© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day, and welcome to the Q2 FY '20 Earnings Conference Call of Grasim Industries Limited. We have with us today from the management, Mr. Dilip Gaur, Managing Director; Mr. Kalyan Ram, Business Head for CFI; Mr. Ashish Adukia, CFO; and other senior management team. [Operator Instructions] Please note this conference is being recorded.I now hand the conference over to Mr. Ashish Adukia. 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 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 the 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, Grasim EBITDA grew 7% Y-o-Y due to -- mainly due to volume, albeit a slow quarter, given monsoon in UltraTech. The stand-alone results were muted as the quarter witnessed declining realization in most of our businesses. This is primarily the result of global capacity overhang, demand slowdown in soft 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.Grasim balance sheet remains to be strong. As you will now notice on Page 8, I'll just flip to few pages only, just to highlight 2 points. Despite the comparative muted earnings, continuing CapEx plan and onetime 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 3 types of incentives, the weighted average deduction on R&D, accelerated depreciation of about 20% and 80IA 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 income expenses for the balance year which will eventually help us determine the tax regime to follow.On Page 19, in case of Viscose business, there has been some correction in the domestic realization based on declining global prices. We've been able to maintain premium over landed costs 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 the next 2 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 a sharp decline in global prices over last few quarters. In line with global prices, our ECU realization has also corrected due to demand slowdown and excess supply. Chlorine continues to yield 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 is the -- 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 INR 100 crores, and it will be met through a 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 the 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 a short run, until the U.S.-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 to questions now. We will endeavor to answer all the questions to the extent possible. And if there are any unanswered, we'll take them subsequent to the call.
[Operator Instructions] We have our first question from the line of Gunjan Prithyani from JPMorgan.
I have 3 questions. Firstly, on the VSF business, if I look at the realization, your realization adjusted for VSF has come down by about 7%. And similar has been the kind of decline that we've seen in the Grey VSF. So is that now the specialty VSF is also seeing a steep hit rising pressure? And in terms of your mix, also, I noticed that it's less of specialty in this quarter, from 35%. And 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 specialty has held on. So the delta between specialty and grey, in fact stayed on. In fact, has gone up. They are all a peculiar case because the domestic demand has been usually good. If we look at the domestic market, it has won by almost 16%, 17% demand of VSF. And we are falling short on the VSF grey capacity for the domestic market. As a result of that, we have temporarily shifted one of the specialty lines to the Viscose at the lab and that's why you're seeing the specialty has come down to 20%. It should going forward come back to the old level. But 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 but -- I mean if you could give me some sense how the specialty prices declined being sequential versus 8% Grey VSF that has been there?
Gunjan, you have to see in our business, we have a long-term partnership with our customers. We are committed to service our grey 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 grey price is INR 1.75, the Modal is about INR 2.6, INR 2.7, so almost INR 0.90 premium. Same thing applies to our exit. So the premiums on the specialties have been better. So it was basically -- I think it's not a loss, it is basically a planning issue. So I think this will ultimately will 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 risks are panning out? I mean how do we think about realizations from here on?
Between 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, there was -- the textile was not a part of the stamps duty. On 1st August, he announced that $300 billion worth of good, it will impose duty from 1st September. And that's probably because now 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 their product from. So today, the prices what are -- ruling in China, 1.3, as we saw last time is below the variable cost also. So I mean one can't predict what happens going forward, but it is kind of a -- rate is bottoming out now, more or less. Now the issues are, as I told you, the one is the issue of the Chinese fight, second is the currency issue. The Chinese currency was 7.14, 7.15. Now if the trade war resolved and the currency goes back to the old level, at the same price level, you can get better realization in the global market.
Okay. Got it. Second question on the chemicals 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 Gunjan, this is Jayant this side. So clearly, 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 was compounded with 2 aspects. One was the fact that a large country capacity scale, and there was a slowdown in some of the consuming markets. Particularly if you look at pulp, paper, textile, they've all had a substantial slowdown and the pressure of demand came onto the business. But 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 ECU 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 ECU with an aberration in the last couple of years, where it went as high as 36,000. I think as we go forward, the growth cycle will come back. And we expect over the next couple of quarters, now, very difficult to say will it happen in the next quarter or the 2 quarters later, but we expect the global averages to stable down and come back to the 30,000, 31,000 levels.
