Buy Grasim Industries Ltd For Target Rs. 3,420 By Choice Broking Ltd
Paints CEO Exit not a Cause for Worry
Positive Outlook across the Businesses, Stock Price Correction due to Paints Business CEO Resignation is an Opportunity to Buy
We maintain our BUY rating on Grasim Industries (GRASIM) with a TP of INR 3,420 as:
1) Our valuation framework for GRASIM is as follows: a) Businesses ex-Paints under the parent entity (standalone), we value them on EV/EBITDA basis, that is Cellulosic Fibre (7x on FY27E EBITDA), Chemicals (7x on FY27E EBITDA), Others clusters – Textiles, Insulators & Renewables (7x on FY27E EBITDA) and B2B E-Commerce (8x on FY27E EBITDA).
b) Paints Business: As we get increasing evidence of the success of the Paints business (high single digit market share, 24% capacity share, on track to achieve INR 100 Bn in revenue in the first 3 years from full capacity coming onstream and strong positive feedback from channel checks). We value the Paints business on 2.5x FY27E EV/Sales, which translates to ~1.5x investment outlay of ~INR 120 Bn.
c) Subsidiaries/Investments: We refresh the valuation of the subsidiary under our coverage, that is UTCEM, to reflect our post-Q2 changes, where we increased our fair value estimate to INR 3.8 Trn. We also mark the latest market valuation of other key investments – Aditya Birla Capital (Subsidiary), Vodafone Idea, ABFRL and Hindalco. We employ a holdco. discount of 25%, which is reasonable, yet conservative.
2) We expect EBITDA for the standalone entity to grow by ~54.1% over FY25– FY28E to reflect increasing success in the paints business, higher volumes and spreads in the commodity businesses, and increasing adoption of the B2B ECommerce platform.
We arrive at a 1-year forward target price of INR 3,420 per share based on the framework discussed above. Risks to the stock price include: 1) A potential dent to the appetite in the equity capital markets due to factors external to GRASIM & group companies, 2) A potential slowdown in the domestic economy impacting demand across the board for Building Materials, Financial Services, Chemicals, and Textiles sectors.
Q2FY26 Results: Results in line with CIE estimate
GRASIM reported Q2FY26 revenue and EBITDA of INR 96,103 Mn (+26.1% YoY, +4.2% QoQ) and INR 3,662 Mn (+12.6% YoY, -4.8% QoQ) vs Choice Institutional Equities (CIE) estimate of INR 94,580Mn and INR 3,487 Mn, respectively. The company reported a PAT of INR 8,045 Mn in Q2 (vs CIE est. INR 7,983 Mn). EPS for Q2FY26 is INR 11.8.
Cellulosic Fibre revenue for the quarter came at INR 41,490 Mn, up 0.6% YoY and 2.6% QoQ. Total CSF sales volume (domestic + exports) declined 5% YoY, primarily due to temporary logistics disruption at Vilayat, which has since been resolved. EBITDA for the business came in at INR 3,500 Mn, down 29.1% YoY and up 8.7% QoQ. The YoY decline in EBITDA was due to higher key input price, which was partially passed on.
Chemicals Business revenue for the quarter came at INR 23,990 Mn, up 16.8% YoY and 0.3% QoQ, led by higher volume and improved realisation. EBITDA for the business came in at INR 3,650 Mn, up 33.7% YoY but down 13.5% QoQ, driven by higher profitability in the Caustic & Chlorine Derivates segment.
Building Materials consolidated revenue for the quarter came in at INR 222.5 Bn, up 28.1% YoY, with a major share from the Cement business. EBITDA for the business came in at INR 29.5 Bn, up 55.2% YoY.
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