Grasim Industries Outperform: Price target Room for upside says Standard Chartered resarch

2,400
Oct‐09 Jan‐10 Apr‐10 Jul‐10
Grasim Industries Ltd BSE SENSEX 30 INDEX (rebased)
Share price (%) -1 mth -3 mth -12 mth
Ordinary shares 10.5 26.2 23.6
Relative to Index -1.8 8.8 2.2
Major shareholder Promoter 26%
Free float 71%
Average daily vol US$7.0m
VSF likely undervalued – Grasim and Lenzing have
almost similar EBIT, yet their valuations differ markedly.
Lenzing currently trades at 8.9x CY09 EV/EBITDA
compared with Grasim’s VSF business which is trading at
an attributed EV/EBITDA of 2.4x on FY10 basis. Given
this, we believe Grasim is undervalued.
Grasim’s capacity catching up with Lenzing’s – By
end FY13, Grasim would have expanded VSF capacity to
415,000 tpa from the current 333,000 tpa. Its Chinese JV
partner is also expanding capacity from 30,000 tpa to
70,000 tpa.
RoCE profile better than Lenzing’s – Grasim’s RoCE is
much healthier than Lenzing’s – Grasims’s averaged
above 45% over the past decade compared with
Lenzing’s high teens.
Change in perception to benefit Grasim – We believe
that Grasim’s VSF business is undervalued because it
was perceived as a cement stock. Now that the cement
business has been spun off, we expect investor
perception to change. In addition, management is now
more focused on VSF.