Grasim Industries Ltd

NSE:GRASIM

Earnings Call Analysis

Grasim Reports Strong FY '24 with Record Revenues and Strategic Expansion

Grasim Industries achieved its highest-ever consolidated revenue and EBITDA of INR 1,30,978 crores and INR 20,837 crores, respectively, in FY '24. The company commenced operations of its new Birla Opus paint business and three greenfield plants. The chemicals sector saw consecutive quarterly improvements despite global and domestic oversupply challenges. The building materials segment, led by cement, added 7.8 million tonnes in capacity. Grasim also reported a milestone in its B2B e-commerce venture, surpassing INR 1,000 crores in revenue. The launch of Birla Opus received positive responses, with plans for national expansion and disruption in the paint industry.

Introduction and Company Performance

Grasim Industries Limited has concluded a fiscal year marked by significant achievements and challenges. The company reported its highest-ever consolidated revenue of INR 1,30,978 crores and EBITDA of INR 20,837 crores. These figures represent remarkable growth, demonstrating the underlying strength of Grasim's diversified business portfolio. For investors, these numbers are a testament to the company's robust performance in a volatile market environment.

Segment-wise Breakdown

Grasim's business is categorized into five segments: Cellulosic Fiber, Chemicals, Building Materials, Financial Services, and Others. The Cellulosic Fiber segment includes staple fiber and fashion yarn. This segment experienced a 95% utilization rate, but Indian realizations were down due to oversupply from Indonesia and declining raw material costs. The Chemicals segment saw caustic soda prices hit an eight-year low, although demand for chlorine derivatives remained weak. The Building Materials segment performed well, particularly in the cement business, which reported an 11% volume growth. New capacities have increased cement capacity to over 140 million tonnes domestically.

Growth in New Ventures

Grasim has launched new ventures such as the Birla Opus decorative paints business and Birla Pivot, a B2B e-commerce platform, which hit INR 1,000 crores in revenue in its first year. The paints business has already commenced production at three greenfield plants, aiming for significant market penetration. The focus on these new sectors showcases Grasim's commitment to diversification and long-term sustainable growth.

Financial Metrics and CapEx

Grasim has issued INR 1,250 crores of sustainability-linked non-convertible debentures, underscoring its commitment to sustainable business practices. The planned CapEx for the next year stands at INR 4,500 crores, primarily directed towards the paints business. This substantial investment highlights the company's focus on growth sectors with high future potential.

Challenges and Impairments

One-time charges were incurred due to the impairment of investments in AV Terrace Bay, a joint venture that has ceased operations due to nonviable market conditions. This led to an impairment charge of INR 716 crores at the stand-alone level and INR 497 crores at the consolidated level. Despite these setbacks, Grasim has taken steps to mitigate future losses by divesting from non-core and loss-making ventures.

Market Conditions and Future Outlook

The macroeconomic environment remains complex, with central banks discussing potential interest rate cuts. However, no definitive timelines have been set. Grasim also faces weak domestic demand in China despite faster-than-expected economic growth. Nevertheless, the Indian economy is on a robust growth trajectory, with the World Bank upgrading its forecast for fiscal 2025 to 6.6%.

Management’s Strategic Focus

Management has reiterated its focus on long-term growth through strategic investments and segmental leadership. With substantial investments planned for new and existing ventures, Grasim aims to capitalize on emerging market opportunities while maintaining its leadership position in core segments like cement and chemicals. The company's diversified business structure and prudent financial management are key to sustaining its growth trajectory.

Earnings Call Transcript 2024-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to Grasim Industries Limited Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Ankit Panchmatia, Head, Investor Relations. Thank you. And over to you, sir.

[Ankit Panchmatia, executive]

Yes. Thank you. Good morning, and thank you all for joining this call. The financial statement, press release and presentation are uploaded on the exchanges and are available on our website.

For safe harbor, kindly refer to our cautionary statement highlighted in the last slide of our presentation.

Our leadership team is present today on this call to discuss our results. We have with us, Mr. H. K. Agarwal, Managing Director; Mr. Pavan Jain, Chief Financial Officer, Grasim Industries. Also joining them, we have our business team, which is Mr. Jayant Dhobley, Business Head for Chemicals, Fashion Yarn & Insulators Business; Mr. Himanshu Kapania, Business Head; and Mr. Rakshit Hargave, CEO of Birla Opus, our Paints division; and Mr. Sandeep Komaravelly, CEO, Birla Pivot, our B2B e-commerce business.

Now I hand over the call to Mr. Pavan Jain for his opening remarks, post which we will open the call for Q&A. Over to you, sir.

[Pavan Jain, executive]

Thank you, Ankit, and good morning, everyone. Thank you all for joining us today to discuss our fourth quarter and full year financial year '24 performance.

To begin with, I'll share some key updates, and then we will discuss macro environment. And finally, we will cover the business and financial performance.

Firstly, alignment of our business segment reporting. So as new businesses are on path to attain meaningful scale in due course, we believe a simplified and transparent reporting of such segments should help you evaluate and analyze consolidated segmental financial performance. Also such reporting reflects underlying strength of Grasim's conglomerate structure which commands leadership across key components of fastest-growing Indian economy.

The disclosure would now include 5 business segments at consolidated financials level. First one is the Cellulosic Fiber, which will include cellulosic staple fiber and cellulosic fashion yarn. This segment was earlier referred as Viscose segment.

The second segment is Chemicals, comprising of our caustic soda, chlorine derivatives and specialty chemicals businesses.

Third segment is Building Materials, which includes cement business carried through our subsidiary, UltraTech. Paints business and B2B e-commerce businesses, which are business divisions at stand-alone level.

