified with the inclusion of the textile and insulator businesses, wherein Grasim enjoys strong market position.

 

Healthy financial risk profile

The company has a robust capital structure, as reflected in standalone networth of Rs 48,624 crore and net debt of around Rs 485 crore, as on December 31, 2022 (lower by Rs 943 crore than as on December 31, 2021). Investments in group entities in fiscal 2022 and in the first nine months of fiscal 2023 were minimal. Based on discussions with the management, CRISIL Ratings understands that the company will not be leveraged significantly for making additional investments in group companies. Any change in this stance will be a key monitorable. Planned capex outlay for fiscal 2023 was around Rs 3,500 crore (excluding paints capex), of which Rs 1,370 was spent during the first nine months of the fiscal.

 

Also, the company has announced capex outlay of Rs 10,000 crore towards the decorative paints business. Of this, Rs 1,817 crore was spent till December 2022 towards land acquisition and construction activities. It is setting up a cumulative capacity of 1,332 million litres per annum (mlpa) spread across six plants located across the country and is expected to commercially launch the paints business by end of fiscal 2024. Grasim has also announced foray into the B2B e-commerce segment with total outlay of Rs 2,000 crore to be spent over the next five years. The platform will focus on the building materials space and is expected to be launched by September 2023. While debt is expected to increase to fund the proposed capex, steady cash flow from the key business segments and strong balance sheet will keep the financial risk profile healthy.

 

Financial flexibility derived from being a holding company

Grasim is the holding company for two large, listed investments of the Aditya Birla group: UltraTech and ABCL. UltraTech is the largest cement player in India, and ABCL houses the financial services businesses. Both are growing businesses and strategic to the Aditya Birla group, making Grasim a key entity within the group. Grasim's 57.27% stake in UltraTech was valued around Rs 127,357 crore as on May 12, 2023. Grasim receives annual dividend from UltraTech, which has a healthy dividend track record. The company also has significant shareholding in other listed entities, namely Hindalco, Aditya Birla Fashion and Retail Ltd (‘CRISIL AA+/Stable/CRISIL A1+), ABCL and VIL, collectively valued at Rs 29,192 crore (as on May 12, 2023). Furthermore, it has not made any significant investments in key subsidiaries in fiscal 2022 and in the first nine months of fiscal 2023. While overall debt to market value of investments ratio remains comfortable, higher-than-envisaged investment outlay will be a key monitorable.

 

Weakness:

Exposure to cyclicality in the VSF and chemical businesses

Demand for VSF remains susceptible to economic downturns. In the past, intense competition has led to sharp fluctuation in the operating margin: around 15% in fiscal 2016 as against 19-20% in fiscals 2017 and 2018. Realisations improved in fiscal 2019 (operating margin remained around 20%) because of steady demand for viscose fibre and increase in the price of rayon-grade wood pulp. However, large capacity additions globally, weak global macroeconomic conditions, change in geopolitical conditions and fluctuations in foreign exchange rates led to drop in profitability in fiscal 2020. Benign input prices helped the operating margin in fiscal 2021 (17%) despite decrease in volumes amid the Covid-19 pandemic. However, with rising input prices, including prices of caustic soda and pulp, despite healthy demand, the operating margin fell again to 14.1% in fiscal 2022 and further to 7.8% during the first nine months of fiscal 2023.

 

In the chemicals business, the operating margin declined to 19.4% and 12.9% in fiscals 2020 and 2021, respectively, from 28% in fiscal 2019. This was due to weak electrochemical unit (ECU) realisations backed by declining domestic prices (in line with global prices), led by capacity overhang and slowdown because of the pandemic. Significant jump in caustic soda and ECU realisations, along with healthy demand, led to rise in operating margin to 19.4% in fiscal 2022 and 23.7% during the first nine months of fiscal 2023. Profitability in the chemicals segment is susceptible to increase in capacities. Similarly, reversal in realisations, on account of global overcapacity of VSF, may restrict profitability. Nevertheless, the company’s strong market position and backward integration of operations will help manage downturns effectively.

