Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+’ ratings on the debt instruments and bank facilities of Grasim Industries Ltd (Grasim)

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The ratings continue to reflect the leadership position of Grasim in the viscose staple fiber (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.

 

Operating performance improved significantly, with steady rise in demand for products post the first half of fiscal 2021 (following the nationwide lockdown due to the Covid-19 pandemic). Revenue has doubled in the first half of fiscal 2022, over the same period last fiscal, driven by higher volume and realisations across the viscose and chemicals segments. Despite increase in input prices, better realisations offset cost pressure, resulting in healthy operating margin of 17.7% during first half of fiscal 2022, compared to 2.5% during the same period last year. Healthy operating performance aided fall in net debt to Rs 1,158 crore as on September 30, 2021 from Rs 2,329 crore as on September 30, 2020. Grasim has earmarked a total capital expenditure (capex) of Rs 2,609 crore in fiscal 2022 (excluding paints capex), of which Rs 905 crore was spent during first half of fiscal 2022. This majorly covers expansion of VSF and caustic soda capacities apart from regular modernisation and maintenance capex in existing businesses.

 

Further, Grasim’s entry into the decorative paints business with an initial capex of Rs 5,000 crore (to be spent over the next three years), is expected to add size and diversity to its existing standalone business. While this likely to be funded through a mix of debt and internal accrual, leverage levels are not expected to rise significantly, given the strong balance-sheet. However, ability of the company to execute the project within the expected timeline and cost, and successfully market the products to gain the envisaged market share, are key monitorables. The company has completed divestment of its fertiliser business in the third quarter of fiscal 2022, and sold it to Indorama Corporation for a final consideration of around Rs 1,860 crore.

 

CRISIL Ratings takes note of the order issued by Competition Commission of India (CCI) dated March 16, 2020, imposing a penalty of Rs 301.6 crore in respect of the VSF turnover of the company and demand of Rs 3,786.4 crore (reduced from Rs 5,872.3 crore vide DCIT order dated October 2020) raised by the Deputy Commissioner of Income Tax (DCIT) on account of dividend distribution tax (DDT, including interest), pursuant to the composite Scheme of Arrangement between Grasim, Aditya Birla Nuvo Limited (ABNL) and Aditya Birla Financial Services Limited (now known as ABCL). Further, as a corollary to the above DCIT order, an additional demand of Rs 8,334 crore (including interest and excluding any penalty proceedings) was raised by the authority on September 30, 2021. All the above matters are currently subjudice. Any crystallisation of demands in these matters and its  impact on the financial risk profile will be key monitorables.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Grasim, its subsidiaries and joint ventures in the VSF and related chemical, pulp and fiber 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 ('CRISIL AA/Stable/CRISIL A1+'), ABCL and their subsidiaries, as they operate in different businesses that have no significant operational linkages and has treated them as financial investments.

 

Please refer Annexure - Details of Consolidation, 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 also has a sizeable share in the global man-made fiber market. Operations are highly integrated, with a pulp plant and caustic soda capacity in India, two global dissolving pulp joint ventures, and captive thermal power plants, providing strong control over production cost. Moreover, ramp-up of the Vilayat plant (Bharuch, Gujarat) and leveraging of the Liva brand have strengthened the market position. The company will maintain its leadership position and benefit from expected growth in demand.

 

The company is also 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 inclusion of the textile and insulator businesses, wherein Grasim enjoys a strong market position.

 

• Healthy financial risk profile

The company has a robust capital structure with standalone networth of Rs 46,505 crore and net debt of around Rs 1,158 crore, as on September 30, 2021 (lower by Rs 1,171 crore compared to September 30, 2020). Investments in group entities during fiscal 2021 and first half fiscal 2022, 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. Grasim plans to incur capex of around Rs 2,609 crore in fiscal 2022 (excluding paints capex), of which Rs 905 was spent during first half.

 

Also, it has announced initial capex of Rs 5,000 crore over the next three years, towards the newly announced decorative paints business. Of this, Rs 267 crore was spent till September 2021, to acquire land parcels in Punjab, Haryana, Maharashtra, Karnataka, and Tamil Nadu. It is currently in the process of obtaining environmental clearances for these sites (post which construction will commence). While debt is expected to increase to fund the proposed capex, steady cash flows from the key business segments, strong balance sheet and proceeds from the sale of the fertiliser business, 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 producer 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 57.28% stake in UltraTech was valued around Rs 1,23,495 crore as on February 7, 2022. 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, together valued at around Rs 26,531 crore (as on February 7, 2022). Further, it has not made any significant investments in key subsidiaries in fiscal 2021 and first half of fiscal 2022. While the ratio of overall debt levels to market value of investments remains comfortable, any 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 macro-economic conditions, change in geo-political conditions and fluctuation in foreign exchange rates led to a drop in margin in fiscal 2020. Benign input prices helped margins in fiscal 2021 (operating margin: 17.0%), despite a dip in volume amid the pandemic. Further, during the first half of fiscal 2022, healthy realisations drove the margin up to 20.9%.

