Buy Grasim; target of Rs 1940: Motilal Oswal

Motilal Oswal's research report on Grasim

Grasim’s 4Q result significantly missed our estimates due to weak operating performances of the VSF and Chemical segments. EBITDA stood at INR4.3b v/s estimated INR7b and OPM stood at 6.4% v/s estimated 11.5%. Adjusted PAT (for tax adjustments) stood at INR935m (est. INR3.2b). Capacity utilization of VSF improved to ~93% v/s 74% in 3QFY23 and is expected to remain at 90%+ going forward; however, profitability will take time to normalize due to a volatile global macro environment. Average quarterly spot prices (CFR SEA) for caustic soda declined 25% QoQ to USD694/t, which affected the profitability of the chemical segment. We cut our EBITDA estimates by 23%/13% for FY24/FY25 given significant margin pressure in both key businesses. Margin in the VSF segment is likely to recover but normalization to the long-term average will take time. We believe that the increased HoldCo discount in the last few months factors in concerns of lower profitability in the standalone business.

Outlook

We maintain BUY on Grasim with a TP of INR1,940 (Exhibit: 9), though, in the current scenario, direct exposure to the cement business (UltraTech) would be preferable.

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