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, end of last year to almost INR 1,800 crores of net debt now. And we have about INR 800 crores infusion, which happens in Aditya Birla Capital, and we continue to have fairly aggressive capacity expansion plan 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 last 1 or 2 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 stand-alone business that 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 -- it'll look a bit concerning.
Gunjan, I can just comment on balance sheet before I would request Dilip, Kalyan, or Jayant 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 VIL, in Aditya 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, okay, they're quite comfortable at these leverage levels as well. We are 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 2 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 you have an issue?
Sure. If I call out that number, it's a very fairly comfortable ratio that -- up till almost 2.5, 3x, there'll 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.
We have next question from the line of Rajesh Lachhani from HSBC.
Sir, my question is with regards to the exit prices of both caustic soda and VSF, and with the pulp prices coming down. Can you throw some light on how could the margin span 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.
Yes, yes. Well and true. We take the first question first. See, the good news is, while the VSF price has 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 have come down by 22%. As I explained to you last year, the problem in our case is, it is not reflecting in the bottom line because we have this system ready, we get our pulp from Canada and Sweden and South Africa, where we -- there is a 45 to 50 days transit time. And then our pricing is previous quarter. So we carry a lag of 4, 6 months. So the consuming cost of pulp is much higher than the spot price of the pulp. And that is why you're feeling the results are looking -- the EBITDA is looking low, there is a time lag effect for quarter 2 alone is about INR 106 crores. So just -- so that is the kind of inherent EBITDA which has been because of the time lag. So actually, if you look at even at these prices and the input prices, the business is pretty healthy.
INR 106 crores that Dilip mentioned if you see on Page 14, the average consumption price for us was INR 62,620, which is the red line. And we have mentioned that number in the box as well. And if we see the spot price average, that was $727, right? And then plus there'll be some small duty for importing the pulp, and then there's some logistics costs from the port to the plant. So including all that, if you just multiply the difference by the sales quantity, you will get the -- somewhere around INR 100 crores kind of a figure, which we will recover over next maybe quarter 4 or second half.
Yes, quarter 4. So it will reflect in the next 2 -- next 2 quarters or so. So -- and yes, Jayant?
I think 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 in which we had an extended monsoon. And I think it's only recently, now a lot of capacities which had because of monsoon slowed down and started coming up. And my guesstimate is that your margin, which we had in Q1 -- margins you got in Q1, similarly, gone down in Q2. But the Q3 margin would be in a similar range, which we are currently operating in on that particular front. Now also, if the monsoon, the winter coming in the western part of the world or the other part of the world, 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. And sir, my next question on the capital infusion in Vodafone Idea?
No, sir. 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 questions today. So as the situation stands today, there is no new development that I had explained in the last call. And just to clarify, there are a few questions that have come after the call on the guarantee, et cetera. We have no guarantee, no letter of comfort or no undertake sponsor undertakings of any thought out from Grasim to be, I just want to clarify that point.
Sir, do you have any further questions. Mr. Lachhani?
No, that's it from my side.
We have a next question from the line of Akshay Ajmera from Nirzar Securities.
I also wanted to add on the previous question that, group 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 given demand capacity? We want to take any...?
Yes. There is absolutely -- so we are an equity holder, right? So we don't -- our exposure is nothing beyond the equity that we've 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 of them.
And any -- there are no plans as of now to give any corporate guarantee of...?
Absolutely not.
No launch, nothing...
We don't get to any of our associate JV investment or subsidiary any corporate guarantees.
Okay. So we don't want to give any corporate loans also, nothing of that sort?
No.
Sir, we have next question from the line of Prateek Kumar from Antique Stockbroking.
Sir, a few questions. Firstly, on global capacity, the main change in outlook in terms of any new capacity, you mentioned about 0.4 million ton like last quarter, including 0.23 million in IndAS and another 0.2 million elsewhere. So is there a new capacity addition outlook globally?
No material change, I think, in that space.
And what would be global operating rates now? It fell to like 65% like last quarter?
It's 78%. It varies from 75% to 80% kind of a thing.
So it has actually improved versus Q1 because of closure of capacity?
Yes. Right.
