Grasim Industries Limited (GRASIM) Q2 FY23 Earnings Concall Transcript

Grasim Industries Limited (NSE:GRASIM) Q2 FY23 Earnings Concall dated Nov. 14, 2022

Corporate Participants:

Pavan K Jain — Chief Financial Officer

H.K. Agarwal — Managing Director

Jayant Dua — Chief Executive Officer, Chemical Division

Rakshit Hargave — Chief Executive Officer – Aditya Birla Group

Analysts:

Sumangal Nevatia — Kotak Securities — Analyst

Navin Sahadeo — Nuvama Institutional Equities — Analyst

Pinakin Parekh — JPMorgan — Analyst

Nirav Jimudia — Anvil Research — Analyst

Prateek Kumar — Jefferies — Analyst

Vipul Shah — Sumangal Investment — Analyst

Aasim Bharde — DAM Capital Advisors — Analyst

Jiten Doshi — ENAM Asset Management — Analyst

Vivek Ramakrishnan — DSP Mutual Fund — Analyst

Sean Ungerer — Chronux Research — Analyst

Abhimanyu Kasliwal — Choice India Limited — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Grasim Industries Limited Q2 FY ’23 Earnings Conference Call. We have with us today, Mr. H. K. Agarwal, Managing Director, Grasim Industries Limited; Mr. Pavan Jain, CFO, Grasim Industries Limited; Mr. Jayant Dua, Chief Executive Officer, Chemical Division, Grasim Industries Limited; Mr. Rakshit Hargave, CEO, Paints Business, Grasim Industries Limited. [Operator Instructions]

It is now my pleasure to introduce your host, and I would now like to hand the conference over to Mr. Pavan Jain, CFO. Thank you, and over to you, sir.

Pavan K Jain — Chief Financial Officer

Yeah. Good evening, and a very warm welcome to all of you to this earnings call of Grasim Industries for Q2 FY ’23. As you all know, the global macro environment is passing through difficult times. We are witnessing inflation levels, especially in the developed economies not seen in the decades. Tightening of monetary policies by central banks across countries is leading to recessionary market conditions in many parts of the world. The ripple effects of the ongoing Ukraine-Russia war and COVID-induced lockdowns by China are adding to the challenging situation across the world. On the positive side, the Indian economy is showing resilience, supported by the domestic consumption and expected to be the fastest growing large economy.

Coming to the Company level key initiatives, as shared earlier, Grasim is investing for building its new growth engines in the form of two new high-growth businesses, namely Paints and B2B e-commerce. With our grit, we are on track for commissioning of our first paint plant by Q4 FY ’24 and remaining plants by FY ’25 in a phased manner. Construction is in progress at five of the total six sites for the Paint business. The statutory approval is expected to be in hand soon for the remaining one plant.

Other activities for the launch of business are progressing parallelly. Progress on the B2B e-commerce business is also on track for commercial launch of the Minimum Viable Product-1, that is MVP-1 by Q2 FY ’24. Product categories to be covered by the platform includes cement, steel, doors and windows, kitchen and electricals, paints, sanitaryware, plumbing and tiles. The leadership team hiring is ongoing and expected to be in place by Q4 this year. Simultaneously, technology partners for the platform are being finalized.

In our existing businesses, the Board has approved an additional capex of INR565 crore, out of which approx INR382 crore is expected to be spent in current financial year and remaining will be rolled over to the next year. The additional capex is mainly towards land purchase for Chemical business for Chlorine VAPs expansion and debottlenecking in our pulp plant at Harihar, that will take the capacity of the pulp to 260 [Phonetic] TPD, making the Harihar unit a fully integrated VSF plant. The debottlenecking will marginally increase the pulp integration by 2%, taking it to approx 37%.

On the ESG front, in line with our commitment to cut carbon emissions, the Chemical business now sources about 10% of its power requirement from renewable power, which will increase to 14% by Q1 FY ’24. Advanced Material business is implementing a plan for sourcing 100% of its power requirement from renewable energy by Q1 FY ’24. The Textile business has increased its — the share of renewable power to 15.7% in H1 FY ’23 [Phonetic]. If we compare with FY ’20, which was 0.8%, it is a significant increase.

VSF business has consequently for three years maintained its leadership position in Canopy’s Hot Button Report 2022 by securing highest category, that is Dark Green Shirt. Grasim’s focused approach towards sustainability initiatives has led to a substantial improvement in Standard and Poor’s DJSI score at 88 percentile for FY ’22 compared to 76 percentile of previous year.

I will now briefly touch upon the key operational and financial highlights for the quarter. This quarter has not been good for the MMCF industry globally, and we have been no exception to this. VSF business reported revenue of INR3,241 crore and EBITDA of INR212 crore. EBITDA is declined by 59% Y-o-Y. The decline in EBITDA is majorly because of lower demand due to subdued market conditions in the developed economies on account of inflationary recession and increase in cost of key inputs such as pulp, caustic soda, and coal.

The high cost of caustic soda is reflected and offset by the higher profit of the Chemical business of the Company. The VSF sales volume dropped by 14% on Q-o-Q basis due to demand slowdown and cheaper imports from Indonesia and China. Grey VSF September ’22 exit prices were down by 9% compared to June exit prices.