Fourth segment is Financial Services business, which is housed in our subsidiary, Aditya Birla Capital. And the fifth segment Others comprises of Textiles, Renewables and Insulators businesses.

The second update is that we have raised -- we have issued our first ever sustainability linked non-convertible debentures of INR 1,250 crores during this quarter. International Finance Corporation, a member of World Bank Group, has invested in these entities of the company. The investment by IFC is a testament to our commitment to build long-term sustainable businesses, creating value for our stakeholders. Third one is a onetime charge of INR 716 crores at stand-alone level and INR 497 crores at consolidated level on account of impairment provisions against current investment and provision against expected exposure in our AV Terrace Bay.

As informed earlier through our stock exchange filings, AV Terrace Bay, our joint venture with 40% holding is operating paper-grade pulp mill, and has now stopped its operations due to nonviable operations and adverse market conditions. The company has recognized an impairment charge of INR 280 crores against carrying value of equity investment in AV Terrace Bay. And additionally INR 436 crores has been provided to our estimated exposure in AV Terrace Bay. AV Terrace Bay as you know, has acquired a paper-grade pulp mill in Canada in year 2012 with a view to convert the sales into DG grade pulps, which could not materialize. Paper-grade pulp manufacturing is not core to our business interests and its continuous losses with no visibility of turnaround has led to the decision of idling the operation and to explore the possibility of exiting this business.

This is a onetime charge to P&L and has been disclosed as an exceptional item with the decision of setting the operations at AVTB and now there will be no more losses of AVTB to be consolidated in Grasim financials.

Coming to macroeconomic environment. On global front, central banks are, though discussing about possible trimming of interest rates, but there are no timelines being put. There is a dichotomy within central banks, On one hand, cutting rates to soon could accelerate current pace of growth with increasing inflationary pressures. On the other hand, cutting rates too led risk of gradual recovery getting surrendered.

China's economy grew faster than expected in the first quarter with recovery in the industrial production. However, consumption indicators like property investments and retail sales indicate that domestic demand remains frail weighing on overall momentum.

In the midst of geopolitical risks posed by elections, polarization and conflicts, Indian economy remains in a robust growth trajectory with the World Bank upgrading its economic growth forecast for fiscal '25 by 20 basis points to 6.6% driven by upward revision to investment growth.

The new fiscal has started on a strong footing with strong PMI numbers and all-time high GST collections of INR 2.1 trillion in April '24.

Despite volatility in recent years, Grasim's revenue has more than doubled and the EBITDA grew by 1.9x since FY '18. Leadership approach diversified businesses provide underlying strength to such growth. We have ended the loan by financial year on a high note. Some achievements of the year are like this.

We have achieved highest ever consolidated revenue and EBITDA of INR 1,30,978 crores and INR 20,837 crores respectively. We have also achieved highest ever sales volume of cement, cellulosic fiber and caustic soda businesses.

During this year, we have launched Birla Opus, the Decorative Paints business with commencement of production at 3 greenfield plants in April '24. Clocked highest ever turnover of INR 580 crores in FY '24 from textiles retail business. B2B e-commerce revenues surpassed a milestone of INR 1,000 crores in its first year of operation.

I'll now briefly touch upon each business segments.

In VSF business, in our cellulosic fiber business, our CSF volume stood at 208,000 tonnes with utilization level of over 95%. Realization in India is lower due to oversupplies in Indonesia and the decline in units of prices, basically pulp and caustic, apart from other raw materials, And the benefit of declining input prices has been passed on to the valuation partners. Growth momentum could have been better if not for the new regulation around the MSME finance which has reduced the demand especially from MSME segment to some extent.

Domestic demand in China was stable, which reflected in operating rates of around 85% and slight improvement in prices. However, majority of Chinese CSF players are still making losses at current levels.

In Chemicals business post correction from historic high levels, global caustic soda prices 8 years' bottom, but the grades have gradually improved for the third consecutive quarter. However, oversupply in domestic markets kept realizations under pressure. Caustic soda sales continued to grow for us on Y-o-Y basis for straight 13 consecutive quarters.

Our first sales volume for the quarter stood highest ever at 308,000 tonnes. Lower caustic realizations had continued negative realizations of chlorine led to lower [indiscernible] realizations during the quarter. Chlorine derivatives especially was subdued due to demand weakness, particularly in agrochemicals and oversupply in CMS.

Building Materials segment growth was majorly driven by superior performance of our cement business, which commands a pan-India leadership position. The utilization for the year stood at 85%, higher than all India level of around 71%. Our volume growth at 11% was also higher than the industry estimates of 7% to 8%.

In Cement, we have added new capacity of 7.8 million tonnes in Q4, taking our domestic capacity to over 140 million tonnes. And global capacity for the company is 146.2 million tonnes.

The incremental revenue in the segment is from Paints and B2B e-commerce businesses. Birla Opus, our paints business has already commenced production at 3 plants at Cheyyar, Panipat and Ludhiana. Dealer leads and exports are being held for pan-India product launch. Birla Opus brand and quality both are receiving positive response. Onboarding of dealers and placement of tinting machines is happening as per plan. Outreach activities to influence -- influencers like painters and contractors are also going on as per schedule. Advertising and brand promotion activities are also on track and Birla Opus would be visible across the country in the current year.

The revenue generation as Birla Pivot, our B2B e-commerce business, is gaining momentum, having crossed INR 1,000 crores revenue in its first full year of operations. Currently, monthly run rate is of around INR 200 crores in Birla Pivot with healthy repeat orders. Birla Pivot Tiles and Plywood which is our private label products are garnering very good response, and we are also evaluating new product categories to increase the total addressable market. The business has aspirations to achieve $1 billion revenue in next 3 years.

