Up 110% from March lows, Grasim Industries still remains a value play for Edelweiss Securities

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November 17, 2020 2:50 PM

The flagship firm of the Aditya Birla Group is a diversified conglomerate with presence in four business segments -- VSF, cement, chemicals, and textiles.

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After having surged 110% since March end, shares of Grasim Industries are still going strong. The flagship firm of the Aditya Birla Group is a diversified conglomerate with presence in four business segments — VSF, cement, chemicals, and textiles. Recently released July-September quarterly results also paint a merry picture for the company with a net profit of Rs 360 crore during the quarter against a net loss of Rs 269 crore in the first quarter of this fiscal year. With the decent comeback on the results front, Edelweiss Securities sees Grasim Industries as a value play.

During the last quarter, Grasim Industries reported production resilience in both its key segments. In Viscose Staple Fibre (VSF) the capacity utilisation rose to 85% in versus 24% in the first quarter. Even as realisation slipped nearly 3% on-quarter basis, EBITDA/kg of VSF stood at Rs 13 versus a loss in April-June quarter. In the chemicals segment too, utilisation rose to 81% versus 48% on-quarter basis. This has taken the utilisations for both segments back to pre-coronavirus levels. “ With prices seeing some improvement in VSF and chemicals, we are revising up FY21E EBITDA 9% and believe Grasim will meet our FY22 estimates,” Edelweiss said.

Remains a value play

“Grasim remains a value play as the stake in UltraTech Cement alone (at CMP), excluding holdco, exceeds its current market cap by 46%,” they noted. Grasim Industries holds 57.3% in UltraTech, which is among the largest cement companies in India. The investment theme is driven by a steady growth outlook for standalone businesses, long-term positive outlook for cement, and expectation of sustained growth in the medium term for financial services businesses.

The standalone entity is valued at 6x FY22E EV/EBITDA and stakes across key holdings at 50% holdco discount to Edelweiss’ fair value estimates. The brokerage has a ‘Buy’ call with a target price of Rs 1,082 per share.

What do others say?

Analysts at Kotak Securities believe that the strong recovery shows that the bottom of the cycle is behind Grasim Industries now. Grasim Industries also plans divestment of the fertilizer business which has been termed as ‘welcome step’ by Kotak Securities. “We have increased our standalone EBITDA by 9%/9%/6% for FY2021/22/23E mainly led by higher volumes and margins in the VSF division. Our Fair Value is revised to Rs875 (from Rs700) based on March 2022E SoTP,” they added. Kotak has an ‘Add’ rating with a fair value of Rs 875 per share. 

While brokerage firm Emkay Global has not made any changes due to the proposed sale of fertilizer business, it has raised VSF sales volume estimates by 12% and profit estimates are up by 85.2% for this fiscal year. With a target price of Rs 905c per share, Emkay Global has a ‘Hold’ rating on the stock.

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