And regarding the pulp prices, the chart on Page 14, as you mentioned, so there is -- this pulp price already has -- I mean, for our consumption, has already -- it seems fallen from INR 66,000 to INR 62,000. So to that extent, benefit is visible in our numbers, but that INR 62,000 falling to INR 52,000 per ton, is it something 15% poly, something which we should expect in Q3, Q4?
And it is further falling. So the price today is now $640 per ton spot prices. So pulp is right now at the lowest historic growth.
And I would just clarify that. I think the more visible benefit will be in Q4 rather than Q3.
That's right. So the upgrade will continue, it will stabilize hopefully, there's no more or less.
And -- but as you mentioned in our per ton profitability probably should remain similar in Q2 -- Q3 -- in Q3, similar to Q2?
Probably, yes. It's difficult to say where there's 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 is that presumably will come in Q4, let's take it that way. It's 15% of what you are seeing, that should come in Q4.
Okay. And sir, can you give this ABNL, -- sorry, VFY segment revenue and EBITDA?
It's already there on Page 15, if you see INR 443 crore is the -- yes, and INR 80 crore is the EBITDA, INR 443 crore is the revenue.
Got it. Correct. And sir, 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's penetration of Chinese in domestic market as well or probably taking share?
No. What happened there is the inventory in the system, so the destocking happens. There is no fiber, fiber imports have not happened. That's remain there, so instead of that, yarn imports are happening, and that is where the trouble is. The yarn imports are increasing, that is where I think the spinners are now trying to work on the pricing to make sure this is an import stock.
Okay. And just on this capital to Vodafone. I had just -- another question there. So meanwhile, like a few credit rating agencies have come out with revised rating for that company. Which you mention that they are resuming likely support from Aditya Birla Group to VIL as their treatment, now we see something they are resuming. So I mean, but as we 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.
We have next question from the line of Tanuj Mukhija from Bank of America.
Just one question from my end. The PPT mentions that the chlorine realization in India have been on negative for 2 quarters. Could you give us some more color about the additional chlorine supply utilization levels and your outlook for chlorine prices?
So Tanuj, 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 quarter, in last financial year when we turned positive after a long time. The current scenario in chlorine is there's a fair amount of capacity additions, which have happened in the industry, which has put a temporary kind of gap between what was the consumption of chlorine to 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 the coming years. I think that's the journey which we are going through of forcing 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 will give synch rate.
Got it. That's helpful. Just a follow-up on that. What are your margins on chlorine VAP products? And what's your negative margin on chlorine realizations?
Chlorine is negative. I think -- yes, and it comes under the ECU as a formula. So I think that's where the stress has come both on the caustic and chlorine. But in terms of VAP EBITDA per ton, it has seen a gradual increase going upward quarter-on-quarter, and the volumes are also increasing quarter-on-quarter.
Sir, can you give the exact number of your VAP EBITDA margin? That would help us understand better how your margin particularly will improve with the increasing VAP.
It is very well -- it's quite integrated with the business. So because you have to see the entire chain to determine what the EBITDA, et cetera, is. So it's needless to say that instead of realizing negative EBITDA in chlorine, if you consume it, you can 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.
When I say, since in your new value-added products, the basket of products is such a large basket. And 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.
Sir, we have next question from the line of Sumangal Nevatia from Kotak Securities.
Sir, 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 was for pulp?
Fiber or pulp, I guess. Is that fiber or pulp?
Yes, yes. So the difference will get equalized by Q4 and thereafter, we believe pulp also like viscose is bottoming out now, 630, 640 even the best of the mills are not making money. So it has to either flatten or maybe improve after that. So hopefully, we should stay on that.
Okay. But earlier you said, given 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 of cost support is, I mean, it continues to fade?
Yes, so the issue is, in case of pulp, the only crop buyer is VSF. So if the VSF doesn't -- can't have ability to pay, the pulp plant come under price. So because in sympathy with VSF, the pulp has fallen, but we believe that both of them now should turnaround hopefully.
Okay, okay. And just -- understood. Just one question to Ashish. I mean, just in a hypothetical situation, in case we are defaults, I wanted to understand, is there any impact on the group credit rating and cost of debt?
See. I think it's, again, should be directed to the group rather than to Grasim, but each of our businesses, we don't fund the other businesses. So 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.
We have a next question from the line of Rishabh Parekh from Sunidhi Securities.