In our Financial Services business, lending portfolio, which includes NBFC and housing finance companies has increased by 31% Y-o-Y surpassing INR 1,24,000 crores. Total assets under management, which includes AMC, life insurance, health insurance grew by 21% Y-o-Y at INR 4,36,000 crores. The business has announced amalgamation of Aditya Birla Finance is Aditya Birla Capital, which is under process, and it is subject to requisite approvals. Simplification of structure, improved financial stability, increased operational efficiency and likely stakeholder value creation are some of the key benefits of the proposed amalgamation.

Other businesses segment, which has textile, renewable and insulators has also done well. Textiles business is moving from pure manufacturing to retail with the highest ever B2C business revenue of INR 580 crores for the year, recording a CAGR of 28% over past few years. Linen Club is now operating with 230 EBOs and available at 9,000-plus MBOs. Renewables business continues to grow gradually ramp up its operating capacity and remains on track to achieve 2 gigawatt level of capacity in current financial year. Insulators business remains self-sustaining closing the current year with healthy order book.

On the CapEx front, we continue to focus on growth CapEx with majority allocation on capacity expansion in Building Materials segment. The consolidated CapEx for FY '24 stood at INR 20,199 crores, 83% of which goes into growth CapEx. We have invested over INR 38,000 crores over the past 5 years in growth CapEx.

On the rights issue front, the Board has decided to make the first call of INR 453 per share. That is 25% of the issue price against the shares issued on rights basis in January '24. This will enable raising INR 1,000 crores in Q2 FY '24.

The Board has recommended a dividend of INR 10 per share for INR 2 fully paid up share. For partly paid up share, dividend will be payable in proportion to the paid up value. The company has a dividend payment record of continuously now for over 60 years.

I have covered the key business updates and financial numbers, and the details are available in the results. We can now go for Q&A.

[Operator]

[Operator Instructions]

The first question is from the line of Tejas Shah from Avendus Spark.

[Tejash Shah, analyst]

My question pertains to paint division, and I'll try to keep it short. So can you provide an update on initial feedback that you would have got on quality on our pan-India launch? If you can also share feedback on current dealer network that we have gotten for a few months? And what are we targeting for FY '25? And also, if you can give us status and strategy update on depot network that we have today? And what are we planning by the end of this year?

[Rakshit Hargave, executive]

Thanks, Tejash. This is Rakshit. I will answer all the 3 elements. So feedback on product quality that we have got across the range in India is excellent. Dealers are extremely happy. Contractors are very happy the ones who have used. And this is across all the product segments where they have launched. And we can already see usage and we can see repeat usage. Like we said in Panipat, we've also done a very large sampling exercise, which is making it very evident that the product quality is absolutely top notch.

Secondly, your question on the dealer network and dealer adoption, so we said that our target in FY '25 is to get 50,000 dealers onboarded and we are absolutely on track in the first 2 months to be able to hit that number. So obviously, we are able to onboard and build a large number of dealers every month as that will only enable us to reach that number, which is quite evident.

In terms of depot network also, we had declared that our ambition and plan is to set up 150 operating depots by the end of the financial year. And we are very much on track. We would be very close to half that number already.

[Tejash Shah, analyst]

Just one follow-up on that. Between the 2 geographies, north and south, that we have kind of launched initially, where are we seeing more traction as of now?

[Rakshit Hargave, executive]

So you see, these are only first 2 months. While we said that we will start launching in North and South, but we also made a commitment that by July of this year, we will be available in all towns, which have a population of 1 lakh plus. So effectively, by now, we have virtually entered all the states of India, where we have onboarded and build at least some dealers. We see pan-India traction. The product quality appreciation that we have done is independent of any region. So whether it is North, South, East or West, so I don't think that there is any differentiation in terms of a response in the 2 months.

[Operator]

The next question is from the line of Nirav Jimudia from Anvil Research.

[Nirav Jimudia, analyst]

Sir, my question pertains to the chemicals side. So if we look at our ECU, it has come down by close to INR 1 on a Q-on-Q basis, which translates into an impact of INR 30 crores, if you multiply by the caustic volumes which we have reported on. However, our EBITDA has fallen by close to INR 70 crores. So was it because of the -- fall in the profits of either the Specialty division or the VAP sales or some of the costs have gone up this quarter and because of which this fall has happened?

[Hari Agarwal, executive]

Thanks for the question. So your math is correct, it's not because of cost. In fact, our costs are better. As was earlier mentioned by Pavan Jain, the real issue really lies in profitability of chlorine derivatives, which are largely used in agrochemical. As you know, the agrochemical industry is not doing very well. So lot of the derivatives that go into agrochemicals whether that is carbon tetrachloride, [indiscernible] benzyl chloride, those are under pressure. And that is why you see that disconnection. So it is not because of costs going up. In fact, it's also not because of the specialty volume. It's mostly related to chlorine derivatives.

[Nirav Jimudia, analyst]

Because the fall in EBITDA is close to INR 70 crores, and I guess the VAP contribution to the EBITDA is not to that extent based on some calculations, what I've done. So possibly some onetime costs would have happened this quarter because of which this fall has happened, and this should again restore in the subsequent quarters. How do you see this?

[Hari Agarwal, executive]

So layer of 2 things. First of all, we maximized for contribution last year. As you know, we report some of the highest operating rates in the industry for utilization. What we typically do, We look at our total contribution margin across caustic, chlorine, chlorine derivatives and maximize for that, right? So that is one impact. And that said, you can't get too bogged down by looking only at individual product lines. Now having said that, there are a couple of our clients there in the last quarter, we have taken maintenance shutdowns for some repairs and for some of upgradations. So there is some small impact of that.

[Nirav Jimudia, analyst]

Got it. So this won't happen next quarter. So that would get corrected.

[Hari Agarwal, executive]

Yes, that is -- sometimes when you take a shutdown of your maintenance costs, et cetera, coming along.

