Buy Grasim Ltd for the Target Rs. 500 by Motilal Oswal Financial Services Ltd
Margin beat; paints business continues to gain traction
Core operations strengthen; paints premium segment gains momentum
* GRASIM’s 1QFY26 performance was above our estimates, led by higherthan-estimated: 1) profitability in the VSF and chemical segments and 2) revenue in high-growth businesses (Paint and B2B). Standalone EBITDA increased ~18% YoY to INR3.8b (~74% beat). OPM contracted 55bp YoY to 4.2% (vs. 2.5% est.). It reported a net loss of INR1.2b vs. a net loss of INR521m in 1QFY25 and INR2.1b in 4QFY25.
* Management highlighted that the paints business posted double-digit QoQ growth even as the broader organized decorative paint industry remained sluggish. Notably, 65% of Birla Opus revenue is now derived from premium and luxury paint products. The brand has expanded distribution to over 8,000 towns in under a year. The B2B platform hosts over 40,000 SKUs across 35 categories, sourced from more than 300 vendors. The annualized revenue run rate is on track to reach INR85b by FY27. The Chemical business saw margin improvements and stable demand, while VSF maintained healthy volumes, benefiting from operational stability.
* We raised EBITDA estimates for FY26/FY27 by 5%/4%, given the outperformance in 1QFY26. The current HoldCo discount stands at ~41% vs the average of the last three years at ~37% (long-term average at ~46%). We reiterate our BUY rating with a TP of INR3,500 (earlier INR3,300) based on an SoTP valuation.
VSF margin contracts 2.7pp YoY; chemical margin expands 2.6pp
* GRASIM’s standalone revenue/EBITDA came in at INR92.2b/INR3.8b (+34%/+18% YoY and +4%/+74% vs. our estimate) in 1QFY26. It reported a net loss of INR1.2b vs. a net loss of INR521m in 1QFY25.
* VSF segment: Sales volume declined ~1% YoY, whereas realization rose ~8% YoY. EBITDA declined ~20% YoY (up 10% QoQ) to INR3.2b (~15% above estimates). OPM contracted 2.7pp YoY (up 70bp QoQ) to ~8% (+1pp vs. our estimate). EBITDA/kg was at INR15 vs. INR18/INR13 in 1QFY25/4QFY25.
* Chemical segment: Sales volume/realization increased 7%/8% YoY. EBITDA increased ~36% YoY to INR4.2b (~55% above our estimates). OPM expanded 2.6pp YoY to ~18% (+4.8pp QoQ; +5.7pp vs. our estimates).
* Revenue from the Paints and B2B E-commerce businesses (combined) stood at INR24.6b vs INR21.7b in 4QFY25 and INR15.9b in 3QFY25. Loss in new high-growth businesses stood at INR3.0b vs. INR3.1b/INR3.3b in 4QFY25/3QFY25.
Highlights from the management commentary
* The company continued to expand its footprint, reaching over 8,000 towns within a year of launch and nearing its first-year target of 50,000 dealers. Throughput per dealer improved as the focus shifted from dealer additions to deepening product penetration per outlet.
* 179+ products with over 1,460+ SKUs are placed in the distribution channel, which are operational across India. The total capex in the Paints business stood at INR95.5b as of Jun’25.
* Phase-1 of the 55K TPA Lyocell project at Harihar, Karnataka, is progressing as planned, with commissioning targeted for mid-FY27. Orders for long-lead items have been placed, while procurement and contracting for the remaining requirements are underway.
Valuation and view
* GRASIM’s core businesses (VSF and Chemical) saw an improvement in profitability, along with stable demand and operating performance. However, changing global trade dynamics and policies may lead to near-term challenges. Meanwhile, the Paints and B2B e-commerce businesses are seeing a steady improvement, with continuous distribution and product portfolio expansions. We continue to believe that revenue growth in these two segments and a reduction in losses will be the key monitorables.
* We reiterate our BUY rating with a TP of INR3,500 as we value its: 1) holding in listed subsidiaries by assigning a discount of 35% on our TP for coverage companies, 2) standalone business at 6x Jun’27E EV/EBITDA, 3) paint business at 2x of investments, 4) B2B e-commerce at 1.5x of Jun’27E (TTM) revenue, and 5) renewable business at 10x FY27E EV/EBITDA.
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