Cotton prices declined by 24% in comparison of quarter-end exit prices. Considering the prevailing demand conditions in the VSF business, the Company has rationalized the capacity utilization at approx 70% for VSF hedges. VFY business reported a strong performance for increased sales volume, recording a growth of 31% Y-o-Y. High consumer demand in the domestic markets, supported by the festivals and wedding season has augured well for the VFY business. On the positive side, the Chemical business reported yet another quarter of robust performance, recording an EBITDA of INR609 crore in Q2 FY ’23 on the back of higher caustic soda sales volume, which increased by 17%, with a stable demand environment and better ECU realizations.

International caustic prices have declined on Q-o-Q basis due to increased availability on account of easing of supply chain disruptions. ECU for Q2 FY ’23 stood at INR49,503 per MT, which is an 89% increase on Y-o-Y basis, but an 8% decline on Q-o-Q basis, in line with the global trend. Oversupply and low downstream demand impacted chlorine realizations, which continues to be in the negative territory. The total chlorine integration percentage, including pipeline sales to our dedicated customers, now stands at 61%, which was 56% in Q2 FY ’22.

Reaping the benefits of being a conglomerate on a standalone level, revenues for Q2 FY ’23 stood at INR6,745 crore, which is an increase of 37% Y-o-Y, and the quarterly EBITDA of INR1,712 crore, and PAT before exceptional items at INR1,052 crore are 14% and 11% up on Y-o-Y basis. Here I would also like to say that both EBITDA and PAT for the quarter at standalone level the highest-ever quarterly numbers for the Company.

Consolidated revenue for quarter is up by 22% Y-o-Y at INR27,486 crore, led by robust revenue growth for both key subsidiaries, that is Aditya Birla Capital and UltraTech Cement. Consolidated EBITDA at INR3,783 crore was down by 12% Y-o-Y, mainly due to cost pressure at UltraTech Cement. As of 30th September 2022, the Company continued to be net zero debt with a net surplus of about INR230 crore. With the large growth investment plans, the Company is well positioned to participate in the high growth trajectory of the country.

I would like now to hand over the call back to the operator for Q&A. Thanks a lot to all of you for joining this call today.

Questions and Answers:

Operator

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have a first question from the line of Sumangal Nevatia with Kotak Securities. Please go ahead.

Sumangal Nevatia — Kotak Securities — Analyst

Yeah. Thank you for the opportunity. And my first question is with respect to this increase in capex. So there’s a INR380 odd crore increase this year, both under the head of existing capacity increase. So if you could just explain where is it basically, what is the capacity increase and debottlenecking incrementally happening with this capex, both in VSF and Chemical? I mean, there were some discussion in the opening remarks, but if you could just elaborate on that, it would be very helpful?

Pavan K Jain — Chief Financial Officer

So the new capex proposals approved by the Board are for two main projects. One is the expansion of our pulp capacity, which we have a pulp plant at Harihar. So from 210 TPD current capacity, it will be increased to 260 TPD. With this, our Harihar VSF plant will be fully integrated, in the sense we will have full pulp requirement met by own pulp plant. So that is one part.

The second part is, we are acquiring a large piece of land at Vilayat location to take care of our plants for the value-added products expansion in the Chemical business. See, our currently, Vilayat land is almost fully utilized, and we will need the new land parcel for the plants under our VAPs business. So these are the two major products — the major projects. The capacities will take time to come up. The spending will start happening from this year. But like VSF, the pulp plant will take about two years to this 50 TPD increase.

Sumangal Nevatia — Kotak Securities — Analyst

Understood. Sir, for the Chemical division, this INR250 crore, INR260 crore kind of a increase in FY ’23, it’s entirely the land acquisition which we are building, right?

Pavan K Jain — Chief Financial Officer

Yes. This is our Vilayat site. Our Vilayat current land parcel is fully utilized. And we have acquired — we will acquire this land for all our future expansion requirements.

Sumangal Nevatia — Kotak Securities — Analyst

Okay. And for the VSF, for the pulp, what is the total expenditure? I mean, so INR100 odd crore, I see an increase in FY ’23, but what would be the total expenditure towards this increase in capacity for pulp?

Pavan K Jain — Chief Financial Officer

So total [Technical Issues], out of which currently, our spending will be about INR85 crore — INR90 crore.

Sumangal Nevatia — Kotak Securities — Analyst

And total you said, sir?

Pavan K Jain — Chief Financial Officer

INR227 crore.

Sumangal Nevatia — Kotak Securities — Analyst

INR227 crore. Got it. Got it. That’s helpful. My second question is more from a longer-term perspective on the VSF versus cotton prices. If you see last six months, VSF prices are outperforming cotton in the downfall. But before that, VSF prices underperformed the cotton rally for a period of 18 months to 24 months. So going forward, if you could just share some perspective as to how should we see the normalized spreads between cotton and VSF and our expectation for VSF prices in the coming quarters?

Pavan K Jain — Chief Financial Officer

So, cotton and VSF prices are directionally co-related. They generally move in the same direction, but the extent of increase in one doesn’t necessarily reflect in the same increase in the other. So as you said, last one and a half years, cotton prices were rising much faster or much more compared to VSF. So VSF has its own dynamics of capacity and demand and cotton has its own dynamics.

So this time, cotton prices have corrected much sharply, but VSF prices have not corrected to that same extent. So similar situation is expected to continue. We don’t expect VSF prices to correct in the same proportion or same extent as cotton prices. Cotton is more speculative, more volatile.

