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Diversification underpins long-term growth

* We expect VSF profitability to remain resilient, supported by relatively tight supply conditions and lower inventory levels in China, which should help sustain higher VSF realizations. Stable pulp prices and lower caustic soda ash prices are estimated to support margin expansion in the VSF business. In the chemical segment, lower caustic soda ash prices (down ~17% QoQ in 2QFY27’QTD) would hurt realizations. However, backward integration, increasing captive consumption of intermediates, and healthy growth in downstream products should support margins.

* In Paints, the company remains focused on market share gain. We expect strong pricing-led revenue growth in 2QFY27, although the full impact of elevated input costs and higher advertising and brand-promotion spends ahead of the seasonally stronger period is likely to result in wider losses during the quarter.

* GRASIM has outperformed UTCEM over the last six months, which is also reflected in a lower Holdco discount (38% vs. 42% during Jan-Mar’26). The outperformance, in our view, is led by: 1) improved profitability in the core businesses (VSF and Chemical)

2) steady progress on its stated growth strategy in Paints and B2B e-commerce businesses.

* We estimate the company’s standalone revenue/EBITDA/PAT CAGR at ~15%/35%/107% over FY26-28. We expect the company’s standalone netdebt to peak out in FY27 and start reducing from FY28. The net debt-toEBITDA ratio is estimated at 2.0x in FY28 vs. 4.1x in FY26. We reiterate our BUY rating on GRASIM with our SoTP-based TP of INR3,800.

VSF: Specialty mix and capacity expansion to drive next leg of growth

* Globally, new VSF capacity additions are limited, with major producers investing in Lyocell and other specialty fibres. This limited supply growth has resulted in tighter industry conditions, with Chinese VSF utilization rising to ~92-93% in Aug’26 and producer inventories declining sharply from ~20 days to just ~7 days. Limited VSF capacity additions and high utilization should support better industry pricing. In China, average VSF prices increased ~3% QoQ in 2QFY27 (QTD) to RMB14,300/t, while pulp prices remained stable at USD950/t. GRASIM’s VSF EBITDA improved to INR30/kg in 1QFY27 from INR24.2/kg in 4QFY26. We estimate VSF profitability to further improve to INR32-33/kg in 2QFY27, aided by higher VSF prices.

* VSF have been among the fastest-growing categories in the global fibre basket, with GRASIM estimating that the segment has grown at nearly twice the rate of competing textile fibres such as cotton and polyester over the past decade. Within this opportunity, specialty fibres offer superior growth and profitability potential. GRASIM is already witnessing strong traction, with specialty CSF volumes increasing 27% YoY in 1QFY27, led by higher exports. This should enable a gradual mix shift toward higher-value products, providing greater resilience to commodity-fibre cycles and supporting a structurally better margin profile.

* GRASIM is constructing its first 55KTPA Lyocell line at Harihar, Karnataka, targeted for commissioning by mid-2027, and has also approved a further INR30.9b investment for 110KTPA of Phase-II capacity, comprising two 55KTPA lines targeted for 2028 and 2030. Upon completion, Lyocell capacity will reach nearly 210KTPA, making GRASIM one of the world’s largest Lyocell producers, while total CSF capacity is expected to surpass 1mtpa by 2030. The expansion should materially increase the contribution of premium and specialty fibres, diversify the business away from conventional viscose, and create a multi-year volume and mix-led growth runway. We, therefore, view Lyocell not merely as a capacity addition but as a strategic pivot toward higher-value, sustainability-led fibres that can improve the quality and longevity of earnings in the VSF business.

Valuation and view

* GRASIM’s core businesses, VSF/Chemicals, drive standalone earnings and cash flows, while Paints and B2B e-commerce represent the largest incremental growth opportunities. We estimate widening losses in the Paints business in the near term to be offset by improving performance in the VSF segment. The Chemical business is likely to face some margin pressure due to lower prices; however, the ramp-up of epoxy capacity, increasing chlorine integration, and higher usage of renewable energy would be key drivers for margin expansion in the medium term.

* We estimate GRASIM’s standalone revenue/EBITDA/PAT CAGR at ~15%/35%/107% over FY26-28. Further, we estimate its cumulative OCF at INR54.4b over FY27-28 vs. INR26.6b over FY25-26. Its standalone net debt is likely to peak out in FY27E and start reducing from FY28E. The net debt-toEBITDA ratio is estimated at 2.0x in FY28 vs. 4.1x in FY26.

* We reiterate our BUY rating with a TP of INR3,800, as we value its:

1) holdings in listed subsidiary companies by assigning a discount of 35%

2) VSF and chemical business at 7x FY28E EV/EBITDA

3) paint business at 3x of FY28E revenue

4) B2B e-commerce at 1x of FY28E revenue

5) renewable business at 10x FY28E EV/EBITDA

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