Liquidity: Superior

Cash and liquid investments stood at Rs 5,090 crore as on December 31, 2022. The company also benefits from its ability to raise short- and long-term debt at short notice and at competitive rates. Minimal utilisation of the fund-based working capital limit of around Rs 600 crore also supports liquidity. Repayment of long-term debt over fiscals 2024 and 2025 will be adequately supported by internal cash accrual. Further, the company has unutilised term loan sanctions of Rs 5,000 crore to fund incremental capex. Cash accrual, unutilised bank lines and existing cash reserves will be sufficient to fund incremental capex and working capital requirement.

 

ESG profile

CRISIL Ratings believes the environment, social and governance (ESG) profile of Grasim supports its already strong credit risk profile.

The viscose and chemical sectors can have significant impact on the environment owing to high water consumption, waste generation and greenhouse gas (GHG) emissions. The sectors’ social impact is characterised by health hazards, leading to higher focus on employee safety and well-being and the impact on local community, given the nature of operations. Grasim has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights:

• Grasim has deployed strategies to reduce water intensity in its production process and has installed zero liquid discharge (ZLD) plants at multiple locations in its VSF, chemicals and textile businesses for reduction of water intake. The VSF Nagda plant has become the first VSF plant globally to achieve ZLD. The VSF business was able to cut water intensity by 56% in fiscal 2022 (compared with fiscal 2015 baseline) and the chlor alkali business saw 15.6% reduction in specific freshwater consumption (compared with fiscal 2017 baseline).
• The company is focussed on increasing its presence in the renewable energy segment. It has significantly grown its operational solar power portfolio (under Aditya Birla Renewables Ltd [‘CRISIL AA/Stable/CRISIL A1+]) to 641.5 megawatt-peak (MWp) and has an additional 301.4 MWp under construction. Further, in its viscose, chemical and insulator businesses, the share of renewable energy in power consumption increased to 8% during the first nine months of fiscal 2023 from 5% in fiscal 2022. The company aims to increase share of renewable energy to ~27% by fiscal 2026.
• Its loss-time injury frequency rate (LTIFR) of 0.28 in fiscal 2022 (0.36 in fiscal 2021) is lower than peers, representing healthy employee safety and well-being standards. Gender diversity is an improvement area, with only 2% of women employees as of fiscal 2022.
• The governance structure is characterised by 50% of the Board comprising independent directors, split in chairman and CEO positions, and presence of an investor grievance redressal mechanism and extensive disclosures.
• At the group level as well, Grasim is focussed on ESG practices, with its key subsidiaries, UltraTech and ABCL, having well-defined ESG policies.

 

There is growing importance of ESG among investors and lenders. Grasim’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in overall debt and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes Grasim will maintain a strong credit risk profile, driven by its leading position in the VSF and chemical segments, and healthy cash accrual. The company will also be a key entity within the Aditya Birla group as the holding company of UltraTech and ABCL, which are sizeable and strategic to the group.

Rating Sensitivity Factors

Downward factors

• Significant increase in leverage due to higher-than-envisaged capex or investments/loans to group entities/ subsidiaries, coupled with a significant decline in market value of investments from the current Rs 1,56,881 crore (as on May 12, 2023)
• Significant decline in overall annual operating profitability on a sustained basis, severely impacting overall liquidity

About the Company

Incorporated in 1947, Grasim is the flagship company of the Aditya Birla group. It commenced operations in 1948 as a textile manufacturer and is the sole producer of VSF in the domestic market. The viscose segment also comprises the viscose filament yarn business of the merged ABNL and acquired rights to manage and operate the rayon division of Century Textiles and Industries Ltd ('CRISIL AA/Stable/CRISIL A1+') with effect from February 1, 2018. The chemicals segment comprises caustic soda, chlorine VAPs and advanced material businesses. The company is also present in the textile and insulator sectors. In January 2021, Grasim announced foray into the decorative paints business. Total capital outlay for the business is Rs 10,000 crore, which will be used to set up capacity of 1,332 mlpa across six plants in various locations across the country. Furthermore, in July 2022, it announced foray into B2B e-commerce segment with total outlay of Rs 2,000 crore over the next five years.

 

UltraTech, Grasim's 57.27% subsidiary (as on March 31, 2023), is the largest cement producer in India. On August 11, 2016, Grasim announced a composite scheme of merger of ABNL with itself, followed by demerger of the financial services business into a separate listed entity, ABCL. Following the scheme, effective July 1, 2017, ABCL was listed in September 2017. Grasim held 54.15% equity in ABCL as on March 31, 2023.

Any other information: Not applicable