Management expects pricing pressure in core businesses to continue in the near term led especially by capacity overhang.
Grasim Industries’ (Grasim) agreed to subscribe 77 million shares, totalling a value of `7.7 bn, on proposed equity raising of `21 bn by Aditya Birla Capital (ABCL). Accordingly, Grasim’s leverage is likely to increase and its stake in ABCL would decline from 55.97% to 54.29%.
We had already factored-in an investment of `10 bn in subsidiaries in our estimates. We maintain our FY20E-FY21E estimates; however, with the recent stock price correction of its various holdings, we reduce our target price to `895/share (earlier: `930), based on 7x FY21E EV/E and assuming 60% holdco discount. The stock is trading at an implied 6x FY21E core business EV/Ebitda assuming higher 70% holdco discount. Maintain ‘Buy’.
ABCL has approved raising of `21 bn through preferential allotment to promoters (`10 bn) and certain marquee investors (`11 bn) at `100/share (9.3% premium to LTP) to fund future growth plans and de-leverage balance sheet. Grasim has agreed to subscribe 77 million shares totalling to `7.7 bn (~37% of issue size) subject to necessary regulatory approvals. Accordingly, its leverage likely to increase further and stake in ABCL to decline from 55.97% to 54.29%.
During Q1FY20 result concall, the management had highlighted they do not foresee any incremental investments in Vodafone Idea (VIL) over the next two years and any capital infusion in ABCL would be opportunistic and based on capital requirements of ABCL. We had already factored-in an investment of `10 bn in subsidiaries, in our estimates.
Management expects pricing pressure in core businesses to continue in the near term led especially by capacity overhang. However, Grasim’s well-integrated business model (~55-60% in pulp and fully captive in caustic soda and power requirements) and sharp focus on specialty products and cost efficiencies would cushion against any sharp margin erosion, in our view.
With strong demand outlook and optimum capacity utilisation level, Grasim is augmenting its VSF capacity by 44% to 788 ktpa by FY21E via de-bottlenecking and brownfield expansion at Vilayat (219kte).