Sumangal Nevatia — Kotak Securities — Analyst

Okay. So can we conclude that the demand supply prospects and the market balance prospects of VSF currently is appearing to be much stronger than the cotton market?

Pavan K Jain — Chief Financial Officer

All the — see, the — this is not just the demand supply situation, but also a play of market expectation. So now, everybody, the brands are expecting the prices to be more volatile, but they are having their inventory of garments. So they are not releasing orders. And people are expecting prices to go down more or remain soft. And in this high interest regime, people are very careful in building up inventories, another inventory correction is happening. So there are many factors in — and it is not just simple demand and supply alone.

Sumangal Nevatia — Kotak Securities — Analyst

Understood. I have more questions, but I’ll join the queue. Thank you, and all the best.

Pavan K Jain — Chief Financial Officer

Thank you.

Operator

Thank you. We have next question from the line of Navin Sahadeo with Nuvama Institutional Equities. Please go ahead.

Navin Sahadeo — Nuvama Institutional Equities — Analyst

Yeah. Thank you. Good evening, everyone, and thank you for the opportunity. Just taking on the previous question about VSF, presentation and, of course, even the global data suggested that VSF prices are on a decline. But is the understanding correct that, for us, the net realizations are actually slightly higher sequentially?

Pavan K Jain — Chief Financial Officer

Sequentially, the realization is mostly flat.

Navin Sahadeo — Nuvama Institutional Equities — Analyst

Okay.

Pavan K Jain — Chief Financial Officer

But internationally, prices have come down, but Indian rupee depreciation has also helped to modify that. But international prices and general tendency of the prices is towards softening.

Navin Sahadeo — Nuvama Institutional Equities — Analyst

Understood. So even then, we have outperformed largely — I think the realizations for us have outperformed the global prices largely because of currency depreciation. Is that the correct understanding?

Pavan K Jain — Chief Financial Officer

Yes.

Navin Sahadeo — Nuvama Institutional Equities — Analyst

And just on this that I think the current spot prices are much weaker than even the exit prices, which your presentation says were down about 4% odd. So is it again safe to really expect that — of course, medium term can be good, but the immediate quarter, which is, let’s say, the December quarter can see further margin compression sequentially because the way the spot prices are?

Pavan K Jain — Chief Financial Officer

Yeah. This is a very reasonable expectation and interpretation of the current situation, yes.

Navin Sahadeo — Nuvama Institutional Equities — Analyst

Understood. Thank you. My second question was on the Paint segment. And this was more to get like conviction or confidence in that business since it’s a new business for us. So when you say that the pilot plant has started, can you give more color as to what exactly does it mean? Are we doing like a test marketing in certain regions or what exactly does this mean? What is the capacity of this pilot project? And when we say Q4 commercial production — Q4 FY ’24, the commercial production is expected to start, what would that capacity be? Thank you.

Pavan K Jain — Chief Financial Officer

Rakshit, would you like to — this one [Phonetic]?

Rakshit Hargave — Chief Executive Officer – Aditya Birla Group

Okay. So as far as the pilot plant is considered, obviously, it is a small plant expected to make test quantities, because launching for the first time, we would want to validate all the products in the market. And as far as the first factory that we are talking about going online in December ’23, as we had disclosed that we are setting up 1.3 billion milliliters per annum capacity, the first factory would be in the range of about 200 million liter to 220 odd million liter per annum.

Navin Sahadeo — Nuvama Institutional Equities — Analyst

Understood. That’s helpful. But are we also then when we say test — testing the product, are we then also saying that we will be starting appointing dealers and the brand rollout also happens now to see the test success of it or how exactly do we get confidence on this?

Rakshit Hargave — Chief Executive Officer – Aditya Birla Group

No. So like we have said that the launch can only happen once when the actual factory is commercialized. So it will follow the timeline — the timelines likewise.

Navin Sahadeo — Nuvama Institutional Equities — Analyst

Yeah. But when we say pilot project as in we are going to set the viability of the project — products you said?

Rakshit Hargave — Chief Executive Officer – Aditya Birla Group

No. The pilot plant is for testing the product performance and validity. It is for that purpose. It has got nothing to do with the commercialization.

Navin Sahadeo — Nuvama Institutional Equities — Analyst

Understood. Helpful. Thank you. Thank you very much.

Operator

Thank you. We have next question from the line of Pinakin Parekh with JPMorgan. Please go ahead.

Pinakin Parekh — JPMorgan — Analyst

Yeah. Thank you very much, sir. Sir, my first question is on the capex. So the press release mentioned capex roughly of INR6,500 crores — INR6,700 crores versus first half spend of INR1,500 crores. So that implies second half of roughly INR5,200 crores. Now Grasim standalone was a net cash balance sheet of just INR500 crores. So in the second half of the year, would it be fair to say that there could be additional borrowings to fund this capex or will basically Grasim run down its existing treasury operations to fund the second half capex?

Pavan K Jain — Chief Financial Officer

So that will depend the speed of spending, but we will look at the opportunities. If, I mean, there are good opportunities to borrow, we will do borrowing. And if this — I mean, the current volatility in the interest rates are good enough to liquidate some part of the treasury, we’ll do that. So, net-net, we don’t expect to be net zero debt by year-end. We will have some net debt on the balance sheet by year-end.

