>GRASIM INDUSTRIES: Global fiber consumption in a new mega-trend

Grasim’s growth profile to witness a marked change, led by VSF business We expect Grasim’s VSF business to drastically alter Grasim’s growth profile. Unlike its past performance, which was largely dominated by the cement business, we expect its VSF business to meaningfully contribute to earnings, going ahead. Grasim’s standalone VSF revenues grew at tepid pace of 9.6% CAGR over FY08-12 on the back of severe capacity constraints restricting volume growth to 3.6% CAGR. However, with Grasim’s VSF capacity expansion (~50% of current capacity) nearing completion, we see its standalone financials witnessing a dramatic shift in growth profile.

Global fiber consumption in a new mega-trend- 9% CAGR in VSF demand Over the last decade, global fiber demand has grown at a 4% CAGR, higher than the 3% CAGR registered in the decade earlier. During 1990-2000 period, synthetic fibre manufacturers, on the back of lower crude oil prices and significant spare capacity, reduced prices and gained market share. Consequently, synthetic fibres registered demand CAGR of 7% over 1990-2000 while MMCF and cotton saw negative growth. However, global fiber consumption over the last decade has undergone a dramatic change with a shift in favour of Man Made Cellulosic fibers (MMCF) like viscose (VSF) driven by 1) rising demand for cellulosic fiber and 2) stagnant cotton production failing to meet incremental cellulosic fiber demand. This is evident from the 6.8% growth in VSF
demand (VSF+Filament+Tow) over the last decade. In fact, over the last 5 years, this shifting trend in favour of MMCF has gained further pace with VSF demand registering a steeper 9% CAGR over CY06-11, clearly outpacing growth in cotton (CAGR of 0.3%) and significantly higher than the 4.9% CAGR in synthetic fibers.

VSF demand outlook remains optimistic –Expect 8% CAGR over 2010-15E Though global fibre demand is expected to witness slower growth over medium term as compared to last decade, the fact that resource constraints will continue to hamper cotton production (cotton is estimated to grow at a CAGR of ~1.5% over 2010-15) means that even a 3% CAGR for global fiber demand over 2010-15, (as compared to CAGR of 4% in 2001-2010) could result in an 8% CAGR for VSF demand.

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