Grasim Industries - New projects to drive growth; Buy - Anand Rathi

We expect Grasim Industries' (Grasim) revenue/EBITDA in 3QFY13 to rise 7%/5% yoy. PAT, however, is expected to dip 2% yoy due to higher tax rate and depreciation. Fundamental positives are captive/long-term contracts for raw material, strong volume growth (led by expansions) and a narrowing of the holdco discount. We maintain a Buy.

- VSF volume growth to drive revenue. During 3QFY13, we expect 10% yoy VSF volume growth (1% qoq) to drive 8% VSF revenue growth (and 7% overall). Realisation is expected to be flat qoq (down 2% yoy) at Rs.136 per kg. Chemicals revenue is expected to be flat yoy.

- EBITDA to rise 5%. We expect OPM to improve 50bps qoq (down 30bps yoy), leading to lower, 5% yoy, EBITDA growth. The outlook for VSF demand and prices is not so rosy in the near term. However, it is much brighter in the long term, given rising consumption in emerging markets and less pressure from supply of cotton.

- Expansion updates. Phase I of the expansion (18,250 tons) in Harihar, Karnataka, was commissioned in Sep'12 while phase II of similar capacity is expected by Mar'13. The greenfield project in Vilayat, Gujarat, (120,000 tons) will be commissioned by May'13. These new capacities will support strong volume growth starting 2HFY14 besides better realisations as major production in Vilayat would be of high-margin specialty fibre.

- Valuation. We expect an 18% CAGR in revenue and profit over FY13-15, backed by the capacity expansions. Captive/long-term contracts for raw material, strong volume growth (led by expansions) and narrowing of the holdco discount are fundamental positives. Our sum-of-parts target of Rs.3,875 is based on the value of Grasim's holding in UltraTech (a 60.3% stake) and other investments at a 25% holding-company discount, the VSF/chemicals business at 6x/4x FY14 EV/EBITDA. Risk. Fall in VSF prices.

Source : Equity Bulls

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