[Nirav Jimudia, analyst]

Got it. And sir, we also commissioned a new epoxy plant in December. So was there a volume growth in the epoxy division sequentially? And along with it, if you can also share any improvement which has happened on a sequential basis on the epoxy profits which we have reported in Q4.

[Hari Agarwal, executive]

So typically, we don't break down the profitability of epoxy separately.

[Nirav Jimudia, analyst]

No, sir just ballpark understanding in terms of any sequential improvement in percentage terms, that would also help.

[Hari Agarwal, executive]

Yes. So there is sequential improvement. We're taking a percentage of that [indiscernible] calculate. But the plant is commissioned, the volumes have started to pick up. As you know the epoxy business, you have to get qualifications and customers. So that takes a bit of time. But I would say the volume growth sequentially has been [indiscernible] close to a volume. About 14%, 15%.

[Nirav Jimudia, analyst]

Okay. And sir, this would be predominantly the LERs, which we would be selling because initially, that would be an easy material to sell on. So how do we see the utilization rates picking up here? So because we have expanded close to 1,23,000 tonnes. So how do we see the pickup in the utilization rates of LER?

And secondly, do we need to create the downstream value-added products for this LER to get absorbed? Or do we have the sufficient capacities of the downstream products as and when the customer requirement comes up, we can convert those LER into the value-added products and start selling those products in the market?

[Hari Agarwal, executive]

I just know our expanded capacity actually is a mix of LER, reactive diluent, polyester and polyamide hardeners. So this is the portfolio. So it's not an exact copy of the first 123 kt. What you have correctly also said is typically LER sells first, and we do formulate further from the LER into value added products. I think it would be fair for you to assume that it will take us about minimum 24, maximum 36 months to sell the entire capacity out. That would, of course, depend a lot upon how the end markets develop. And we specialize in composite, in coatings. So as qualifications increase and more and more of our LER get consumed later.

[Nirav Jimudia, analyst]

Got it. Sir, just 2 last clarifications. So one, based on the presentations of this year as well as last year, our total CapEx in the epoxy is close to INR 326 crores. So is this the total CapEx what we have spent? Or was there any earlier CapEx is also which have happened and the total CapEx amount stands higher than this amount?

[Hari Agarwal, executive]

That's about overall magnitude. There's always some maintenance, et cetera. I didn't actually understand the question.

[Nirav Jimudia, analyst]

The total CapEx for the expansion of the epoxy plant?

[Hari Agarwal, executive]

Yes, most of the CapEx spent has gone into an expansion of capacity?

[Nirav Jimudia, analyst]

Okay. Okay. And sir, last bit is on the chlorine side. So last time, you mentioned that Q3, we had a negative realization of INR 3. And the run rate was close to INR 4 in Q4. So how that was on an average basis for Q4?

And secondly, we have seen some strengthening of the caustic soda prices in the current month. So is it fair to assume that Q1 would see some improvement in our eco realizations?

[Hari Agarwal, executive]

Yes. So for quarter 4, our negative chlorine was around 3.5, 3.6. So actually, it was worse. In Q1, you are right that there is some improvement in the market. So we have seen a slight improvement. Now let's see where that improvement goes as you know the chemical markets are quite volatile. But chlorine has become more negative in Q4 compared to Q3 by about 500 and it is getting somewhat better in the first quarter of this financial year, both caustic as well as chlorine.

[Nirav Jimudia, analyst]

Wish you all the best.

[Hari Agarwal, executive]

Thanks. You do a very comprehensive analysis of the chemical business as usual.

[Operator]

[Operator Instructions] The next question is from the line of Percy Panthaki from IIFL Securities.

[Percy Panthaki, analyst]

My question is on the paint segment. So can you give some idea as to how many tenting machines have you placed till date?

[Rakshit Hargave, executive]

Yes. Thanks for asking that. So like we said, we will be sharing the numbers at a later scale, but what I can tell you is that we have a very aggressive plan of placing tinting machines and with a very high dealer penetration, and we are on track.

[Percy Panthaki, analyst]

Right. And to the previous question, when you had mentioned that the target is 50,000 and we are on track to achieve that, is it that the progression is linear? Or would it be exponential? I'm just trying to figure out, I mean, at least at the ballpark, should I be taking 50,000 divided by 12 multiplied by 2 as a rough ballpark of dealers? Or that would be a wrong way to look at it?

[Rakshit Hargave, executive]

No, Percy, I think that will be slightly wrong. It will be slightly overweighed towards the first half.

[Percy Panthaki, analyst]

Overweighed towards the first half. So you're saying recruitment would be higher in the first half of the year than the second half of the year?

[Rakshit Hargave, executive]

Correct.

[Percy Panthaki, analyst]

Okay. Understood. Secondly, I wanted to understand that in terms of your -- I mean, your terms of trade with your dealers, paint dealers, how does that differ versus the large incumbents in terms of margins or schemes? Is it comparable? Are the schemes more volume based? Or are they sort of based on some other parameters? What are the differences in terms of how you incentivize your dealers versus the other larger incumbents?

[Rakshit Hargave, executive]

We have been meeting dealers across India. We have met the top 7,000 dealers. And we had shared our commercial program, which is out there in the public. So there is a certain benefit that the dealers get in terms of price, then there is a certain benefit which the contractor community gets in terms of rewards and then we have this offer for the end consumer, which gives them 10% free volume on emergent purchases. So if you look at the total package as a dealer and contractor end, we would be stay about 7%, 7.5% depending on the market. And if you work out on the 10% for the volume, that's how it turns out to be. It has already been analyzed in the market before, but that's the commercial program that we have given.

