ICICI Securities: Buy Grasim Target Rs 2,650

Post the merger of Grasim’s cement division and UltraTech Cement (UTCL),
Grasim would house India’s largest pure play cement company besides being a
leader in viscose stable fibre (VSF). This would result in better financing options to
fund the next phase of organic/inorganic expansion. Its VSF division is delivering
strong and consistent performance, both in terms of volume and realisations.
After factoring in a 20% holding company discount to current market price of
UTCL, our sum-of-the-parts (SOTP) target price is Rs2,650/share. We believe the
market is assigning significantly higher holding company discount of ~45%, which
seems unjustified as cement still contribute 75%+ to revenue and 70%+ to EBITDA
on a consolidated basis. Besides, VSF cashflows would continue to fund
expansion of the cement division. Grasim currently trades at an attractive FY11E
EV/E of 5.4x and FY12E EV/E 4.9x. Grasim is among our top picks in the sector.
􀁦 Cement – Higher volumes & cost efficiencies. The 4.5mnte Shambhupura
capacity in Rajasthan commenced commercial production in Q2FY10, while the
4.9mnte Kotputli capacity (in Rajasthan) started production in Q4FY10. We expect
UTCL to post industry-average volume growth over FY11-13. With diversified
presence resulting in better realisations, strong volume growth and increased cost
efficiencies & productivity, UTCL is better placed to contain margin erosion caused
by any pricing pressure. We raise our FY11-12E EBITDA by 6-8%.
􀁦 Next expansion phase announced for setting up a 9.2mnte grinding unit in the next
three years at a capex of Rs56bn via brownfield expansion. This also includes
setting up additional clinkerisation plants at Chhattisgarh and Karnataka and bulk
packaging terminals across states. Besides, Rs26bn would be spent on augmenting
grinding capacity in Gujarat and installing waste heat recovery systems. The
acquisition of 3mnte ETA Star Cement is likely to be completed soon.
􀁦 VSF – Momentum to continue. VSF demand is likely to continue both domestically
and internationally on revival in consumer offtake and fall in global cotton production.
But margin could come under pressure due to rise in raw material costs. Grasim has
announced setting up a Rs10bn VSF plant, which would increase capacity 25%.
Also, the Chinese JV would double capacity to 70,000te from 35,000te by March ’10.
􀁦 Robust cashflows. Grasim is expected to generate Rs16bn FCF standalone and
Rs55bn on a consolidated basis. Cashflows from Grasim’s VSF division (say, via
rights issue of equity shares to Grasim) can be utilised for expansion in cement.