Grasim’s Q3FY17 PAT exceeded our forecasts by 5%, largely driven by VSF realisations, which drove profitability to levels last seen in 2013. We agree part of this was driven by seasonal factors, as 220 ktpa capacity was shut down due to emergency pollution control measures in China. While some of it could normalise, looking at the sector, it appears that Grasim should be able to maintain the current spreads in VSF business over next few years. At consolidated level, we are marginally trimming our estimates to align it to recent changes in UltraTech (UTCL) numbers. News flow on consolidation in telecom sector is also positive for the stock as fears from any balance sheet dilution in Grasim now stands mitigated at the margin. Accordingly, our revised target price now stands at R1,200 (earlier R1,090) as we roll forward to FY19e. Maintain Buy.
What have we factored in?
We have raised our standalone forecasts led by strong performance by VSF and chemical businesses. However, factoring in our revised price/volume forecasts for cement sector post demonetisation, we cut our FY17/18e EPS by 3% each and rollover to FY19e with growth rate of 25%.
Outlook and valuations: Positive; maintain Buy
We continue to value Grasim on SoTP basis, valuing standalone business (VSF and chemicals) at 6x FY18e EPS and 60.3% stake in UTCL at our target price and stakes in Idea Cellular, Hindalco and Aditya Birla Fashion & Retail Ltd at market price, applying a holding co. discount of 40%. We maintain Buy/So with target price of R1,200.
* VSF revenue surged 10% y-o-y, largely led by robust realisations (up 9% y-o-y). Sales volumes stood at 122 ktpa, up 1% y-o-y. Also, continued focus on cost management helped Grasim post Ebitda growth of 31% y-o-y.
*Sales volume of chemical segment fell 5% y-o-y, though continued uptrend in realisations y-o-y drove net segment revenue to R2 bn, up 7% y-o-y.
*Cement division’s Ebitda remained flat at R12.8 bn due to subdued volumes and weak realisations on demonetisation-led slowdown.
*Overall, standalone PAT stood at R3.3 bn, up 22% y-o-y, with margin jumping to 11.9% from 10.6% in Q3FY16. Consolidated PAT stood at R7.3 bn, up 14% y-o-y.
You may also like to watch this video
We continue to value Grasim on SOTP basis, valuing standalone business (VSF and chemicals) at 6x FY18e EPS and 60.3% stake in UltraTech at 40% holding company discount to our fair value estimate and stakes in Idea Cellular, Hindalco and Aditya Birla Fashion & Retail at 40% discount to CMP. Considering our recent upgrade of fair value for UltraTech and strong standalone performance, we revise our TP to R1,200 (earlier R1,090) and maintain Buy/So.