For AV Birla, VSF business is on a sprightly canter

Grasim Ltd, the global leader in viscose staple fibre (VSF), along with group firms, is set to increase capacity by 33%, betting Asian consumers will give it a fair chance against competing fibres such as cotton and polyester, the prices of which are more volatile.

KK Maheshwari, business director, pulp and fibre, Aditya Birla Group, says capacity would grow faster than the market.

“Our capacity addition is relatively sharper. As a market leader, we would look to increase our market share and, therefore, we need to plan our capacity addition much in advance,” he said in an interview.

Aditya Birla Group has a global market share of around 22% in VSF. Its closest competitor is Lenzing of Australia, which has 21% share, and is increasing its presence in India.

VSF prices are more stable than competing fibres, yet they trace the latter, Maheshwari said.

Grasim had earlier this month reduced VSF prices by Rs7 per kg. In the last decade, prices have risen from a little over Rs60 in April 2001 to around Rs150 per kg in the same month this year.

Prices have risen 50% from around Rs100 per kg to Rs150 in the last 12 months. The rally, to some extent, is linked to flying cotton prices because VSF is favoured as a substitute by textile majors.

Grasim’s plan is to increase production capacity by 50% of the current capacity of 3,40,000 tonne per annum (tpa) by 2013, taking the aggregate global capacity to 1 million tpa.

The group, with three units in India and one each in Thailand, Indonesia and China, expects the VSF market to grow at a modest compounded annual growth rate of 7%.

The group’s recent $340 million acquisition of the Swedish pulp manufacturer Domsjo Fabriker AB was a significant step to ensure supply of wood pulp, the key ingredient in VSF.

Maheshwari said this takes the group’s total captive wood pulp supply roughly from 55% to 80%, but with new capacities coming up, this would come down to about 60%.

The group is keen to increase its wood pulp capacities.

“Long-term alliances and acquisition are the two options available, we are evaluating both,” he said.

Surprisingly, the cost of operations in India is much higher compared with other plants, especially power and freight, so profitability is impacted.

Nevertheless, Maheshwari said the company would continue to expand both in India and overseas, and “we will continue to invest in India”.

“Market cycles are turning shorter and sharper and this will continue. But we are focused on the long-term play,” he said.
In the long term, Maheshwari expects VSF to perform better in comparison to its counterpart fibres — cotton and polyester.

“Beyond a point growth in cotton is difficult. The work on increasing yield will always continue. Also, cotton needs a lot of land and water, which is turning into a challenge. Polyester will surely continue to grow, but I don’t think the fibre’s cost competitiveness will improve as it is linked to crude prices,” he said.

Analysts and industry officials have already started flagging this uptrend.

“We expect healthy profits from this (VSF) business to continue. However, profitability in the short term will be governed by the prices of competing fibres and input prices. Also, cotton production in the forthcoming season will be the key influencing factor,” said Adesh Gupta, wholetime director and CFO for Grasim, during its fourth quarter earning’s call early this month.

At present, cotton prices in India are at around Rs46,000 per candy much lower than Rs60,000 per candy sometime back.

The rise in VSF prices have helped the company benefit from higher realisation. With the recent acquisition in the pulp segment, the level of integration will be higher.

Analysts are concerned whether the capacity addition plans in the sector will lead to overcapacity. There is no exact absorption data available for VSF, which makes it difficult to estimate if there is scope for the capacity addition planned.

“Both Grasim and rival Lenzing are adding capacity. In India alone, this would tantamount to around 70% of Grasim’s current capacity. This is a concern,” said an analyst from a domestic brokerage firm, who did not wish to be quoted.