Buy Grasim Industries Ltd - Motilal Oswal

GRASIM: Robust cotton prices augur well for VSF pricing/profitability; Short-term outlook for cement improving; Buy

Strong cotton prices (+156% in 12m; +17% in 1m) augur well for VSF pricing.

Grasim’s VSF business realizations have improved by ~15% in 12m and ~4.5% in 3m, leaving enough headroom for further price increases in VSF.

Costs, which negated higher VSF prices, are stabilizing, albeit at higher levels.

Any further price increase would drive margins higher from current levels of ~35-36% (v/s peak margins of ~42% in 2HCY09).

Outlook for cement business is also improving, as cement prices are expected to be buoyant in 1HCY11 driven by recovery in demand.

The demerger of the cement business has triggered de-rating of the stock and currently trades at implied holding company discount of ~50% to UltraTech. The stock is quoting at attractive valuations of 8.6x FY12E consolidated EPS, 4x EV/EBITDA and 1.3x P/BV. Implied valuation of cement business is US$60/ton. Maintain Buy with target price of Rs2,852 (valuing economic interest in cement business at US$96/ton post 20% hold-co discount and VSF at 4x EV/EBITDA).

Source : Equity Bulls

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