Motilal Oswal

Grasim Ind (Buy)

Target: ₹2,050

CMP: ₹1,798

Grasim Industries should benefit from the changes in cotton industry dynamics. VSF demand growth should outpace cotton until FY25E. Further, the US ban on cotton imports from Xinjaing region may trigger a shift to substitute products. Focus on backward integration in the Chemical segment should improve chlorine usage as Grasim plans to increase chlorine consumption in value added products (VAPs) to 40 per cent by FY25 from 28 per cent in FY21. Chemical segment’s OPM should improve to 19 per cent in FY23 from 13 per cent in FY21.

Further, likely capacity expansions of 37 per cent/33 per cent in the VSF/Caustic soda segments, respectively, should improve volume/profits during FY22-24. We estimate a 16 per cent/15 per cent volume CAGR for the VSF/Chemical business, respectively, over FY21-24. Grasim’s plan to augment the capex of its Paints business indicates its intent of entering the paints segment on a large scale. Brand recall of Grasim as well as its strong balance sheet, and distribution network of UTECM’s white paints segment should help the company succeed in this segment.

We upgrade our rating on Grasim to Buy from Neutral. Key risks: delay in entry into the paints business; inability to gain volumes in the paints segment; and margin pressure on the VSF/caustic business.

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