Hold Grasim Industries; target of Rs 905: Emkay Global Financial
Emkay Global Financial recommended hold rating on Grasim Industries with a target price of Rs 905 in its research report dated November 13, 2020.
Nov 19, 2020 / 02:59 PM IST
Emkay Global Financial's report on Grasim Industries
Grasim benefited from a reduction in fixed costs in both VSF and Chemical segments in Q2, though lower realization continued to impact profits. EBITDA stood at Rs3.98bn vs. our estimate of Rs3.8bn and OPM was 11.6% - above our estimate of 9.4%. Key positives: 1) capacity utilization of VSF improved to 88% in Q2 from 26% in Q1; 2) capacity utilization of caustic soda improved to 80% in Q2 from 49% in Q1; and 3) 28%/34% yoy fixed-cost reduction for the VSF/Chemical segment. Grasim has approved the divestment of its fertilizer business for a consideration of Rs26.49bn. This deal is expected to get completed in 9-12 months. It has entered into an agreement with Lubrizol which will help improve chlorine sales, and Grasim will receive a fixed annual compensation.
We raise EBITDA estimates for FY21/22/23 by 20%/4%/1% on higher volumes and lower fixed cost. Lower caustic soda prices due to surplus capacities will continue to affect the profitability of the Chemical segment. The sustainability of recent increase in VSF prices needs to be seen as CU in China remains at 72-73%. Maintain Hold with a TP of Rs905.
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