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Higher losses in Paints lead to earnings miss

More than 80% of the 145 planned products launched in the market

* Grasim’s 1Q performance was significantly below our estimates, mainly due to higher losses (INR3b vs. INR800m/INR1b in 1Q/4QFY24) in the new business segments (Birla Opus and Birla Pivot). EBITDA was INR3.3b (-52% YoY) vs. our estimate of INR5.7b and OPM was 4.7% (-6pp YoY) vs. our estimate of 8.3%. It posted a net loss of INR521m (vs. our PAT est. of INR1b).

* Management indicated that Birla Opus started commercial production at three plants in Apr’24. Out of 145 products planned, ~80% have been launched into the markets and received a good response from customers. Grasim has already established 108 depots to date (plans to reach 150 depots by FY25-end). In VSF, Grasim is trying to maximize production from the current plants. The domestic VSF price was up, in line with the international price trends. However, the Indian caustic soda market remains hit by an oversupply situation.

* We cut our EPS estimates by 17%/10% for FY25/26 and introduce FY27E. We reiterate BUY with a revised TP of INR3,030 (earlier INR3,150) as we value its: 1) holding in subsidiary companies by assigning a discount of 35%; 2) standalone business at 7x Jun’26E EV/EBITDA, and 3) Paints business at 1.5x of investments.

VSF’s performance below estimate; while Chemical in line

* Standalone revenue/EBITDA stood at INR69b/INR3.3b (up 11%/ down 52% YoY and in line/43% below our estimate) in 1QFY25.

* VSF segment: Sales volume was up 13% YoY, while realization was down 6% YoY. EBITDA was INR4.0b (+4% YoY) vs. estimated INR4.7b. OPM came in at 10.7% (-20bp YoY) vs. estimated 12.5%. The Jun-exit price of VSF was almost similar to 1QFY25 average. VSF’s EBITDA rose 16% YoY, while VFY’s margin was down due to weak demand and imports from China.

* Chemical segment: Sales volume was down 3% YoY; while realization was flat YoY. EBITDA was at INR3.1b (-13% YoY) vs. estimated INR3.0b. OPM was at 15% (down 1.7pp YoY) vs. estimated 13.2%.

* Depreciation/finance costs grew 21%/32% YoY, while other income declined 20% YoY. It reported a net loss of INR521m vs. a PAT of INR3.6b 1QFY24.

Highlights from the management commentary

* Globally, VSF prices have been in an uptrend since 3QFY24; however, Indian realizations remain hit by the oversupply situation in Indonesia and a decline in input prices (pulp & caustic soda), which were passed on to the consumers.

* In chemical, one plant at Vilayat was shut down and production from that plant was impacted for 18 days. This led to a volume loss in 1QFY25.

* In B2B, the quarterly revenue run-rate was INR5.5b and there has been a gradual scale up across categories, geographies, and new customers.

Valuation and view

* Grasim’s 1Q performance was below our estimates due to higher losses in its new growth businesses and lower-than-estimated performance in VSF. We estimate a gradual improvement in VSF margins with improvement in VSF prices. The chemical segment saw QoQ improvement in margins led by higher caustic soda realization and improved margins of chlorine derivatives. In Paints it has been successful in its initial product campaigning and its AD (Make life beautiful campaign) received good response from the customers. It is on track to reach its guidance of 50,000 dealers in FY25E.

* We cut our EPS estimates by 17%/10% for FY25/26 and introduce FY27. We reiterate BUY with a revised TP of INR3,030 (earlier INR3,150) as we value its: 1) holding in subsidiary companies by assigning a discount of 35%; 2) standalone business at 7x Jun’26E EV/EBITDA, and 3) Paints business at 1.5x of investments.

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