[Percy Panthaki, analyst]

So versus the large incumbents roughly how much would be the benefit that your dealers would get? Is it like a 300, 400 basis points benefit, not talking about the extra volume, which is a benefit to the end consumer?

[Rakshit Hargave, executive]

So that would be difficult to calculate because the large dealers have -- the large players have various programs with other dealers. But what we can say is that the adoption by larger dealers also for Birla Opus as we see is attractive, which means that the proposition is working for them.

[Percy Panthaki, analyst]

Okay. And last time we spoke, you had mentioned that you would be targeting to place tinting machines in 80% to 90% of your dealer network. Would I be right in assuming that kind of percentage is already something that you are running at currently for whatever dealers you have recruited?

[Rakshit Hargave, executive]

Yes. So like we said that we have an aggressive program. I don't recall whether I said 80% or 90%, but it's a number which is fairly high, and we are running on track.

[Operator]

The next question is from the line of Prateek Kumar from Jefferies.

[Prateek Kumar, analyst]

My first question is on VSF. So in VSF, we are operating already at 98% utilization, a strong volume growth current year. How are we seeing -- I mean, with utilization cap? How are we looking at growth in this segment over the next 2 years. Also, we have exited this year probably at strongest unit EBITDA in VSF segment. How are we looking at the unit EBITDA for the next 2 years in the segment?

[Pavan Jain, executive]

Yes. So we have a good volume growth in the last financial year compared to previous one. Q4 was similar to Q3 in terms of volume. And there were some hiccups because MSME notification for payments came into play from February onwards. So the volume was disturbing a little bit. But currently, the volumes are running at a similar pace, and we are trying to ramp up production as much as possible at our different clients. So we see some opportunity there to keep pace with the demand.

On the unit EBITDA, we benefited from the decline in raw material prices in the last year. And those prices are hovering from item increase from item sale from item review. So we're limping along with the similar thing with slight increase in the last 1 or 2 months. But we have to see how it goes. Prices have also softened a bit in the last 2 months in China. So we will see how it goes.

[Prateek Kumar, analyst]

Also, just a related question, so 824 kt which is the capacity of VSF in FY '24. Can it be debottlenecked like 900 kt eventually without doing much CapEx? Or like otherwise, we might have just like 3% to 5% volume growth in the segment next 2 years? Or the capacity can be seen immediately bottlenecked later on?

[Pavan Jain, executive]

Yes, we are trying our best, and there are some opportunities, but I would not try to give any confirmed figure how much per year. We have been working on that, and that is very much on our roadmap. Yes. So about 4%, 5% growth, we should have compared to last year, not last quarter.

[Prateek Kumar, analyst]

And now sir, the Canada business closure of pulp business, is this something which affects our raw material procurement in this business because that was captive unit? And how is the captive raw material percentage now for VSF?

[Pavan Jain, executive]

So the unit which we have taken a decision to close -- was not producing dissolving grade pulp. It was producing paper-rade pulp. And this was one factor behind our decision to close the unit as the economics were not working. The wood cost has increased there too much. And this was not a dissolving at pulp mill.

Our captive pulp mill -- pulp procurement is around 35%. It has been in this range for quite some time, and it remains at that level. And our procurement is stable. We have long-term contracts with some retail dissolving grade pulp producers. Some for more than 3 decades, some for last 4, 5 years new players. And everybody is very keen to work with us. All the new dissolving grade players are liking to work with us as a long-term suppliers. So we are quite comfortable on that front.

[Prateek Kumar, analyst]

Question on CapEx. We haven't given any CapEx outlook in the presentation of FY '24 INR 900 crores. Any number which we should work with or a similar number for next 2 years?

[Pavan Jain, executive]

You're talking for Grasim as a whole or you are talking of any particular business?

[Prateek Kumar, analyst]

Grasim as a whole, maybe we can discuss if you have granular details also, but Grasim as a whole as of now, if possible.

[Pavan Jain, executive]

Yes. Our CapEx spend for next year would be about, I think INR 4,500 crores for the company as a whole, which will mainly comprise the large amount going into paints business. The remaining part of the INR 10,000 crores CapEx announced for the paints. This is on a stand-alone basis.

[Hari Agarwal, executive]

Yes, standalone.

[Operator]

I'm sorry to interrupt, sir. I would request you to kindly rejoin the queue for follow-up questions, please. We have other participants are waiting for their turn. [Operator Instructions]

We'll take the next question from the line of Siddhesh Raje from ICICI Presidential Mutual Fund.

[Siddhesh Raje, analyst]

My question is regarding dividend policy. So the understanding was that the UltraTech dividend gets passed through. So in this financial year, that has not happened. So how should we see that going ahead?

[Pavan Jain, executive]

Yes. So I think the policy was to -- the payout to be range in the 25% to 45%. And within that range, we will strive to pass on the dividend issue from track record and other key subsidiaries. That is the policy. But we have also -- the policy also says that looking at the CapEx plan of the company, et cetera, and other factors, there can be variation to this section. So given the large ongoing CapEx plans of the company, especially in the paints business, we have not passed on fully the UltraTech dividend this year. But that is, I think, it's specifical to this year's situation.

Going forward, we can't comment now, but I think it will be more prerogative. But still, the payout ratio is still quite high, almost 40%, which is much higher than the previous year's when the full and final dividend was passed on. So you should appreciate that while the operating profit is affected but we are maintaining the dividend.

[Siddhesh Raje, analyst]

Okay. And secondly, this CapEx for paints, which happened of INR 1,067 crores. So given that commercial operations have started in April, there would be certain expenses which we would have still capitalized. So can you just give some color as to how much capitalization of expenses happened in last quarter?

