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VSF segment disappoints; Paints business revenue promising

Board approves Lyocell expansion; first phase (55ktpa) to be completed in two years

* GRASIM’s 3QFY25 EBITDA was below our estimate, primarily due to lower profits in the VSF business (EBITDA margin of ~8% vs estimated ~12%). The company’s EBITDA declined ~48% YoY to INR2.7b (42% miss), led by losses in new business segments (~7% decline ex-new business segments). OPM contracted 4.8pp YoY to ~3% (est. ~6%). It reported a net loss of INR1.7b (estimated INR14m profit) vs. PAT of INR2.4b in 3QFY24.

* Management indicated that the Paints business under the Birla Opus brand continued to gain market share, driven by the expansion of the distribution network, strong brand visibility, and superior product quality. It reiterated its target to exit FY25 with a high single-digit market share for the Paints business. The Lyocell (specialty Fibre) capacity at Harihar, Karnataka, will be increased by 110ktpa, with the first phase of 55ktpa expansion set to be completed in the next two years at a capex of INR13.5b.

* We cut our EPS estimates by 10%/7% for FY26/FY27 due to a lower margin in the VSF segment and management guidance of higher investments in branding, distribution network, etc. in the Paints business. Initial traction in Paints is better than earlier estimates; however, core business segments continue to be impacted by their cyclicality. Higher capacity utilization of VSF in China (~89% in 3Q) and a low inventory period there should support global VSF prices. We reiterate our BUY rating with a revised TP of INR2,920 (earlier INR3,210) based on an SoTP valuation.

VSF margin contracts 2.4pp YoY; chemical margin expands 1.5pp

* GRASIM’s standalone revenue/EBITDA came in at INR81.2b/INR2.7b (+27%/- 48% YoY and -2%/-42% vs. our estimate) in 3QFY25. It posted a loss of INR1.7b (estimated profit of INR14m) vs. PAT of INR2.4b in 3QFY24.

* VSF segment: Sales volume was flat YoY (-6% v/s estimates), while realization improved 5% YoY. EBITDA declined 18% YoY to INR3.3b (34% miss), led by RM cost pressure. OPM stood at ~8% (down 3.6pp YoY). EBITDA/kg was at INR15 vs. INR19/INR21 in 3QFY24/2QFY25. Chemical segment: Sales volume was up 1% YoY, while realization was up 10%. EBITDA grew 25% YoY to INR3.3b (-7% miss). OPM was at ~15% (up 1.5pp YoY) vs. estimated ~16%.

* The combined revenue of the Paints and E-commerce businesses increased to INR15.9b vs. INR10.5b in 2QFY25. Operating loss stood at INR3.3b vs. INR1.3b/INR3.5b in 3QFY24/2QFY25.

* In 9MFY25, revenue/EBITDA/PAT stood at INR226.4b/INR9.2b/INR5.4b (+19%/-49%/-61% YoY). In 4QFY25, we estimate revenue to grow ~25% YoY to INR84.6b and EBITDA to decline ~22% YoY to INR4.1b. OPM is expected to contract 2.9pp YoY to ~5%. It is estimated to report a loss of INR625m vs. a PAT of INR2.3b in 4QFY24.

Highlights from the management commentary

* The VSF segment’s margin was impacted by a 10% increase in RM prices, including pulp, caustic soda, and Sulphur.

* In the Paints business, there was a strong takeoff in the mid and upper-mid-tier towns in the first few months. However, in the last quarter, it witnessed excellent reach in the metros too. It is currently focusing equally across all geographies.

* It has a presence in all product categories and across various points in the Paints segment. Its luxury products are receiving good repeat orders.

Valuation and view

*  GRASIM’s chemical business witnessed improvement in realization, led by the higher price of caustic soda in 3Q, and we believe that current prices are further up by ~7% compared to the 3QFY25 average price. This should result in better profits for this segment in 4QFY25. While profitability in the VSF segment remains under pressure, low inventory (~8 days) and higher capacity utilization (~89% in 3QFY25) in China should help support prices. The Paints business is witnessing strong traction, and going forward, revenue momentum and its movement in losses will be the key monitorables.

* We reiterate our BUY rating with a revised TP of INR2,920 (earlier INR3,210) as we value its: 1) holding in listed subsidiaries by assigning a discount of 40% on our TP for coverage companies (earlier 35%), 2) standalone business at 6x Dec’26E (earlier 7x Sep’26E) EV/EBITDA, 3) paint business at 2x of investments, and 4) renewable business at 12x Dec’26E EV/EBITDA.

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