Grasim Industries share price: Sharekhan retains Buy rating with a revised price target of Rs 1680

Grasim Industries is expected to benefit from continued uptick seen in VSF prices in the current quarter. It has also identified a manufacturing plant for its paints business. VSF prices have increased by 88% from their historic low of RMB 8300/tonne in August 2020 to now RMB 15,600, led by strong demand in the Chinese textile market. Grasim Industries share price today is Rs 1384, trading flat.

The VSF prices are up 48% since December 2020 where they were RMB 10,550 which should benefit Grasim industries during Q4FY2021 in terms of high realizations. Operating rates in the VSF industry are now at 83%, while VSF inventory has significantly declined from 45 days in April 2020 to just 12 days.

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Grasim Industries VSF segment blended realization had improved by 14% qoq during Q3 FY21 while it operated at 100% capacity utilization. Sharekhan expects the benefit of higher VSF prices to accrue in the Q4FY2021 for Grasim, owing to firm prices and improved dynamics in the Chinese VSF market.

On the other hand, average caustic soda flake and lye prices in Mumbai for Q4 FY21 till date have declined by 7.4% and up 10.5%, respectively, compared to Q3 FY21. However, average caustic soda flakes price during February and March 2021 has improved 9% mom while down by 0.8% mom, respectively. The prices of caustic soda remained under pressure on account of global oversupply of caustic soda while chlorine demand had been strong in the wake of covid-19 pandemic.

Sharekhan believes caustic soda prices are bottoming out and should improve from here on, with demand pick up from textile, paper, and other segments. Further, demand for chlorine is expected to remain healthy, driven by demand from organic intermediaries, agrochemicals, and chlorine product segments. Sharekhan expects Grasim Industries chemical segment to benefit from bottoming of caustic soda prices going ahead, which along with its partnership with Lubrizol would aid in improving captive chlorine integration.

Grasim Industries is venturing into Rs 40,000 cr decorative paints industry with an initial investment of Rs 5000 cr over the next three years in the initial phase. The paints venture is expected to provide high growth for its standalone business, consistency in earnings and clearing out the air on capital allocation priorities for the company. Consequently, it has signed an MoU with the TamilNadu government to establish a paint manufacturing unit at Cheyyar near Chennai with an investment of Rs 750 cr. However, the details of the investments are yet awaited.

As per Grasim Industries management, the manufacturing from the paints operations is still two to two and half years away which will further take another two years to reach optimum capacity. Sharekhan retains Buy rating on Grasim Industries with a revised SOTP-based price target of Rs 1680, as Sharekhan incorporates revised price target for Ultratech of Rs 8000 and revised market capitalisation of other listed subsidiaries (Aditya Birla Capital and Vodafone Idea).