Pinakin Parekh — JPMorgan — Analyst

Sure, sir. So, sir, just trying to understand that the second half capex implies more than a tripling of the first half capex. So in terms of the spending, what are the downside risks to this actual — to the budgeted program, because this is a very sharp step-up in spending that the Company proposes?

Pavan K Jain — Chief Financial Officer

So there is a possibility of some slowdown in the spending. But there may not be any material difference, because — see, what happens, so, generally the approvals and ordering, etc., take place in mostly Q1 and Q2, the actual work starts now in the second half.

Pinakin Parekh — JPMorgan — Analyst

Understood, sir. And sir, just a clarification on the Paints business. So the pilot plant is scheduled sometime this year and the first plant gets commissioned in Q4 FY ’24. In terms of the launching of the brand for the Paints business and the marketing and the brand building, should we expect that to happen after the first plant is commissioned, so that would be more like FY ’25 or would that start in the next two quarters before the first plant gets commissioned? Just trying to understand the sequencing of that part of the launch.

Pavan K Jain — Chief Financial Officer

Yeah, Rakshit?

Rakshit Hargave — Chief Executive Officer – Aditya Birla Group

So — yeah. So if I might add, the brand launch can only happen with the copper launch, which will start with the factory and we will adhere to that schedule.

Pinakin Parekh — JPMorgan — Analyst

Okay. So it’s fair to say it will happen only after the first plant gets commissioned in the fourth quarter F24 [Phonetic]?

Rakshit Hargave — Chief Executive Officer – Aditya Birla Group

Yes.

Pinakin Parekh — JPMorgan — Analyst

Understood. Thank you very much.

Operator

Thank you. We have next question from the line of Nirav Jimudia with Anvil Research. Please go ahead.

Nirav Jimudia — Anvil Research — Analyst

Yeah. Good afternoon, sir. So I have a question on the Chemicals. Sir, your presentation says that we have been able to increase our VAP production substantially because of the commissioning of CMS capacity which happened in October 2021. So if you can just let us know what is our capacity utilization of the CMS plant in Q2 FY ’23? And along with that, if you can help us explain what was the increase in the EBITDA of VAP in H1 FY ’23 versus H1 FY ’22? Even if a percentage margins would help, sir.

H.K. Agarwal — Managing Director

So the CMS plant was actually a vertical start-up. I think we reached 85% capacity within the first quarter of it’s launch, which was October.

Nirav Jimudia — Anvil Research — Analyst

Okay.

H.K. Agarwal — Managing Director

So by December or January of the production, we were able to hit about 85% mark. And we’ve been hovering at that capacity utilization ever since depending upon market reactions between 90% to 80% is what we gain. That’s reply to your first question.

The second one in terms of the differential in your margin of VAPs, give me a minute and I’ll just pull the data out. So, see, at the end of the day, we’ve got about — let’s say, we’ve got about at — 20% odd — 20% to 30% odd jump on our EBITDA on the VAP side because the VAP side actually runs into multiple products.

Nirav Jimudia — Anvil Research — Analyst

Correct.

H.K. Agarwal — Managing Director

So it’s actually down by around 20% to 30%, sorry, I said it up, for a simple reason that chlorine has been highly impacted in the quarter two on its negative pricing.

Nirav Jimudia — Anvil Research — Analyst

Correct, correct. But sir, when we transfer the chlorine from the caustic to the VAP side, that happens on a transfer pricing I believe. So because in Q2, we have seen chlorine prices going as negative up to INR9, INR10 also. So wouldn’t that have been captured in the incremental VAP profits?

H.K. Agarwal — Managing Director

Your point is absolutely fair. See, what happens is the caustic running on high realization in the market, we — everybody has been producing caustic as the cost of chlorine being sold at a high negative.

Nirav Jimudia — Anvil Research — Analyst

Correct.

H.K. Agarwal — Managing Director

While you might be in a situation where you are transferring at the market price, the chlorine negative price to your products.

Nirav Jimudia — Anvil Research — Analyst

Yeah.

H.K. Agarwal — Managing Director

So are the others doing at the same level, and there has been a lot of intensity and competition on the chlorine derivative side along with that of chlorine. So both of them have seen a subdued margin compared to Q1.

Nirav Jimudia — Anvil Research — Analyst

Got it. So, sir, what you mentioned is as compared to last H1, this H1, we have seen actually 20% to 30% decline in VAPs profits, this is what you have been trying to say?

H.K. Agarwal — Managing Director

While our volumes have gone up — come down, but it gets more than adequately compensated with the caustic prices.

Nirav Jimudia — Anvil Research — Analyst

That’s true. That’s true. Sir, second question…

H.K. Agarwal — Managing Director

Hopefully, you’re doing between the two [Phonetic] — three [Phonetic] of them.

Nirav Jimudia — Anvil Research — Analyst

Yeah. Sir, second question is on the Epoxy as well as the ECH capex. So if you can just let us know the timeline of the commissioning of both the projects, what is the total capex for both of them and how much we have spent till date? And a related question is, because you have mentioned that we have seen the specialty share of Epoxy going up in the overall portfolio this quarter. So if you can just help us explain what’s our current share of specialty Epoxy in our overall Epoxy sales? And once our new capacities would be commissioned, how that mix would look like?

