We estimate PAT to grow at 14.0% FY19-21E CAGR and EBITDA margin to improve to 21.0% by FY21E. We reiterate our BUY rating on the stock with a revised target price of Rs. 803 calculated using sum of the parts (SOTP) valuation methodology (SOTP table on page 2), taking into account the market potential, business environment and growth prospects.
Maintain Buy with revised PT of Rs. 955: We have lowered our net earnings estimates for FY2020-FY2021E factoring lower realizations in Viscose and Chemical verticals along with increased interest expense due to increase in debt. The funding requirements of Grasim’s investment in Vodafone Idea has been key overhang on the stock leading to increased discounting of its other listed entities. We have adjusted our SOTP based price target for current market capitalization of Aditya Birla Capital and Vodafone Idea. We have also increased holding company discount due to key funding concern for Vodafone Idea. Hence, we arrive at a revised SOTP based price target of Rs. 955. However, we maintain Buy purely on the basis of attractive valuation post steep discounting of listed subsidiaries and investments.
Outlook and valuation: Value play; maintain ‘BUY’ We maintain that Grasim is a unique holdco with a solid underlying SA business. Yet capital commitments towards Idea (~INR29bn for a steady 11.5% stake) and potential infusion into ABCL (plans yet to be firmed up) are likely to overhang the stock. Maintain ‘BUY/SP’ with an SOTP-based target price of INR988 (valuing SA at 8x FY20E P/E and all key holdings at a 50% holdco discount to our respective fair value estimates).