Buy Grasim Industries; target of Rs 3785: Motilal Oswal

Motilal Oswal is bullish on Grasim Industries and has recommended buy rating on the stock with a target of Rs 3785 in its October 30, 2012 research report.

“Grasim Industries' standalone EBITDA for 2QFY13 was in line with our estimate at INR2.9b. Higher than expected VSF volume was offset by higher cost. However, lower tax boosted reported PAT to INR3.8b (v/s our estimate of INR3.6b).  Standalone net sales grew 9.6% YoY and 7.7% QoQ to INR13.3b (v/s our estimate of INR11.7b). EBITDA declined 5.3% YoY and 1.8% QoQ to INR2.9b (v/s our estimate of INR2.85b). EBITDA margin contracted 340bp YoY and 210bp QoQ to 21.7% (v/s our estimate of 24.3%). PAT grew 11% YoY and 40% QoQ to INR3.8b (v/s our estimate of INR3.6b), led by higher other income.”

“VSF volumes grew 8% YoY (declined 11% QoQ) to 85,312 tons (v/s our estimate of 77,838 tons) despite 11 days shutdown at Nagda plant. Realizations were stable at INR126.7/kg (down 1.1% QoQ; up 1.6% YoY). VSF PBIDT margin declined 690bp YoY and 440bp QoQ to 21.6%, as the benefit of higher volumes was diluted by (a) cost push in caustic soda, coal and sulphur, and (b) rupee depreciation neutralizing softening pulp prices. For the VSF business, environment continues to be challenging due to overcapacity in China and Euro zone issues. However, VSF prices would get support from EBITDA losses for Chinese players at current pricing.”

“We are upgrading our FY13/14 EPS estimates by 2.5/3.6% to INR357/INR389 to account for (a) earnings upgrade in UltraTech, (b) higher volume growth in VSF and Chemicals business, and (b) cost push. The outlook for VSF is improving driven by expectations of weak cotton production in FY13. Cement business outlook is improving, with expected improvement in demand and pricing. Further, Grasim's aggressive capex plan of INR159b over the next 2-3 years endorses our long-term positive outlook for both the businesses. Stock is quoting at attractive valuations of 8.7x FY14E cons. EPS, EV of 5x FY14E EBITDA, and implied cement business valuations of USD102/ton (on 60mt capacity). Maintain buy with a target price of INR3,785 (SOTP-based, valuing economic interest in cement business at 9x EV/EBITDA and 30% hold-co discount, and the VSF business at 5x EV/EBITDA),” says Motilal Oswal research report. 

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