Jayant Dua — Chief Executive Officer, Chemical Division

So, let me give you the commissioning time of the Epoxy and ECH separately. For Epoxy, it will be Q1 of FY ’24 and for ECH, it will be Q1 of FY ’25.

That’s what the timelines are. See, at the moment, obviously, largely, both the plants are just at the moment closing on their negotiations for capital equipment. So not a lot of material amount of capex has been spent. And as Mr. Jain was saying, largely, the capex trends will come in the H2 part, is when the true ordering will be happen. Here, you are mostly closing the negotiations and the technology alignments.

Nirav Jimudia — Anvil Research — Analyst

Correct. Correct. And sir — but if you can just run upon on the total capex that needs to be spent on both the projects cumulatively, that would be helpful.

Pavan K Jain — Chief Financial Officer

So, Epoxy, the total spending or the doubling of the capacity would be about INR360 crores. And ECH —

H.K. Agarwal — Managing Director

It will be somewhere around INR450 crores plus.

Nirav Jimudia — Anvil Research — Analyst

Okay. INR454 crores, this is what you mentioned, right?

Pavan K Jain — Chief Financial Officer

Yes, yes.

Nirav Jimudia — Anvil Research — Analyst

Correct. And sir, my question on the specialty Epoxy, if you can just give some understanding on the same, that would be helpful.

Jayant Dua — Chief Executive Officer, Chemical Division

If I — the specialty chemical — the specialty part of Epoxy is doing very well. It is in the range of about 30%, 35%.

Nirav Jimudia — Anvil Research — Analyst

Okay. Okay. And is it safe to assume that once we double our capacity, that mix would continue to remain at those levels, or that mix would see an upward tick once those incremental capacities would be in place?

Jayant Dua — Chief Executive Officer, Chemical Division

So I think it’s a question a little premature to answer at this moment. Logically, yes, the tick would be on the positive side, but very difficult to put a number or a figure today on it.

Nirav Jimudia — Anvil Research — Analyst

Got it, sir. And sir, last question —

Operator

I’m sorry to interrupt now. Sir, please come back in the question queue. Thank you. We have next question from the line of Prateek Kumar from Jefferies. Please go ahead.

Prateek Kumar — Jefferies — Analyst

Yes. Good evening, sir. My first question is a bookkeeping question. Can you update on VFY segment revenue and EBITDA for the quarter?

Pavan K Jain — Chief Financial Officer

So see, we are not giving separately numbers of VFY EBITDA and revenue, etc. But as I told you, the VFY revenue — VFY volumes are doing well. VFY volumes are up by 31% this quarter on Y-o-Y basis. And the cost increase in the VFY, we have been able to pass on because of the good demand conditions of the book.

Prateek Kumar — Jefferies — Analyst

So this quarter onwards, we will not be giving the VFY data, because the last quarter, we were giving the data?

Pavan K Jain — Chief Financial Officer

No, we have not — I don’t think we have separately given any VFY data.

Prateek Kumar — Jefferies — Analyst

So we were giving every quarter this data since our —

Pavan K Jain — Chief Financial Officer

Okay. So we will possibly share that, I think. Let us recheck that. So the VFY business on the — directionally, let me share with you, the VFY business has done well during this quarter. Their EBITDA is up and the volumes are up. The prices, they are able to pass on the cost increase in the realizations.

Prateek Kumar — Jefferies — Analyst

Sure. Okay. My second question is on — like, on capex. So second half, hypothetically, if we see some lower capex versus projected capex of over INR5,000 crores, would that impact the timelines for first plant of Paints in FY ’24, or is it related to — it could be related to some other projects?

Pavan K Jain — Chief Financial Officer

No, no. See, the Paints, we have already told you that we — the first plant will be commissioned in Q4 next year. So that we are on track. For the existing businesses, especially on the modernization and normal maintenance capex, then there may be some slowdown or some delays, and which actually gets sold out to the next year. But there may not be a large difference between what we have already projected versus actual.

Prateek Kumar — Jefferies — Analyst

Sure. And one question on VSF profitability. It probably has slipped to below INR15 per kg this quarter or closer to INR10 per kg. So this seems to be the second lowest or third lowest kind of profitability in past many quarters, leaving aside the COVID quarter of Q1 ’21. How should we, like, sort of look at this profitability, like, let’s say beyond, like, 3Q, which expected to be much weaker? But like beyond 3Q, how should we look at the profitability in the segment?

Pavan K Jain — Chief Financial Officer

See, VSF profitability is expected to remain under pressure for the time being, because input prices remain elevated and in line with the cotton sentiments are depressed and VSF price is also affected by continuous lockdown in China and slowdown in demand in Europe and USA, which are the major textile-consuming countries — centers. So for the time being, VSF margins will most likely remain subdued.

Prateek Kumar — Jefferies — Analyst

Sure, sir. These are my questions. Thank you.

Operator

Thank you. We have next question from the line of Vipul Shah with Sumangal Investment. Please go ahead.

Vipul Shah — Sumangal Investment — Analyst

Hi, sir. Thank you for the opportunity. So my question is, sir, how do we calculate ECU per ton, means on the — only chlorine is included in the byproduct, means 1 ton of caustic soda produces how much chlorine?

Jayant Dua — Chief Executive Officer, Chemical Division

So ECU is calculated as a function of the caustic, both liquid and solid, also chlorine and then hydrochloric acid. And the formula for chlorine production is, 1 ton of caustic generates 0.89 ton of chlorine.