I just wanted to get a little more perspective on Vodafone Idea. So typically, historically, what you guys have been saying is that it represents an interesting opportunity, and you would participate in any fundraising with the aim of maintaining your stake. This was what was communicated to investors during the rights issue. Where does that stand right now? Hypothetically, should there be a fundraise? Would Grasim still participate to maintain its 11.5% holding? Or -- because there is no clarity on the use from Grasim'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. First of all, I would like to correct that statement. I think in the last quarter call, I had very clearly stated the order of preference in terms of capital allocation, I've said the first call for the money goes to the businesses of Grasim itself, which is VSF Chemicals and elite businesses that are there, okay? The second call of money goes to the consolidating subsidiaries, which is ABCL and UltraTech, okay? And there, I 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, okay? And then there is nonconsolidating investments, which -- 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 -- the target of debt-to-EBITDA that you put 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 fund Vodafone Idea?
It's a very hypothetical question. I don't think we can comment on that.
We have next question from the line of Swagato Ghosh from Franklin Templeton.
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 like do that, put it to vote?
Yes, again, it's a hypothetical question, whether it will be put to vote or not. I think you have an 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 don't -- I, obviously, don't expect you to comment anything as of now because, as you said, the situation is hypothetical, but because this is extraordinary circumstances and you have seen how like the stock has reacted post the last infusion also, the Grasim stock. Hence, can we keep that as an option? That's my question.
There is management and board of the company that takes decisions, okay? And there is also shareholders on certain matters that take decision. So wherever in whichever category it falls, that authority will take decision on that matter.
[Operator Instructions] We have next question from the line of [ Deepak Malhotra ] from [ TPG Consultancy ].
Yes. My question is, again, actually on Vodafone Idea itself, because at the end of the day, if you 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 admitting to us 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 agencies 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 said, it's a hypothetical situation, but if we see the track record in the past, the group has -- and Grasim as part of the group has contributed to its share of putting in money into Vodafone Idea. So if push comes to shove, I mean, as it may happen. In that case, it may impinge basically on the financial flexibility of Grasim itself and also on the CapEx program, which you alluded to in the sense that although Grasim would may have its first right, but in the past, if the track record is to be seen, then you ended up supporting Vodafone Idea. So the question is that how is this issue genuinely be resolved, because this is really a concern for us as investors?
Sure. I think whatever you have said just how we've already, in the last 2, 3 questions answered those questions. What I would request is that if there are questions pertaining to Grasim'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.
We have next question from the line of Saket Kapoor from Kapoor & Co.
Sir, I'm coming in the queue, my line is on a weak note, just coming, again, you please move to the next participant. I'm dialing from a new number.
We have a next question from the line of Gunjan Prithyani from JPMorgan.
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 there -- 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 Birla Fashion has been at 11% or Hindalco at 3.9% or 4%. Do -- can some of these be -- is that something you looked at that you can monetize these to fund or whatever you're -- I mean, I don't want to drag on Voda Idea, because it was more from a clarification, what is the thought process around keeping the 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. Gunjan, 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 that -- and if they exist, if there is no compulsion to monetize these stakes, then we don't need to because Grasim is generating cash on a stand-alone basis, the debt-to-EBITDA is very, very comfortable. So we really don't -- there's no compulsion to do so. So...
Specifically on UltraTech, I mean, we are at 60%, and you did mention that we will try to deepen a cushion over 50% level so that if there is a fundraise there, we don't want to go below 50%. Or is it, let's say, there is no cap rate as I see it at UltraTech right now. So at 60%, we don't intend to change this holding at all right? I'm just trying to get comfort around UltraTech stake 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 4, 5 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 their acquisition.
Yes, yes, correct.
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 when you 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.
Fair enough. I mean, so 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 than the others, which are at, let's say, below majority.
Absolutely right.
We have a next question from the line of Amit Murarka from Motilal Oswal.
Just on the CapEx, I wanted to understand that you give a breakup on CapEx is 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 debottlenecking because 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 INR 100 crore plus. Then in VSF, we have the carbon activated plant, which we'll be implementing, I think, in 2 plants.
Yes. This year.
