Grasim Industries — Cheap, but not very cheerful; Neutral:: BofA ML

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Grasim Industries — Cheap, but not very cheerful; Neutral

Bullish on VSF business; bearish on cement
We resume coverage on Grasim with a Neutral rating due to conflicting outlook
for its two key businesses and steeper-than-expected holding company discount
implied by current valuations. We are bullish on the Viscose Staple Fiber (VSF)
business, which constitutes 40-45% of proportionate EBITDA. However, the profit
outlook for cement, which constitutes 55-60% of proportionate EBITDA, is weak.
Overall, we see modest upside (~6%) post 20% holdco discount.


VSF prices should rise at least 5% in the next 2-3 quarters
We foresee at least a 5% hike in VSF prices over next 2-3 quarters. We assume
VSF’s premium vs polyester (primary blend) will not exceed the peak levels of
~75% seen earlier, and its premium vs cotton will remain low at 20-40%.

Cement prices to fall; rational pricing difficult to sustain
Average cement prices across India are nearly flat compared with FY10 levels
despite pressure from new supplies. Based on the peak-to-trough fall in earlier
cycles, we expect prices to fall ~5-7% over next 12 months. We forecast
Ultratech’s (60% subsidiary of Grasim) earnings to fall 24% over FY10A-12E.

Current holdco discount is steeper than expected
Our sum-of-the-parts analysis indicates that Grasim’s cement business is trading
at ~52% discount to the market price of Ultratech and ~29% discount to our target
price for the same. We are comfortable with ~20% holdCo discount for Grasim
and prefer it over UltraTech (Rs1097.6, C-3-7) due to steeper-than-expected
discount.