Vipul Shah — Sumangal Investment — Analyst

Okay. So there, we are carrying negative carry as on today, right?

Jayant Dua — Chief Executive Officer, Chemical Division

Not on your own. If 1 ton produces close to 0.9 ton, that’s running in positive and one is running at INR9 to INR10 negative, as stated in our listing that you can figure out.

Vipul Shah — Sumangal Investment — Analyst

Okay, sir. And my second question is, we are totally self-sufficient as far as pulp is concerned for our VSF business, or we have to purchase any pulp from the market?

Pavan K Jain — Chief Financial Officer

So we do have to purchase pulp from market. Our integration is in the range of about 35%, and we have long-term arrangement with some world-renowned suppliers. We have formula-based pricing. So we do have to purchase pulp from outside to that extent, about two-third.

Vipul Shah — Sumangal Investment — Analyst

Okay, sir. So, only 35% we are integrated?

H.K. Agarwal — Managing Director

Yes.

Pavan K Jain — Chief Financial Officer

But here, just I would like to add, see, we have — our pulp JV — is one of the JV plant is paper-grade pulp. They manufacture paper-grade pulp. So we also sale that paper-grade pulp in the market. And at the same time, we buy the DG grade, our VSF-grade pulp. So if we add that, then our integration goes to about 45%. We have kind of hedging, you know, when we have the paper-grade pulp, which goes to the market and we buy the VSF-grade pulp.

Vipul Shah — Sumangal Investment — Analyst

So any plan to increase our pulp integration over medium term, sir?

Pavan K Jain — Chief Financial Officer

So we are doing a small debottlenecking at Harihar, but of course, it is a small thing. And then we are working on some plans for circularity, where we will have plans to use the used garments, cotton garments. But it is still some time away, but that is the way to increase or reduce the need for virgin pulp.

Operator

Thank you. We have next question from the line of Shalini Vasant with DSP Mutual Fund. Please go ahead.

Thank you. We have next question from the line of Aasim Bharde with DAM Capital Advisors. Please go ahead.

Aasim Bharde — DAM Capital Advisors — Analyst

Yes. Hi, just one question. Wanted an update on your tie-up with Lubrizol to manufacture CPVC resin. The tie-up was announced in late 2020, and the first phase was supposed to start by end 2022. So what is the status on this one now?

Jayant Dua — Chief Executive Officer, Chemical Division

So, there was a change of management at Lubrizol. That has led to a delay. So there was about 12 to 18 months of — while the new management settled down and delay. Now, things are back on track, and we expect that in about 24 months, the execution will be kind of overhead there, and that’s the communication we received from them.

Aasim Bharde — DAM Capital Advisors — Analyst

24 months from today, right?

Jayant Dua — Chief Executive Officer, Chemical Division

Yes.

Aasim Bharde — DAM Capital Advisors — Analyst

And that would be for the first phase or for the entire plant?

Jayant Dua — Chief Executive Officer, Chemical Division

The first phase. We’re only talking first phase.

Aasim Bharde — DAM Capital Advisors — Analyst

First phase. And just lastly, we are not spending anything over here, right? It’s entirely their capital?

Jayant Dua — Chief Executive Officer, Chemical Division

There is no capital burden on Grasim at all for this particular project.

Aasim Bharde — DAM Capital Advisors — Analyst

Okay. Thank you. Thanks a lot.

Operator

Thank you. We have a next question from the line of Jiten Doshi with ENAM Asset Management. Please go ahead.

Jiten Doshi — ENAM Asset Management — Analyst

Good afternoon, sir. I would like to ask you about your Paint business. What is the capitalized loss that you’re projecting just before commencement, or what sort of interest losses would you capitalize prior to commencement?

Pavan K Jain — Chief Financial Officer

So, the interest till this — the plant commissioning will be capitalized. I don’t have readily numbers of the model. Rakshit, do you have that interest capitalized number readily available with you?

Rakshit Hargave — Chief Executive Officer – Aditya Birla Group

No, I don’t have it readily available. But, it is a —

Pavan K Jain — Chief Financial Officer

We can share with you separately.

Jiten Doshi — ENAM Asset Management — Analyst

Sure. And sir, I wanted to ask you that at full capacity, what do you really estimate the Paint business turnover? Because you — we’re putting this capex with some calculation. So roughly going by whatever capex that you’re putting in, what should be your output in terms of topline from this at full capacity?

Rakshit Hargave — Chief Executive Officer – Aditya Birla Group

So the way I would want to answer this question is that we have declared that we are setting up 1.3 billion liters capacity, and you would know what is the percentage utilization, capacity utilization in major paint companies. And then it becomes a function of pricing. So I don’t think that I want to disclose anything on how would the pricing in the market develop once when we come in and after a few years. But I think the answer lies in putting those dots together. So that’s how — so, we would not want to share in terms of what have been our assumptions on our business plan at the moment. But these are how the building blocks will look like.

Jiten Doshi — ENAM Asset Management — Analyst

No. So I assume that there will be some sort of a calculation, which will be a return on capital employed number that I’m looking for, not really your strategy in terms of how you’re going to price, etc. I’m just saying, what sort of return on capital employed can we expect, let’s say, in year three, not in year one.

