Buy Grasim Ltd for the Target Rs 3,800 by Motilal Oswal Financial Services Ltd
Loss narrows in Paints; brand royalty levied Market share remains priority in paint business
* GRASIM’s 1QFY27 operating performance was above our estimates, driven by lower-than-estimated losses in paint business as it benefitted from lower-cost inventory and lower advertisement expenses. Standalone EBITDA jumped 2.5x YoY to INR9.5b (~20% beat). OPM surged 3.9pp YoY to 8.1% (est. 6.6%). It reported PAT of INR2.5b (est. INR696m) vs. a loss of INR1.2b in 1QFY26.
* Management indicated that it remains focused on market share gains in the paint business. Margin is expected to be lower in 2Q due to higher-cost raw material inventory and increased advertisement expanses, which would be partly offset by the price hike taken in 1Q. In B2B e-commerce, GRASIM is confident of achieving a breakeven by FY27 end. VSF business is cyclical and margin will continue to fluctuate in line with input cost and global demand.
* We raise our FY27 EBITDA/EPS estimates by ~8%/4% due to outperformance in 1Q, while we cut FY28 EBITDA/EPS estimates by ~4%/7% given royalty of 0.25% of standalone revenue levied by the group (impact of ~INR1b). We reiterate our BUY rating with a SoTP based TP of INR3,800.
VSF margin expands 6pp YoY; chemical margin up 1pp YoY
* Standalone revenue/EBITDA stood at INR117.9b/INR9.5b (up 28%/2.5x YoY and -2%/+20% vs. our estimates). OPM expanded 3.9pp YoY to 8.1%. Adj PAT stood at INR2.5b vs. loss of INR1.2b in 1QFY26.
* VSF segment: Sales volume declined ~4%, while realization increased ~16% YoY. EBITDA surged 96% YoY (+7% QoQ) to INR6.3b. OPM expanded 6pp YoY (1.2pp QoQ) to ~14%. EBITDA/kg was INR30 vs. INR15/INR24 in 1Q/4QFY26. Chemical segment: Volume declined ~6% YoY, while realization increased ~18% YoY. EBITDA rose ~16% YoY to INR4.9b. Its OPM increased 1pp YoY to ~19%. Paint revenue grew ~64% YoY to INR16.6b, and B2B revenue increased 75% YoY to INR25.5b. Losses in these high-growth businesses stood at INR1.4b vs. losses of INR3.0b in 1QFY26/4QFY26 each.
* Net debt stood at INR99b vs. INR69b as of Mar’26. It guided to maintain a net debt-to-EBITDA ratio of <2x in FY27.
Valuation and view
* GRASIM’s reported performance was above our estimates, driven by lowerthan-estimated losses in the paints and B2B businesses, while chemical outperformance was offset by lower VSF profitability. In paints, margins are expected to remain under pressure in the near term due to high-cost inventory and higher advertising expenses; however, GRASIM reiterated its targets of achieving INR100b in Paints’ revenue and breakeven by FY28E. We estimate VSF margin to improve marginally in the near term due to higher prices; however, long-term sustainability depends on global demand and input costs. In chemical business, chlorine integration is likely to increase to ~68% by FY27 end vs. ~65% in 1QFY27, which is estimated to support margin.
* 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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