 

The chemicals business also saw the operating margin decline in fiscals 2020 and 2021, to around 19.4% and 12.9%, respectively, from 28% in fiscal 2019. This was due to weak electrochemical unit (ECU) realisations on the back of declining domestic prices (in line with global prices), led by capacity overhang and slowdown because of the pandemic. Reversal in ECU realisations and healthy demand led to a rise in operating margin to 16.6%, during first half of fiscal 2022. Profitability in the chemicals segment is susceptible to increase in capacities. Similarly, any reversal in realisation, on account of global overcapacity of VSF, could restrict profitability. Nevertheless, the company’s strong market position and backward integration of operations will help manage any downturn effectively.

Liquidity: Strong

Liquidity remains strong, with cash and liquid investments of around Rs 5,500 crore as on date (of this, the company has furnished a non-disposal undertaking to the Income tax department with respect to certain mutual fund units [mark to market value of Rs 807.85 crore as on December 31, 2021]). The company also benefits from its ability to raise short- and long-term debt at a short notice and at competitive rates. Minimal utilisation of the fund based working capital limit also supports liquidity. Repayment of long-term debt over fiscals 2022 and 2023 will be adequately supported by internal cash accrual. Further, proceeds from sale of the fertiliser business and improving cashflows in fiscal 2022, is expected to sufficiently fund the company’s capex plans of existing businesses.

 

ESG profile

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

 

The viscose and chemical sectors can have a significant impact on the environment owing to high water consumption, waste generation and greenhouse gas (GHG) emissions. The sector’s 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 its operations. Grasim has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights:

• Grasim has deployed strategies to reduce the water intensity in its production process and has also installed zero liquid discharge (ZLD) plants at multiple locations in its VSF, chemicals and textile business for reduction of water intake. The VSF Nagda plant has become the first VSF plant globally to achieve ZLD. The VSF business has been able to cut water intensity by 47% in fiscal 2021 (compared to fiscal 2015 baseline) and the chlor alkali business has seen a reduction of 14%.
• Grasim is also 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 508.5 megawatt-peak (MWp) and has an additional 54.4 MWp under construction and 180 MWp in the pipeline. The chemicals division is focussed on increasing share of renewable energy in the energy mix to ~11% from ~1.55% in the next 3-4 years (on expanded capacity).
• Its loss-time injury frequency rate (LTIFR) of 0.36 in fiscal 2021, is lower vis-à-vis peers, representing healthy employee safety and well-being standards. Gender diversity is an improvement area with only 2% of employees being women as of fiscal 2021.
• The governance structure is characterised by 43% 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 viz. 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 its overall debt and access to both domestic and foreign capital markets.

Outlook Stable

CRISIL Ratings believes Grasim will continue to maintain a strong credit risk profile, driven by its leadership 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 house businesses that 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 more than 40% decline in market value of investments
• 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 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 industries. In January 2021, Grasim announced its foray into the decorative paints business, with initial capital expenditure of Rs 5,000 crore to be spent over the next three years.

 

UltraTech, Grasim's 57.28% subsidiary (as on December 31, 2021), 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. Post the scheme, effective July 1, 2017, ABCL was listed in September 2017. Grasim holds 54.19% of equity in ABCL as on December 21, 2021.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating assigned with outlook
INE047A08133	Debentures	26-Mar-19	7.65%	15-Apr-22	500	Simple	CRISIL AAA/Stable
INE047A08141	Debentures	02-Apr-19	7.85%	15-Apr-24	500	Simple	CRISIL AAA/Stable
INE047A08158	Debentures	04-Jun-19	7.60%	04-Jun-24	750	Simple	CRISIL AAA/Stable
INE047A08166	Debentures	17-Feb-20	6.65%	17-Feb-23	500	Simple	CRISIL AAA/Stable
INE047A08174	Debentures	17-Jun-20	5.90%	16-Jun-23	500	Simple	CRISIL AAA/Stable
INE047A08182	Debentures	05-Apr-21	6.99%	04-Apr-31	1000	Simple	CRISIL AAA/Stable
NA	Commercial paper	NA	NA	7-365 days	3000	Simple	CRISIL A1+
NA	Rupee term loan	28-Mar-18	NA	1-Apr-24	139.27	NA	CRISIL AAA/Stable
NA	Cash credit^	NA	NA	NA	545	NA	CRISIL AAA/Stable
NA	Short-term bank facility^^	NA	NA	NA	375	NA	CRISIL A1+
NA	Letter of credit#	NA	NA	NA	1546.73	NA	CRISIL A1+

*Yet to be issued

^Interchangeable with working capital demand Loan (WCDL), packing credit in foreign currency (PCFC), short-term loan, buyers credit

^^Facility of Rs 175 crore fully interchangeable with PCFC

#Interchangeable with bank guarantee