Rakshit Hargave — Chief Executive Officer – Aditya Birla Group

Okay. So the way we are looking at is — I would put is that we are looking towards keeping the EBITDA losses to a reasonable amount and to become a profitable business as soon as possible, okay?

Jiten Doshi — ENAM Asset Management — Analyst

So I mean, just to get it, would — at full capacity, would you be doing a 3 times of the gross block or what number can we factor in from the gross asset base?

Rakshit Hargave — Chief Executive Officer – Aditya Birla Group

So I think, Pavan, maybe we could engage separately in terms of clearing these queries with whatever numbers we can share with them.

Pavan K Jain — Chief Financial Officer

Yes. So as of now, it is very uncertain to, again, give any kind of numbers of year three or year four or year five. So, I mean, we are still away from the actual, I mean, the product coming to the market and how the, for example, input prices will behave and all that. So the — it is not a year one, two or three kind of story. We are in Paints for the long haul. So I think let us come to a stage where we can give you some kind of numbers on the Paints business.

Operator

Thank you. We have next question from the line of Shalini Vasant with DSP Mutual Fund. Please go ahead.

Vivek Ramakrishnan — DSP Mutual Fund — Analyst

Hi, this is Vivek Ramakrishnan. Sorry, I got cut last time. My question, if you do a rough-cut mathematics, the net debt goes up to about INR2,000 crores as at March ’23. I just wanted to know whether that number is correct. And is there a debt to EBITDA guidance that you have for a longer period of time as you undertake this large capex? That’s question number one

And question number two is, whether there is any working capital release that you anticipate in the second half, given the fact that prices have come down and supply chain constraints have become less? That’s it from my side.

Pavan K Jain — Chief Financial Officer

So on the net debt to EBITDA, see we will — at the peak of the capex, once we are done with the Paints capex, everything, then we may have about 2.73 kind of net debt to EBITDA. That is our current estimate. But it will all depend upon how the — I mean, the profitability pans out over the years. That is one part.

And the second question was about? Your question was about what?

Vivek Ramakrishnan — DSP Mutual Fund — Analyst

On the working capital release, sir. Whether there is — because in supply chain constraints have come down, any working capital release that we anticipate?

Pavan K Jain — Chief Financial Officer

Not any large amount. We are already working in the VSF business, for example, on net negative working capital basis, and some kind of inventory buildup is possible because of the demand slowdown in VSF business, for example. So not any large working capital release is expected in the current year. We are actually already doing a negative working capital level in our two businesses, one, textiles and VSF.

Vivek Ramakrishnan — DSP Mutual Fund — Analyst

Okay. Thank you very much, sir, and wish you good luck.

Operator

Thank you. We have next question from the line of Nirav Jimudia with Anvil Research. Please go ahead.

Nirav Jimudia — Anvil Research — Analyst

Yes, sir. Thanks for the opportunity again. Sir, my question is on the Chemical side. So I have two questions on the same. So, you mentioned that we have been increasing our capex on the Chemical side for increasing the capacities of the VAPs. So, once this land is purchased and we keep on adding those products on that infrastructure, how much our chlorine integration would go up on the increased capacity of caustic soda?

Jayant Dua — Chief Executive Officer, Chemical Division

So let me take that question. Jayant this side. So I think we announced earlier in last year in one of our calls that we are expanding our capacity from 1,000 ton to 1,400 ton of — at Vilayat. This purchase of land will only come — get used for the chlorine consumption of Vilayat plant. So — yes, so Vilayat plant at full capacity utilization at — let’s say, at a 90% capacity utilization are 1,400. And with this new land, we will be able to reach — I can’t give an exact number, because need times, between 70% to 75%, 77% of total chlorine consumption.

Nirav Jimudia — Anvil Research — Analyst

Okay. And this includes our pipeline sales also?

Jayant Dua — Chief Executive Officer, Chemical Division

Actually — yes, this includes the pipeline sales also. This is the way our chlorine definition is.

Nirav Jimudia — Anvil Research — Analyst

Correct. And sir, when we see our VAP sales, I think from 2016 to 2023, if you see the chlorine integration, I think it has almost doubled, so from 1,60,000 tons to now, a run rate of almost 3,30,000 tons. So, once we come up with the new products at the land what you mentioned, is it fair to assume that the margins on a per kg basis would be higher for the new products vis-a-vis the existing basket of products we manufacture?

Jayant Dua — Chief Executive Officer, Chemical Division

Let me not go into any guidance of that at this point of time. I think as we formulate our plans and put it up to the Board, the approvals will come through. I think this would be a more pertinent question at that point of time, because what we will be — otherwise, what we’ll be sharing with you would be our own internal discussion rather than an approved discussion plan. So, let’s stay with the — we’ll come to that question when we come to those approval stages.

Nirav Jimudia — Anvil Research — Analyst

Got it. And sir, one more question, if you allow and if you can share with us. So, what was the average coal cost for us in Q2 FY ’23 vis-a-vis Q4 of FY ’22? So, if we take Q4 of FY ’22 as a base, what was the coal cost for us in Q2 of FY ’23 for the Chemical business? Even a percentage increase or a decrease would also help us, sir.

Jayant Dua — Chief Executive Officer, Chemical Division

So I wouldn’t know the coal cost, because at the end of the day, we look at it from a gross calorific value and its consumption. But from a Q4 of last year to Q2 of this year, my guesstimate would be that we would have — the coal costs have kind of jumped by on a year-over-year basis about 130% to 142%, depending upon the country. And if you look at it from a quarter-to-quarter, it’s between 6% to 10%. So it’s a fairly high volatile scenario on the coal front as of now.

