Buy Grasim; target of Rs 1900: Motilal Oswal

Motilal Oswal's research report on Grasim

GRASIM has underperformed UTCEM in the last few months, which is also reflected in higher HoldCo discount (41% v/s 31-38% during Jul-Dec’22). The underperformance, in our view, is led by: 1) lower demand for textiles globally leading to a cut in production by VSF manufacturers, which in turn, led to lower VSF prices and 2) decline in Caustic soda price/margins.  Though, VSF price in China is still down 8% v/s 2QFY23 average; there has been a fall in pulp price too (at USD890/t v/s average of USD1,180/t in 2QFY23 and USD950/t in 3QFY23). Benefits of pulp price reduction get reflected after a lag of about three months and hence, we believe that this will offset the pressure on VSF segment’s profitability in 1HFY24E (after subdued margins in 2HFY23). In the Chemicals segment, capacity additions in India have put pressure on the margins, but global capacity additions are not happening. The industry has also increased exports to balance out the domestic availability. Energy costs are likely to decline led by a fall in coal prices and hence, we expect OPM to settle at 19-20% in FY24/25 (v/s peak OPM of 29.5% in 1QFY23).

Outlook

We reduce our FY23E/FY24E EBITDA for Grasim by ~4%/6%, respectively, on account of lower caustic soda prices. We incorporate the financials of Paints business into our assumptions that led us to reduce our EBITDA/EPS for FY25E by 16.5%/33.5%, respectively, as we assume this segment to make operating losses for the initial three years. We maintain BUY with an SoTP-based (Exhibit: 8) TP of INR1,900 (v/s INR1,970 earlier).