[Pavan Jain, executive]

How much capitalization of expenses. So we have capitalized few. We have put the commercial production from 29th of April. Yes, so almost all the preoperative expenses for 3 plants before that day were [indiscernible] now from 29th April, it's all -- 3 plants are fully commercial production. So everything is going through income statement.

[Siddhesh Raje, analyst]

Can you quantify the amount which has got capitalized?

[Pavan Jain, executive]

You can take offline this. We don't have that number ready.

Yes. For the first year of -- full year of operation -- paint operation, there will be a lot of investment in marketing, in planting, in advertisement, so although things will be first time, and they will all go through income statement. So you should be expecting that as a part of building a new business. Yes, while it will go in the P&L chart, but it is like an investment in establishing the new business.

[Operator]

The next question is from the line of Abneesh Roy from Nuvama.

[Abneesh Roy, analyst]

I have few questions on paints. So this is the first quarter where the paint launch has happened. So first question is, when you see JSW paint, they have become INR 2,000 crores after 5 years of launch, and there is captive demand also being present there. Second is, if you see the top 2 paint companies, they have given guidance of double-digit volume growth in FY '25 and even in Q1. So if you mix all this, where does your optimism now stand given launch has finally happened? But then the competitors seem to be still quite gung-ho in terms of demand even in the first year. And the other player has entered. He has done only INR 2,000 crores in 5 years, you have a INR 10,000 crore target in the FY '28. So if you could tell us how does this all map up.

[Rakshit Hargave, executive]

Yes. So Abneesh, see, the way we look at it, JSW has done a certain turnover. The other companies have given a certain guidance where they are talking about double-digit volume. If you take a look at the results which have come, while the volume growth is high, the value growth is very low. I think we are looking at it as a different case because we have come here to make some changes in the way we operate in the paint industry and the changes that we will bring and the disruption that we will bring that we disclosed in Panipat, then you will see that as the year goes on.

As far as we are concerned, we are going to be gaining share. We can already see that we are onboarding dealers, there is uptake, contractors are liking it. So we are not so bothered about competition is paying 10% and that should make me feel that, okay, how can they grow so much. I am competing against the numbers, and I have a solid plan, and I am moving us from my business plan. And to that effect, we are very optimistic about what we have said, and we are on plan. That is how I would say it.

[Abneesh Roy, analyst]

Sir, my second question will be on the disruptions which you had announced in Panipat, it was extremely detailed. Now almost every paint company in the Q4 analyst call or analyst meet said, all these disruptions have been tried earlier in terms of extra grammage, in terms of extra warranty, in terms of free tinting machine, so to that extent, now because now you are there in the market, what is the dealer feedback because this is not really disruption. This has been tried earlier, and it was to an extent but is it really disruptive? No, it hasn't been.

Second is when you put the tining machine, a lot of the free tinting machines are put at the back of the dealer shop. So India [Foreign Language] So if the tinting machines at the back, then what is the response?

[Rakshit Hargave, executive]

So as far as the disruptions are concerned, I think it is very early for even competition to say that in 2 months, we have not seen anything because you will see how gradually we roll out and our success will also lie on executing those disruptions successfully. And our organization is actually designed to do that.

As far as tinting machines are concerned, we are very confident that the tinting machines that are being put by Birla Opus, our tinting machines, which will actually get used. And we can already see usage of our tinting machines are happening. They are performing excellently. As we had announced, they are connected with our back-end. We have live information of what is being tinted in terms of basis on products on a daily basis, we can actually already withdraw that. No company can do that today.

So what I would say is that giving free tinting machine is a way of accessing the market and winning the dealer. Our tinting machine is also unique. It is about 40% smaller in terms of area. So I think in terms of tinting machines, I would not agree to the fact at all that Birla Opus tinting machines will be put in the backyard. I think they've been already put to use. And on the disruption, like I said, very early for someone in 2 months to say that nothing at all. These things have happened before. Please keep watching because we are also going to execute them successfully, and our business model is designed to do that, which is why we've taken 3 years to prepare for it to come to the market.

[Operator]

The next question is from the line of Latika Chopra from JPMorgan.

[Latika Chopra, analyst]

Two questions again on paints. The first, you said that the dealer feedback, the contractor feedback on paints, on quality is quite good. So just wanted to check, does it imply that you're quite comfortable with your pricing strategy at this point? And you talked about 7% to 10% kind of dealer margin or dealer benefit, and at this point, you do not see any reason to play around with that. And even in terms of different kind of paints that you launched, premium, economy and luxury, any comments on that?

[Rakshit Hargave, executive]

So I think the first question on product quality, like we said, the acceptance of product quality across all the segments that we have launched, whether it is exterior, interior and within that luxury, premium or economy, or if you take a look at waterproofing enamels, the feedback from contractors and dealers is extremely positive. They are actually very pleasantly surprised that in keeping with the Birla brand name, the product which has come out is exceptional, both in terms of performance and ease of usage. So I would say that the acceptance of product quality is actually unanimously uniform across the whole segment. In terms of pricing, what we have come out in the market, I think we are happy with what we have put and we are steady with what we have put, and we are rolling it out across the country.

[Latika Chopra, analyst]

Sure. The second bit I wanted to check was, and I think someone alluded to the fact that during the course of the year, you're going to step up advertising spends or above-the-line spends on the paints category. Should we anticipate much of that is going to be seen in the second half, probably closer to the festive season? And once you've kind of rolled out the portfolio to more dealer base?

[Rakshit Hargave, executive]

So yes, we will indulge in out of the line advertising. Probably you have not noticed, but we're already on with our outdoor plans in South India's Chennai, Bangalore, Tamil Nadu, Karnataka, the outdoor launch is up in Punjab already. It is up in Delhi from today. Obviously, logically, it will follow also with television and other digital media as we drive up our distribution. So as expected, we had announced that we will aggressively invest in building the brand, which is going to happen in due course.

