Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to the Rs 250 crore non-convertible debentures (NCDs) of  Grasim Industries Ltd (Grasim) and has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the existing debt instruments and bank facilities of the company. CRISIL Ratings has withdrawn its rating on NCDs worth Rs 500 crore upon their maturity. The withdrawal is based on independent confirmation of redemption of these NCDs and is 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 high financial flexibility by virtue of being the holding company of Aditya Birla Group’s key listed companies such as 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 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 in the interim period, 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 monitorable.

 

Besides the paints and B2B business, Grasim had also earmarked capex of Rs 1,587 crore in fiscal 2024, of which Rs 1,037 crore was spent during the first nine months of fiscal 2024. The capex is for expansion of VSF and caustic soda capacities apart from regular modernisation and maintenance capex in existing businesses.

 

For the first nine months of fiscal 2024, Grasim’s standalone revenue fell 5.5% year-on-year, driven by downtrend and low realisations across the VSF and chemical segments. This also resulted in moderation in operating margin to 9.4% during the first nine months of fiscal 2024 from 13.6% in the corresponding period of the previous fiscal. As anticipated, net debt inched up to Rs 5,729 crore as on December 31, 2023, from Rs 485 crore as on December 31, 2022, since it incurred capex towards paints as well as core businesses. Company’s liquidity position stood at ~Rs 3,452 crore as on December 31, 2023, including cash and current investments.

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. Further, CRISIL Ratings has also used the capital allocation method by factoring in the capital required for maintaining credit profile of ABCL.

 

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 the 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 52,386 crore and net debt of around Rs 5,729 crore, as on December 31, 2023. 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 2024 was around Rs 1,587 crore (excluding paints and B2B e-commerce capex), of which Rs 1,037 crore 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 5,996 crore was spent till December 2023 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 across the country. Company has commercially launched the paints business in February 2024, operationalised three of its plants with a total capacity of 630 mlpa, and will launch the balance three in fiscal 2025. 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  building materials. 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 entities 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 acting as a holding company. Grasim's 57.27% stake in UltraTech was valued around Rs 158,355 crore as on March 21, 2024. 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 34,639 crore (as on Mar 21, 2024). Further, the company has recently raised Rs 1,000 crores through rights issue and balance Rs 3,000 crores to be raised in tranches by March 2026. 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. Being input prices helped the operating margin in fiscal 2021 (17%) despite decrease in volumes amid the Covid-19 pandemic. However, while realisations have subdued in fiscal 2024, with increase in volumes, operating margin improved from 6.8% in fiscal 2023 to 11.3% during the first nine months of fiscal 2024.

 

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 21.8% during the first nine months of fiscal 2023. However, falling global prices and continued demand supply disparity of chlorine leading to low realisations reduced the operating margins to 14% during first nine months of fiscal 2024. 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 3,452 crore as on December 31, 2023. 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 1,100 crore also supports liquidity. The funds of Rs 1,000 crore raised through rights issue during fiscal 2024 were utilised to repay debt. Further, repayment of long-term debt over fiscals 2025 and 2026 will be adequately supported by the balance rights issue and internal cash accrual. 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. Also, three initiatives have been implemented to reduce the environmental impact, including: 1. Installation of RO systems to recover and reuse up to 70% of processed water from various effluent streams 2. Influent and effluent characterisation, closed-loop backwashing, pinch for washing, utilising RO reject for once through quenching 3. Expansion and upgradation of effluent treatment plant and process improvisation
• 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 840.8 megawatt-peak (MWp) and has an additional 1,053.4 MWp under construction. Further, in fiscal 2023, the company used 5.6% renewable energy across the businesses that includes biomass fuel (steam and heat generation) and solar and wind (electricity generation). For the steam and heat generation, company is utilising non-fossil fuel sources such as biomass fully and partially for the textiles and viscose business respectively. In addition, company has also installed renewable power share of 8% and 7% for chemical and textiles business respectively.
• Its loss-time injury frequency rate (LTIFR) of 0.22 in fiscal 2023 (0.22 in fiscal 2022) is lower than peers, representing healthy employee safety and well-being standards. Gender diversity improved with 3.3% women employees in fiscal 2023 as against 2.5% in 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 193,529 crore (as on Mar 21, 2024)
• 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 Aditya Birla Nuvo Ltd (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 December 31, 2023), mis 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 52.16% equity in ABCL as on December 31, 2023.

 

For the nine months ended December 31, 2023, on standalone level Grasim reported profit after tax of Rs 1,386 crore and operating income of Rs 19,080 crore, against Rs 2,030 crore and Rs 20,194 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not Applicable