Shares of Grasim Industries Ltd rallied over 7 percent to hit a fresh record high of Rs 1,082.45 apiece on the BSE after the company announced its plan to foray into paint business.
In a regulatory filing on Friday, the Aditya Birla Group flagship company said that its board had approved initial capital expenditure of Rs 5,000 crore over the next 3 years. The company’s ambition is to be a strong number 2 player in terms of both market share and profitability over a ‘reasonable’ period and targets 20 percent IRR.
“Grasim's strong balance sheet will facilitate this entry, which will add size, scale and diversity to its existing portfolio of established standalone businesses. The company endeavors to invest in businesses that have the potential to be a leader in their addressable markets; have the ability to achieve scale, and generate consistent and attractive returns in the long term. The paints industry presents a high-growth option for Grasim,” said Kumar Mangalam Birla, Chairman, Aditya Birla Group.
The company intends to leverage the well-established Birla White brand and a large network of white cement/putty dealers of its subsidiary UltraTech Cement. With the recent divestment of fertiliser unit for Rs 2,650 crore, Grasim is likely to be debt-free by FY22E, hence it intends to leverage its strong balance sheet for the proposed paint business.
ICICI Securities is of the view that with the likely improvement in core businesses and better clarity on capital allocation, holdco discount may narrow. Grasim will benefit from strong Birla White and Birla Wall Care putty brands, and large distribution network of putty through UltraTech Cement’s 54,000 outlets as 70 percent of these outlets also sell paints, it said.
Grasim will also have an advantage in cement paints/primer. Relationship with real estate developers may help gain share in project business. Creation of stronger brand equity and investment in tinting machines remain two challenges, but considering Rs 50 billion as an investment, it can also invest in and/or subsidise tinting machines, ICICI Securities said.
The brokerage maintained Add rating on the stock and increased its target price to Rs 1,140 per share from Rs 875 earlier valuing the core businesses at an unchanged 6x FY23E EV/E.
However, going ahead, key risks would be price volatility in the core business of VSF and chemicals, and any substantial non-core investments.
At 11:55 am, the shares of Grasim Industries were trading 7.14 percent higher at Rs 1,076.10 apiece on the BSE as compared to a 0.26 percent fall in the benchmark Sensex.
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