Grasim Industries (GRASIM)
Cement
Sustaining pricing power and attractive valuations. We reiterate our BUY rating on
Grasim, with prices of VSF sustaining at Rs160/kg and prices for the cement business
remaining upbeat. At 8X on FY2013E EPS and 4.7X EV/EBITDA, Grasim is our preferred
stock in the cement space. In our view, the implied holding company discount of 47%
for Grasim’s ownership in the cement business is unwarranted and will likely narrow
over time. Maintain BUY rating and target price of Rs2,900/share.
CMP implies a discount of 47% for ownership in cement subsidiaries
Grasim’s CMP implies a 47% holding company discount for its 60% ownership in UltraTech based
on the CMP of UltraTech. We note that the recent relative outperformance of UltraTech vis-à-vis
Grasim has led to widening of the implied discount which had earlier settled down at 30% levels
(see Exhibit 1). In our view, such a large holding company discount is unwarranted and the
valuation gap between UltraTech and Grasim should likely narrow down to sub-30% levels.
Grasim is currently trading at 4.7X EBITDA and 8X EPS on FY2013E earnings, at the lower end of
its historical trading range.
VSF – prices remain robust even as cotton prices stabilize after recent correction
VSF prices continue to remain strong bucking the general trend of correction witnessed in cotton
prices. VSF prices have corrected by a marginal 6% as compared to ~40% correction in cotton
prices from their peak in March-April 2011 (see Exhibit 2). We note that our estimates factor gross
VSF realizations of Rs146/kg in FY2012E as against Rs152/kg in 1QFY12 and hence, we see limited
downside risks to our FY2012E estimates.
Cement – market discipline is allowing for price increases despite sluggish demand
Our channel checks indicate that post some weaknesses witnessed during the monsoon (months
of July and August), cement prices are already showing signs of revival in several pockets,
especially those of West and North India. Lower capacity addition in FY2013E and a potential
revival in demand could help address the current demand-supply imbalance leading to improved
utilization rates for the industry in FY2013E.
Maintain BUY with a target price of Rs2,900/share
We maintain our BUY rating with a target price of Rs2,900/share. On comparative valuations on
FY2013E, our assigned valuation implies 4X EV/EBITDA for the VSF business. We value Grasim’s
60% stake in UltraTech at our target price of UltraTech (Rs1,220/share) and a holding company
discount of 20%.
Cement
Sustaining pricing power and attractive valuations. We reiterate our BUY rating on
Grasim, with prices of VSF sustaining at Rs160/kg and prices for the cement business
remaining upbeat. At 8X on FY2013E EPS and 4.7X EV/EBITDA, Grasim is our preferred
stock in the cement space. In our view, the implied holding company discount of 47%
for Grasim’s ownership in the cement business is unwarranted and will likely narrow
over time. Maintain BUY rating and target price of Rs2,900/share.
CMP implies a discount of 47% for ownership in cement subsidiaries
Grasim’s CMP implies a 47% holding company discount for its 60% ownership in UltraTech based
on the CMP of UltraTech. We note that the recent relative outperformance of UltraTech vis-à-vis
Grasim has led to widening of the implied discount which had earlier settled down at 30% levels
(see Exhibit 1). In our view, such a large holding company discount is unwarranted and the
valuation gap between UltraTech and Grasim should likely narrow down to sub-30% levels.
Grasim is currently trading at 4.7X EBITDA and 8X EPS on FY2013E earnings, at the lower end of
its historical trading range.
VSF – prices remain robust even as cotton prices stabilize after recent correction
VSF prices continue to remain strong bucking the general trend of correction witnessed in cotton
prices. VSF prices have corrected by a marginal 6% as compared to ~40% correction in cotton
prices from their peak in March-April 2011 (see Exhibit 2). We note that our estimates factor gross
VSF realizations of Rs146/kg in FY2012E as against Rs152/kg in 1QFY12 and hence, we see limited
downside risks to our FY2012E estimates.
Cement – market discipline is allowing for price increases despite sluggish demand
Our channel checks indicate that post some weaknesses witnessed during the monsoon (months
of July and August), cement prices are already showing signs of revival in several pockets,
especially those of West and North India. Lower capacity addition in FY2013E and a potential
revival in demand could help address the current demand-supply imbalance leading to improved
utilization rates for the industry in FY2013E.
Maintain BUY with a target price of Rs2,900/share
We maintain our BUY rating with a target price of Rs2,900/share. On comparative valuations on
FY2013E, our assigned valuation implies 4X EV/EBITDA for the VSF business. We value Grasim’s
60% stake in UltraTech at our target price of UltraTech (Rs1,220/share) and a holding company
discount of 20%.
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