Key investment rationale for Grasim according to Motilal Oswal
- Grasim Industries (Grasim) should benefit from the changes in cotton industry dynamics. VSF demand growth should outpace cotton until FY25E. Further, the US ban on cotton imports from the Xinjiang region may trigger a shift to substitute products.
- Focus on backward integration in the Chemical segment should improve chlorine usage as Grasim plans to increase chlorine consumption in value added products (VAPs) to 40% by FY25E from 28% in FY21. Chemical segment’s OPM should improve to 19% in FY23E from 13% in FY21.
- Further, likely capacity expansions of 37%/33% in the VSF/Caustic soda segments, respectively, should improve volume/profits during FY22-24E. We estimate a 16%/15% volume compound annual growth rate (CAGR) for the VSF/Chemical business, respectively, over FY21-24.
- Grasim’s plan to augment the capex of its Paints business indicates its intent of entering the paints segment on a large scale. Brand recall of Grasim as well as its strong balance sheet, and distribution network of UTECM’s white paints segment should help the company succeed in this segment.
- Grasim’s plan to invest INR50b of capex for the Paints business indicates its intent of entering the paints segment on a large scale.
Buy With A Target Price of INR 2,050
Motilal Oswal has said in its research report that “Grasim’s significant CAPEX plans for its Paints business indicates its intent to enter the segment on a large scale. The company’s strong balance sheet is likely to be sufficient for its CAPEX requirements in this segment. Grasim’s net debt is anticipated to decline notably to INR11.7b in Mar’22 from INR29.4b in FY20. We expect the company to turn net cash positive in FY23 (excluding CAPEX for the paints business).”
According to the brokerage “We value the standalone business at 6x Dec-23E EV/EBITDA and other listed subsidiaries at 40% HoldCo discount to arrive at our revised target price of INR2,050. Our target price for Grasim includes a 5% premium to the underlying SoTP valuation in order to capture the potential upside from its paints business. We upgrade our rating on Grasim to BUY from Neutral.”
“Key risks to our call: a) delay in entry into the paints business, b) inability to gain volumes in the paints segment and c) margin pressure on the VSF/caustic business” further added the brokerage.
The above stock has been picked from the brokerage report of Motilal Oswal. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.
Original news source Credit: www.goodreturns.in