[Operator]

[Operator Instructions] We'll take the next question from the line of Raashi Chopra from Citigroup.

[Raashi Chopra, analyst]

Just coming back to the VSF and the chemicals business, any sort of outlook on the margins, profitability from here as well as pricing for both? VSF and chemicals, both.

[Jayant Dhobley, executive]

Okay. So I'll start it. Thanks for the question. So look, we -- pricing more or less is a range, whether you look in caustic, whether you look in chlorine or for that matter [indiscernible] within epoxy, what you must have observed if you are following the chemicals sector is there is still a lot of capacity in China and their domestic consumption has not yet picked up, which means there is a lot of exports of all range of chemicals, which is affecting the chemical industry globally, including India, and including, for example, exports of agrochem, et cetera, from India.

So we see -- actually this quarter to be range bound. There may be some ups and downs, and potentially the next quarter, what may help us is if globally, the agrochem industry picks up, the monsoons in India have proven to be better. Let's see what happens in South America and the U.S. If we start to see good news coming out of the agricultural sector or we start to see good news coming out of the Chinese consumer, then I think that will be very quickly reflected across the chemical industry and including the chlorine.

[Pavan Jain, executive]

Yes. So to add to what Jayant has said about macro factors. The global business conditions still remain a little bit impacted by high interest rates, though inflation seems to be coming down, but still interest rates are expected to remain high. That keeps on impacting the real consumer demand interest especially. Of lately, cotton prices have come down in anticipation of better crop in the coming crop season. Consumption remains good and raw material prices are also range bound. So there will not be, I think, too much change either way in the profitability of cellulosic fiber business, at least in the near term.

[Jayant Dhobley, executive]

Jayant here, back from the chemical business. So maybe one more thing to add is we do observe whether in caustic or in chlorine derivatives or, for that matter, even in epoxy, the contribution margins are such that there is very limited scope or very limited possibility for prices to drop further unless something strange happens, for example, with feedstock prices or energy prices, that could move. But at the current level of feedstock costs, there is actually very little playing room, particularly in the Chinese industry to drop utilization rates below where they are today. So we don't see much of a downside from there. It can't get much worse unless crudes are only dropped or something like that, then that changes the whole economics.

[Operator]

The next question is from the line of Prateek Kumar from Jefferies.

[Prateek Kumar, analyst]

My first question is on your B2B e-commerce. Are we looking to add like more value -- private label products in the segment? Can you throw some light after like a couple of products which you have talked about earlier?

[Sandeep Komaravelly, executive]

Yes, this is Sandeep here. We have launched Tiles and Ply in this financial year. where our focus right now is to increase the penetration for both of these products across our different channels, whether it is our channel, which is developers and contractors or the retail channel. That is the focus for now. Next last year, we are evaluating a few categories, but nothing specific as of now. The focus will remain on increasing the penetration for both of these products or categories.

[Prateek Kumar, analyst]

Just one question on paints, while you have discussed enough in the call, but how has been the response from competition like in first maybe 1, 1.5 months of the product launch in the market?

[Rakshit Hargave, executive]

Well, the response from competition, the way I will answer is all dealers are saying that competition which was relatively absent in the market have become extremely active, and they are visiting us more regularly and they're showing a lot more intent. So the way I would want to read it is obviously they're trying to defend their ports and they're doing what it takes, which shows that they are alert and maybe also apprehensive. But like we said, we are moving on with what our plans that we are executing and we are meeting up the benchmark.

[Prateek Kumar, analyst]

Related question, there's an increased discount pricing or like margins with the competition also talked about, while you have talked about aggressive ROIs for the dealers.

[Rakshit Hargave, executive]

No, I think at least what we have seen in the last 2.5, 3 months status quo or what it was before.

[Hari Agarwal, executive]

You should go and visit a branch dealer.

[Rakshit Hargave, executive]

Yes. Sometimes, next one, we can arrange for visits to dealers for you to actually find out. We can work on that schedule.

[Prateek Kumar, analyst]

That would be useful.

[Operator]

The next question is from the line of Aakash Goel from Tara Capital Partners.

[Unknown Analyst]

Congratulations on the good quarter. I just had one small clarification. Most of the other questions have been answered. Is that in the stand-alone business when I'm seeing the employee cost that has come off sharply both quarter-on-quarter as well as year-on-year. So what exactly has happened there? Because we are starting off with our paint business as well. So I was expecting that maybe the employee cost either hold up or you see some steady increase. So what exactly has played out for this quarter?

[Pavan Jain, executive]

So nothing very specific or any special item. But see, as far as paints is concerned, the employee cost continues to be capitalized for these employees, which are involved in the projects implementation, okay? So the chart will start from the current quarter post capitalizing at the end of April when we have commenced the commercial production, That will start to P&L from this quarter. Otherwise, there are, I think, some year-end adjustments like the valuation of the retirement liabilities, particularly, which has gone down because of the higher discounting rates, et cetera. And then some of the businesses have made, I think, some lower provisions of variable pay because of the current year's performance, et cetera. So these are like year-end normal adjustment. There have been some write-backs earlier -- in the earlier quarter.

[Operator]

The next question is from the line of Praful Kumar from Dymon Asia.

[Praful Kumar, analyst]

Congratulations on a great launch. Couple of questions on paints business. Now first question is that if you look at the margins of the market leader, clearly, the gap that we thought in terms of launch, in terms of our pricing versus theirs seems to have reduced. That's what we are picking. So just want to get your confidence in terms of market share gain, given that the competition, especially the market leader will not -- it would make it easy for us to gain market share as we go towards expensing for the project cost.

[Rakshit Hargave, executive]

So we didn't get the question. We are talking about project costs.