This year. So that's another INR 100-plus crore. There is some debottlenecking possibility that is there at Kharach 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. This is -- 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, out of INR 3,800 crores, roughly INR 3,700, crores, INR 3,800 crores for this year, okay, about INR 2,600 crores is actually going towards capacity enhancement and only about INR 1,000 crores is towards such cases of modernization and maintenance. And sustainability, we can't understate how important it is becoming and your longer-term cost on sustainability will increase. So therefore, if you take steps today, you'll have -- you'll be far ahead of your competition. And in fact, it will help you in reducing loss as well. And Dilip and Kalyan, please feel free to add.
And it includes the margins also, like you may know we have launched the product called Livaeco, basically a sustainability platform, a green product, and it gives you premium over the normal products. So that's how we're adding value to the conventional grey viscose. Sustainability is now a big idea in the fashion industry.
I think even within chemicals, we strongly believe that sustainability will become competitive advantage. What we have seen in China with the closures and all that, I think we have -- we believe that being ahead and then being competitive, it's not just about investing in more capacity, but making the existing businesses robust and sustainable.
So why I asked the question was basically, I try to calculate an ROCE of the expansion that is going on. So it gives about roughly 13% -- 12% to 13% pretax ROCE from VSF and sort of about 13-odd percent on chemical and is based on the long-term EBITDA margin that I'm assuming for those 2 segments. But if I load up the modernization CapEx, it just declines to about 8% to 9%. So that is the context I was trying to understand. Like, will there be an instrumental EBITDA benefits also coming through from the modernization CapEx or not?
I don't know how did you compute these numbers, because modernization has multiple elements to it. We are bringing some bigger machines, with even better speed and lower cost of production. We are building a facility to produce grey and nonwoven in that. So the product mix is going to be different. So I think we holistically...
No. That's what I was trying to understand. If I...
All these are very, very highly attractive IRR product -- market. And you have to do over a 10 to 15 years. You can't take the current exit price of Viscose. So you do the last 10 year Viscose side and do IRR, it will be much more attractive.
We have next question from the line of Madhav Marda from Fidelity. We lost the line of Mr. Marda.We have next question from the line of Prateek Kumar from Antique Stock Broking.
A few -- sir, I have a few follow-up questions. Firstly, sir this -- in VFY segment also, we have seen some compression of margins. So how do we understand this segment in terms of profitability?
Yes. So in VFY, I think 1 of the key products that we have is tire cord, okay, which is coming out of Century VFY business. And in case of tire cord because of the slowdown in the auto sector, there has been -- it's running at probably about 50% capacity utilization. So therefore, there has been impact in VFY as well. There is some realization pressure in VFY 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 within the range of 10,000, 11,000 per quarter. But the pricing has come down and profitability has come down.
So VFY 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 volumes. It's developing market in segments like Chiffon and georgette. And as we plan to do that, we are -- we have created capacities for the future. I think it's -- and also, we wanted to make sure that we're creating not 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 opportunity. 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 in every 6 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 your volume question. There are 4 products out there and the product mix determines the profitability rather than the volume because the margins of each of those products very, very different PSY, CSY, SSY, and tire cord these would be the 4 broad product categories, and the margins are very different in those. So where the volume is coming from determines fee margin rather than it being a secular kind of movement.
Tire cord would be higher-margin segment?
Tire cord, and SSY.
And SSY...
SSY is, yes, a very high margin segment.
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 there.
And in terms of VSF capacity expansion, we are online to commission that in 3Q FY '21?
Yes, yes. The first line in third quarter, second line fourth quarter.
Okay. And just one thing on pricing. So our exit pricing both the segments is lower versus average. So how much would that be lower versus average in both segments?
See the pricing, it 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 totally different shape. So we can't predict what's going to happen in that area. So I think let's see as it comes. But the prices at which we -- at these prices, Chinese are losing RMB 2,000 per ton. So they can't going any lower, I mean, logically. So the average loss is about RMB 2,000, that means about $250 per ton that's the kind of money they're losing.
We have next question from the line of Saket Kapoor from Kapoor & Co.
Sir, just to understand, the which -- what are the structural changes that has 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. And the reason being that of -- in the first half, particularly the first quarter, the India prices were far more attractive than the global prices. So that has led to it. The current export -- currently, the exports are kind of stabilizing because it is the price is at par with the global market. So I think that's the -- and going forward, we expect that this strategy would continue.
So is it -- there's some certification that was due from some countries I think, it was Japan and all, they got the certification and now the major import has been from the Japanese itself?
