Grasim Industries - Fundraise, A Positive Step; To Alleviate Pressure On Balance Sheet: Motilal Oswal

Motilal Oswal Report

Grasim Industries Ltd. yesterday announced its plans to raise equity of up to Rs 4,000 crore through a rights issue. The promoters group has committed to fully subscribe to their entitlements and will also cover any unsubscribed portion, if applicable.

The company has undertaken a substantial capex of Rs 10,000 crore to venture into a new growth sector, specifically the 'paints' business. Till Q1 FY24, the company had already invested Rs 3,640 crore in the paints business.

The management has outlined a capex of Rs 5, 700 crore for FY24, which includes Rs 4,280 crore allocated for the paints business (Rs 1,050 crore spent in Q1 FY24).

Fundraise to be earnings per share accretive; leverage to be much better than our earlier estimates

We believe that this fund-raise will be earnings accretive for the company and would result in an EPS increase of 0.6%/1.9% for FY24/25E.

We have assumed an equity dilution of 3.1% for our assumptions. Post this equity issue, we expect net debt to be 66%/47% lower than our earlier estimates in FY24/25E, leading to interest expense savings of 18%/15% in FY24/25E.

Net debt/Ebitda will be at 1.5 times in FY25E versus our earlier estimate of 2.7 times.

Reiterate 'Buy' with a SoTP-based price target of Rs 2,380

Caustic soda prices have started to improve from their lows and should benefit in Q3 FY24. Additionally, viscose stable fibre prices in China have experienced an uptick in the last few weeks and we believe that the September 2023 exit price of VSF was ~4% higher than the average price in Q2 FY24.

In light of these, we have adjusted our HoldCo discount for Grasim’s holding in subsidiary companies, reducing it to 35% from the previous 40% to factor in the anticipated improvements in the balance sheet following the fundraising activities.

We standalone business at seven times Sep-25E enterprise /Ebitda and paints business at one time book .

Our SoTP-based price target is Rs 2,380, which gives an upside of 21% from current market price.

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