Grasim Industries’ (Grasim’s) Q2FY19 standalone Ebitda was up 35% y-o-y to Rs10.7 bn while core businesses (VSF and chemicals) Ebitda stood broadly in line with our estimates. VSF (including VFY) Ebitda grew 23% y-o-y with margin remaining flat on y-o-y basis at 22.1%, while chemical Ebitda grew 60% y-o-y with 389bps y-o-y Ebitda margin improvement to 28.3%. Grasim is likely to invest in the equity raise plan of Vodafone Idea Ltd (VIL) and Aditya Birla Capital Ltd (ABCL) as the management mentioned that it would likely maintain its stake in VIL and is unlikely to dilute its stake in ABCL to below 51% (vs~56% now).

VIL board of directors has approved a fund raising plan of Rs 250 bn in which Grasim’s share works out to Rs 29 bn to maintain its ownership. Thus capital allocation concern remains a key overhang. Besides, Grasim has embarked on aggressive expansion plans with a capex outlay of Rs 75 bn and these equity investments are likely to increase its leverage.

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We broadly maintain our FY19e-FY21e Ebitda with the target price unchanged at Rs 1,140/share based on 7x Sep’20e EV/E and assuming 50% holdco discount on its various holdings on CMP basis. Post the ~30% stock price corrections over the past one year, implied holdco discount has likely increased >70%, assuming 7x 1-year forward EV/E for the standalone entity. Maintain Buy.

Standalone revenue increased 26% y-o-y to Rs 51.2 bn (I-Sec: Rs 49.1 bn): Standalone VSF revenue (including VFY) increased 23% y-o-y to Rs 26.1 bn on 10% y-o-y increase in volumes. Domestic volumes increased 24% y-o-y leading to increase in its share to 84% vs 70% in Q2FY18.

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Chemical revenue/Ebitda increased by 38/60% y-o-y to Rs 16.1 bn/ Rs 4.6 bn respectively owing to higher ECU realisation along with higher volumes. Management continues to focus on increasing the volumes of speciality products (chlorine-based VAPs), which were up 7% y-o-y in Q2FY19.

Standalone entity reported net loss stood at Rs 11.9 bn after an exceptional charge of Rs 22.8 bn pertaining to loss on fair valuation of the company’s investment in VIL. Post the merger of Vodafone India and Idea, Grasim’s shareholding in the merged entity declined to 11.55% and VIL ceased to be an associate company w.e.f. 31 Aug’18. Adjusted PAT increased 22% y-o-y to Rs 7.7 bn.