No. Japan is one of the countries which is selling material to India. But there are also countries from Middle East and there are also countries -- Bangladesh, but Japan is one of the larger ones, sure.
Sir, I was just looking for the volumes, sir. If you could clarify. Do you have the volume with you, what was the imported quantity for the last quarter or the first half in totality?
Yes, we have the [ mixed figures ].
And sir, secondly, for negatives 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.
Yes. 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.
So can you quantify how much it has been negative in the first half in chlorine?
Typically, you can take the transportation cost to move to the customers is the negative that you have.
Okay. How much it is?
It could be -- if we are moving it all the way to the South versus West, it could be anywhere between INR 500 to INR 4,000 a ton. So I think we need to be careful. The minute it -- depending on which customer it is and which location it is that can change.
Okay. Lead distance is there, but average price was how much, sir? We have the biggest share?
No. But I think so need to be careful there. So when we provide ECU, what we say is still consolidated number between pulp and chlorine. So we don't try and then show you a huge price increase in caustic and then something else in chlorine. It's what you see as a number is a consolidated number. And it has to eventually somewhere, one act as a byproduct for the other. I would also say that directionally, I think one difference in India versus rest of the world is in majority of rest of the world, chlorine is consumed in some of the largest derivatives like PVC and CDI and [ UVL ]. 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[Technical Difficulty]
Hello?
Saket, just a second. We lost the line of the management. Saket, kindly stay connected, we will be connecting back to the management. Please stay connected.[Technical Difficulty]Sir, we are back in the call. Please go ahead.
Yes. So I think -- I'm not too sure where we lost you guys. But I think what Kalyan was trying to say that over a longer term, we will increase chlorine derivatives to ensure that we profitably evacuate chlorine.
Fine. Today the mix of value-added products is 28% as of now.
Yes, as of now.
And with the CapEx that is where it that will happen, what would be the value-added, proportionate, let's say for March '20 and '21?
Percentages will go up on value-added products. Our expectation in the next 5 years, we will get closer to 43% to 45%.
It's a long 5 years growth target?
But I think the other thing which we are doing actively, as I said earlier, is bringing customers next to our plant.
Correct, sir.
And hence, we don't have to build on the transportation, et cetera. And majority of these space, we expect to help. And in the meantime, we are working with very large petrochemical majors to see whether they are putting up world-scale capacities on PVC and others. That continues to be our focus area.
And sir lastly, sir, caustic soda prices have declined even for this 45 days of this quarter also? Or are they stabilize? If you can give you some color on this, sir.
At the moment, the spot prices on caustic soda continues to be on a decline.
Okay, even they're lower than what September was. How much is in the reduction, sir? Can you quantify it?
I guess, for some point of time, we can't quantify that, but the trend is downwards.
Trend is downwards. But utilization levels are in the high 90s for all our plants or we are also having problem in demand?
Not having substantial issues with demand. I see from demand front, we are fairly comfortable.
Right. And sir, going forward also, what factors will give us this trend for caustic soda prices, sir? Well, according to you, what factors are -- can be deployed?
It's a clump of capacity, which has come in a short period of time. As they were stabilizing the market, we will see stabilization of prices happening. The timing of that is not at the moment -- is not firm.
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%, in a 4 million ton market or 3 million to 4 million ton market. We need capacities, almost 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 is -- it creates a huge barrier to entry for many. Because it can be highs and lows. And but we plan over a period of long term.
And sir, can you quantify the capacity addition? You articulated about huge capacities coming onstream. So for first half, how much has been the new capabilities that have been onstream? And any new capabilities that will be going onstream in the second half?
No, I think it's all captured on Page 9, monthly additions that we're doing.
We have next question from the line of Kevin Kuriakose from Alphaline Wealth Advisors.
I just wanted to know what would be our capacity utilization, both the expansion in FY '21?
Look, I had already told you, if you look at the history of VSF, we already 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%, almost 12% is value-added exports. And when the new plant comes up, we will maximize the domestic sale and whatever is remaining, we export. The plant will be fully utilized because there's a huge global demand for the product.
Thank you. As there are no further questions, we would like to close the call. Ladies and gentlemen, on behalf of Grasim Industries Limited, that concludes this conference call. Thank you for joining with us. You may now disconnect your lines.
Thank you, everyone.
Thank you, everyone.