Grasim has completed the acquisition of a one-third stake in Domsjö Fabriker (Sweden). This acquisition marks a major milestone for its VSF business, giving it access to quality pulp.
Grasim’s efforts to solidly consolidate its pole position in the VSF business in which it enjoys a leadership status globally. Through a greenfield project at Vilayat (Gujarat) 120,000 tpa, Brownfield expansions at Grasim Harihar (Karnataka). 36,500 tpa and Domsjö Fabriker (Sweden) 45,000 tpa, the company intends to beef up its leadership position. These expansion projects will be commissioned during 2012-13. Collectively, these projects will ramp up capacities by 50 per cent to an impressive 498 ktpa.
Further, a 180,000 tpa greenfield plant in Turkey is in a planning stage. As a country, Turkey offers enormous potential, given its pre-eminence as a major textile hub. A detailed study and obtaining the requisite approvals to get this project going is underway.
In the VSF and related Chemicals businesses, Grasim’s capex stands at $700 million (Rs. 3,700 crores). This is largely towards the greenfield and brownfield projects at Harihar and Vilayat.
In FY11-12, the prices of VSF and competing fibres corrected from their peak level. In anticipation of record crop, cotton prices declined during the first quarter. High inventory and a cautious approach adopted by the textile value chain amidst the Euro Zone uncertainties affected business sentiments and demand for VSF. There were spurts in demand to restore depleted inventory by the downstream players in the second half. Higher input cost and sharp rupee depreciation impaired operating margins.
Grasim operated all of its VSF plants at full capacity (excluding the shutdown period at its Nagda plant for water shortage). Production increased by five per cent with reduced shutdown days at the Nagda plant. Sale volumes improved marginally as compared to last year. A sharp depreciation in rupee, rise in energy prices and higher caustic and sulphur prices led to substantial increase in input costs. The average pulp cost was up by 11 per cent. Increase in input costs resulted in lower PBIDT and operating margins.
The performance of pulp JVs was impacted due to the increase in energy cost coupled with softening of pulp prices. Difficult market conditions affected the performance of the fibre JV Birla Jingwei in China.
The VSF greenfield projects at Vilayat (120,000 tpa), Gujarat, and the brownfield expansion (36,500 tpa) at Harihar, Karnataka, are on track. The Vilayat project is slated for commissioning towards the end of FY12-13. The Harihar project is expected to be commissioned in two phases during the current year. A capital outlay of Rs. 2,700 crores has been earmarked on the above projects.
An additional water reservoir is being constructed at Nagda to create higher water storage capacity to meet the water requirements during summers (pre-monsoon period). This will help in ensuring continuous plant operations at Nagda and avoid plant shutdown due to water shortage.
The demand for textiles will continue to expand as growing population and rising prosperity in the emerging markets will fuel consumption. With limited availability of arable land for cotton due to competition with other cash crops, VSF demand is expected to grow reasonably well in the long term.
In the short run, the market condition may remain volatile. New capacities in China may create pressure on markets. Stability in the Euro Zone and macro-economic policies will be the key factors influencing demand. Profitability will be governed largely by the dynamics of competing fibres, input and energy costs.
Business outlook
The focus of the company continues to be on specialty fibres. Its plan to produce specialty fibre at Vilayat will lead to market enlargement. The business will increase its efforts towards building a strong R&D, which will enable it to launch new product offerings. With the availability of increased volumes post expansion, VSF business will be able to achieve accelerated growth and increase its market share globally.
To expand global footprint, plans are on anvil to set up a greenfield VSF plant in Turkey. To this end, Grasim has invested one-third of the initial capital of ABES for acquiring land and meeting initial expenses during the year. ABES is in the process of undertaking a detailed study and subsequently seeking the necessary approvals.