Buy Grasim Industries; target of Rs 3700: Emkay

Emkay Global Financial Services is bullish on Grasim Industries and has recommended buy rating on the stock with a target of Rs 3700 in its October 9, 2012 research report.

“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.”

“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.”

“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."

“We believe Grasim is set to chart a steep growth trajectory over FY12-15E, with both its key businesses- VSF and Cement, all set to reap the benefits of USD 3bn investments in capacity additions, driving an impressive consolidated EBIDTA CAGR of 13.8% over FY12- 15E. Apart from the impressive consolidated EBIDTA growth, we believe the dramatic shift in the growth profile of standalone biz (VSF volumes CAGR of 12.2%) will lay the ground for stock out performance as significant volume traction drives FY12-15E standalone EBIDTA CAGR of 16.3%. The resultant higher contribution of standalone earnings is expected to drive down current holdco discount of ~45%+ to more reasonable levels. Building in a 25% holdco discount and valuing Viscose business at 6X FY14E EBIDTA, we re-iterate our conviction buy on Grasim with a price target of Rs 3700,” says Emkay Global Financial Services.

Public holding more than 90% in Indian cos

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