Nirav Jimudia — Anvil Research — Analyst

Okay. Okay. And sir, a small clarification on the VSF sales and the EBITDA, what you mentioned in your opening remarks. So, what you mentioned is, INR3,241 crores of sales and an operating profit of INR210 crores. This is what you mentioned in your opening remarks, right?

Pavan K Jain — Chief Financial Officer

Yes, yes.

Nirav Jimudia — Anvil Research — Analyst

Okay. Okay. Thanks a lot, and all the best.

Operator

Thank you. We have next question from the line of Sean Ungerer with Chronux Research. Please go ahead.

Sean Ungerer — Chronux Research — Analyst

Good afternoon, everyone. Thank you for the time. Just some questions focused around the VSF business. Just in terms of the comment you made earlier about VSF capacity having to be rationalized, I think you said around 70%. I’m just confirming that number. And then secondly, I guess, you must have already sort of answered this, but more confirmation that it’s most really like to be like this for a couple of quarters, given your comments around margins being subdued. That’s my first question.

Pavan K Jain — Chief Financial Officer

Yes. Yes, so the current capacity utilizations are rationalized at about 70%, and we expect the demands to be back sometime maybe in next couple of quarters. Till then, we will continue to monitor the situation and we’ll align the production levels accordingly.

Sean Ungerer — Chronux Research — Analyst

Okay, very clear. Thanks. And then if I just look at your current full year capacity, that’s sitting at about 824,000 tons. With the sort of planned capex in terms of modernizations and anything else, is that — the — is that capacity going to increase further? And if so, by when and how much?

Pavan K Jain — Chief Financial Officer

So there are small increases in the specialty products, which is about 13,000 tons, yes. But these are like third generation of VSF fiber, and that is all about the capacity increase. There is not much capacity increase in the normal VSF. It’s a small debottlenecking.

Sean Ungerer — Chronux Research — Analyst

Okay, great. Okay, excellent. That’s great. And then your comment around DP or dissolving wood pulp integration into the VSF business earlier, I think you said it’s around 35%. Is that pre or post the current debottleneck that you’ve got planned?

Pavan K Jain — Chief Financial Officer

It is at the full capacity.

Sean Ungerer — Chronux Research — Analyst

So once the debottlenecking is done, you’d be 35% integrated. Is that what you’re saying?

Pavan K Jain — Chief Financial Officer

Yes. At the current capacity level, it is about 35% integration. And we are increasing the capacity, as we shared, at one of the — our Indian pulp plant. That will take the integration to about 37% of the capacity.

H.K. Agarwal — Managing Director

Then fiber capacity will also increase.

Operator

Thank you. We have next question from the line of Abhimanyu Kasliwal with Choice India Limited. Please go ahead.

Abhimanyu Kasliwal — Choice India Limited — Analyst

Thank you so much for taking my question, sir. Most of my questions have been answered. So I had just two specific queries. Number one was regarding your platform business, the B2B business. What can we expect — how do we forecast this business? Will this be a game-changer in terms of revenues, in terms of margins? What is the company’s expectations?

And my second question, sir, is, in other income, I have noticed there is a pattern that in the September quarter, there is a substantial jump-up, and this — is this the case, or is it that the past three Septembers, for some reason, they just jumped up? How do we forecast the other income? What is the reason? These are my two questions, sir.

Pavan K Jain — Chief Financial Officer

So the first one is about the B2B platform. So the B2B E-commerce platform is expected to be a high growth business in terms of revenue. And since it is a e-commerce business, the margins are not going to be very large margins there, but the topline could be very significant. So — our aim is to be one of the largest e-comm players in B2B segment, especially in the building material segment. So, that is the — I mean, B2B e-commerce —

Abhimanyu Kasliwal — Choice India Limited — Analyst

Sir, to interrupt, would it be like an IndiaMART for building materials? Is it a correct way to look at it?

Pavan K Jain — Chief Financial Officer

Yes. IndiaMART does, I think, industrial products. We are from building materials segment, and we have the ecosystem for the building material businesses in the Group. So, we have large kind of customers who are buying cement from us or now, they’ll be buying paint from us. So, the same ecosystem will be available for the B2B platform business.

Abhimanyu Kasliwal — Choice India Limited — Analyst

Okay. So we’re expecting easy runs on the board from this one, hopefully. Okay, sir. My next question is —

Pavan K Jain — Chief Financial Officer

The question is about your other income.

Abhimanyu Kasliwal — Choice India Limited — Analyst

Yes.

Pavan K Jain — Chief Financial Officer

Other income is, Q2 will be significantly higher every quarter, because we get the dividends from our subsidiaries and other investments. So, it the large dividend income comes from UltraTech. So, for example, in this quarter, about INR618 crores has come from dividend from UltraTech.

Abhimanyu Kasliwal — Choice India Limited — Analyst

Understood, sir. Thank you so much. Best of luck.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I’d like to turn the conference back over to Mr. Pavan Jain for closing remarks. Over to you, sir.

Pavan K Jain — Chief Financial Officer

So thank you all for joining us for this call today, and we’ll meet next quarter again.

Operator

[Operator Closing Remarks]