UBS upgrades Grasim’s rating from 'Neutral' to 'Buy'

Research: UBS Investment Research

Rating: Buy

CMP: Rs 1,825.2

UBS has upgraded Grasim’s rating from `Neutral’ to `Buy’. It has also removed the short-term `Sell’ rating. This was on account of a significant underperformance since the fixing of the record date of the demerger of the cement business (May 14, 2010).

Further, its current valuation at $80/tonne ($115-140/tonne for other larger companies) looks compelling. UBS has however not changed its earnings or valuation estimates. It has lowered the price target from the earlier Rs 2,875 per share to Rs 2,300 per share after removing the value of the demerged cement business of Grasim (Samruddhi Cement, which listed last week).

We continue to value Grasim on a sum-of-the-parts basis with cement at 6.5 times EV/EBITDA, VSF at 5.5 times EV/EBITDA, and apply a 10% holding company discount to the cement business. We believe the stock is attractive at current valuations despite our near-term cautious outlook on cement prices.