Grasim Industries - Aspiring for strong no.2 position in paints - ICICI Securities

Grasim Industries' (Grasim) has announced its plan to foray into paint business with a huge capital outlay of Rs50bn over the next three years. Its ambition is to be a strong no.2 player in terms of both market share and profitability over a 'reasonable' period and targets 20% IRR. It intends to leverage the well-established Birla White brand and large network of white cement/putty dealers of its subsidiary UltraTech Cement (UTCEM). With the recent divestment of fertiliser unit for Rs26.5bn, Grasim is likely to be debt-free by FY22E, hence it intends to leverage its strong balance sheet for the proposed paint business. With the likely improvement in core businesses (VSF demand / prices up) and better clarity on capital allocation, holdco discount may narrow, in our view. Accordingly, we reduce our holdco discount to 50% (earlier 60%) and, factoring-in the recent run-up in the stock prices of its various holdings, we increase our target price to Rs1,140/sh (earlier Rs875) valuing the core businesses at an unchanged 6x FY23E EV/E (half yearly rollover). Maintain ADD. Key risks: price volatility in the core business of VSF and chemicals, and any substantial non-core investments.

- Entry into paint business is a strategic choice as management believes the move would add size, scale, diversity and stability to cashflows of the existing business portfolio of VSF and chemicals. Prior to FY11 (demerger of cement division), Grasim's VSF cashflows were used to fund its cement expansion and now the same is intended to be utilised for high-growth paints business. Accordingly, key investor concerns about capital allocation may get addressed and holdco discount may narrow, in our view.

- Core business VSF and chemical expansion plans remain intact and expected to be complete by FY22E. Grasim would be augmenting its VSF capacity by 38% to 801ktpa and chemicals capacity by 27% to 1,457ktpa by FY22E as planned earlier. Company is likely to generate OCF of >Rs25bn p.a. beyond FY23E.

- Huge capex of Rs50bn planned for paint business over next three years mainly to add plants at multiple locations within India and have substantial backward integration. While Grasim would be debt-free by FY22E, it intends to leverage its strong balance sheet and seems comfortable with 3x 'net debt to EBITDA. Ajith Kumar with nearly three decades of experience in paints industry (AkzoNobel and Asian Paints) would be COO of paints division.

- Our paints sector analysts Manoj Menon and Aniruddha Joshi believes Grasim will benefit from: 1) strong Birla White and Birla Wall Care putty brands, and 2) large distribution network of putty through UTCEM's 54,000 outlets. 70% of these outlets also sell paints. Grasim will also have advantage in cement paints/primer. Relationship with real estate developers may help gain share in project business (~10% of paint industry). Creation of stronger brand equity and investment in tinting machines remain two challenges, but considering Rs50bn as investment, it can also invest in and/or subsidise tinting machines.

Shares of GRASIM INDUSTRIES LTD. was last trading in BSE at Rs.1002.45 as compared to the previous close of Rs. 1017.05. The total number of shares traded during the day was 37382 in over 1346 trades.

The stock hit an intraday high of Rs. 1030.7 and intraday low of 1000. The net turnover during the day was Rs. 37913077.

Source : Equity Bulls

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