Buy Grasim Industries - Raises VSF Prices - Motilal Oswal

GRASIM: Raises VSF prices by Rs6/kg in Mar-11, ~Rs21/kg in 4QFY11; Improving short term outlook for cement; Buy

Grasim has raised VSF prices for the 3rd time since Jan-11, with Rs6/kg increase in Mar-11 (on top of Rs7/kg increase in Jan-11 and Rs8/kg in Feb-11).

As a result, current realizations are ~Rs144/kg (v/s Rs123/kg in 3QFY11) and 4QFY11 blended realization would be ~Rs137/kg.

However, price increase is significantly ahead of cost push and as a result margins are expected to improve from current levels of ~35% to ~38% for 4QFY11.

Outlook for cement business is also improving, as cement prices are expected to be buoyant in 1HCY11 driven by recovery in demand.

Based on our current estimates, the stock is quoting at very attractive valuations of 8.4x FY12E consolidated EPS, 3.9x EV/EBITDA and 1.3x P/BV. Implied valuation of cement business is US$59/ton. Maintain Buy with target price of Rs2,927 (SOTP based, valuing economic interest in cement business at 8x EV/EBITDA and 20% holdco discount, and VSF at 4x EV/EBITDA).

Source : Equity Bulls

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