Upgrade Grasim to Buy - Motilal Oswal

GRASIM: Increases prices of VSF by Rs7/kg (~5% QoQ) w.e.f. 1-Jan-11; Potential 3-7% EPS upgrade; Buy

Grasim Industries has increased VSF prices by Rs7/kg (~5% QoQ) w.e.f. 1-Jan-11. This increase is on back of ~Rs8/kg increase in 3QFY11 (in phases).

VSF demand and prices have been very strong resulting in ~17% increase in VSF prices in last 12 months.

With stable pulp prices, VSF business margins in 3QFY11 are estimated to improve 200bp over 2QFY11 levels and a further 300bp in 4QFY11 to ~37%.

The outlook for VSF business has improved considerably. However, short term outlook for the cement business is challenging.

The stock is quoting at very attractive valuations of 9x FY12E consolidated EPS, 4.2x EV/EBITDA and 1.3x P/BV. Implied valuation of cement business is 4.3x EV/EBITDA and US$67/ton. Maintain Buy with target price of Rs2,787 (SOTP based, valuing economic interest in cement business at US$96/ton post 20% holdco discount and VSF business at 4x EV/EBITDA).

Source : Equity Bulls

Keywords