[Praful Kumar, analyst]

The question is the difference at the time of launch when the product was launched, your paint business was, say, 5% plus dealer margin of 10%, 15%. So we were 15-odd percent cheaper than the market leader today, which after we saw the market leader, results seem to have been narrowed. The pricing gap between you and the #1 player today. And that's what we are picking that the market share gains that you envisage might be tough to come by, given that the incumbent will not let the market share go very easily. So your thoughts on that.

[Rakshit Hargave, executive]

So all incumbents will try and defend their market share, which is very obvious. If I was there in their place, I would do the same. But our market share, I think this is built not only on pricing, which is just one of the factors. Our market share hypothesis is firstly based on excellent product quality, excellent market working with influencers, which is contractors, which is a very attractive program for them, excellent distribution build up, being able to supply, and we are building up our range. I have not talked about it today, but we are building up our range very successfully because what the dealers are looking at is assurance of supply.

As we build up our range, as we open up depots, we are observing that the confidence in the last 2 months of the dealers to accept that when they place their orders with Birla Opus, they should by and large get the products is improving. It does take time to build up a range, but the way we have progressed, we are very happy.

And obviously, the data that we are getting from the systems, the track and trace that we implemented last mile, it is also going to come into place. We are doing several things. So our market share hypothesis, while obviously what the dealer makes in terms of an ROI is important. And I think we will also deliver on that. Our market share hypothesis is based on several factors. And I think we are very confident that in terms of executing it, we are as per our plan.

[Praful Kumar, analyst]

Superb. Secondly, sir, in terms of market share -- pardon my ignorance.

[Operator]

I am sorry to interrupt sir.

[Praful Kumar, analyst]

Just last one question, my second question. Just 2 questions. Yes, sir, second question in terms of market share over the next 3 years, generally, given the fact that it was a great launch, you are hiring so many people. The trajectory of market share gains has to be significant in year 1 and then slowly getting -- adding more every year? Or it should be slowly in year 1 and gradually picking up in year 2 and 3?

[Hari Agarwal, executive]

So I think the question itself has many different trajectories. But what I can again reemphasize that what we told in Panipat was that our ambition is to exit this financial year in high single digits. And I think we are working towards that either to meet or better it. And we feel that we are on track in terms of indicators. So I would actually suggest to answer it this way.

[Operator]

The next question is from the line of Amit Sachdeva from HSBC.

[Amit Sachdeva, analyst]

Thank you so much for sharing your details on paint business. It's again a small detail on I wanted that. In that assumption of 3-year target and also given the pricing that you have sort of disclosed and the responses you've got and you seem like you're pretty comfortable with how things are shaping up. My question is on in terms of capacity utilization assumptions that you sort of make in this hypothesis of high single-digit share by year-end and perhaps teams kind of share in 3 years' time, what sort of your thinking and modeling, what capacity utilization will get you there? And is there any risk to that, that you see?

[Rakshit Hargave, executive]

So our installed capacity is 13.32 million liters per annum. Three of our factories are already operating. And obviously, they are operating at a certain capacity. Now what we had declared is that in first 3 years of full operations, we will hit INR 10,000 crores. Obviously, the capacity which will be delivered by these 3 factories is more than that. But the factories also take time to scale up. And the scaling up of the first 3 factories already up. We have also declared that #4, #5 and #6 will also get operational later this financial year. So the capacity utilization of the factories will keep on growing gradually as we keep on driving our sales, and we will be able to monitor the balance between what we are manufacturing and what we are selling.

Obviously, we want to utilize our factories better. We are also working in terms of how to make the factories work more efficiently and how to make sure that the right KPIs are driven. But I don't see -- I think what we have done is set up enough capacity to be able to take advantages of swings and opportunities which might come so that we don't have to wait and be out of the market. So I think the step that was the building strategy that we should first develop enough capacity for us to go national in the first lot and not try regional strategy. So that's how I would want to base this answer.

[Amit Sachdeva, analyst]

No, that's very helpful, sir. So my question is that, can I just hazard a guess that, my sense is a INR 10,000 crore kind of revenue target, is it sort of safer to assume given the installed capacity would be 1.33 million kiloliters in paints. Would it be like 50% utilization is like your base number. To get there, you need about 50% utilization. The reason I'm asking this is that it also has some pricing discipline and build into it as an assumption.

So my view is that how desperate are you to fill the capacity? Or are you okay to have 50% capacity utilization in 3 years? That sort of intent of how you want to develop this market. So what I want is your -- what is your first priority to get the utilization to that set of number? Or you gradually build the capacity utilization. You don't care really about that. You want to build it organically in a disciplined manner, how the business is progressing, given the pricing you put in place and you're okay with that, and you don't see any substantial response from competition as well. So it seems like a good foot in the door. And how do you -- so the reason I'm asking is that, how desperate you would be to fill that capacity at a certain level?

[Rakshit Hargave, executive]

We also declared that when we do the third year business of INR 10,000 crores, we will also be looking at turning profitable. And as we have done the math, and you know the realization per milliliter or per kiloliter from competition, most of the companies are in the same ballpark range. So you would know that if 13.32 million liters is sold, what turnover will be generated. Obviously, it is more than INR 10,000 crores. So the way I would put it is that we would be aggressive in terms of driving our distribution and building our brand, in acquiring dealers, with that, there is a certain volume share gain that we will keep on getting quarter-on-quarter, and we will keep taking that. I would not want to use the word desperation because when we shared this number and the capacity that we have worked, we have already factored those maps in our business plan.

[Amit Sachdeva, analyst]

Got it. That's very helpful. I still get a good idea of how you're thinking about this.

[Operator]

Ladies and gentlemen, due to time constraint, that was the last question for today. Thank you, members of the management. On behalf of Grasim Industries, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.