Hi, I came across the company recently, went through the concalls/PPTs and below are my observations.
The super high valuations of the company at the time of the IPO has not held up, and the current price has gone below IPO price and profits have increased, thus making the company relatively cheaper, hence attracted my interest.
The co. is growing ahead of the industry, margins have improved and now there is little headroom for margins to improve from here, based on A&P spends. If they continue to grow ahead of the industry, and A&P spends grow at lesser rate, then some benefits will show up in the EBIDTA, and the co. expects that it could reach 20% EBITDA margins next year. Currently their margins are second best, slightly behind Asian Paints.
The company has finished the TN capex and initiated the Jodhpur capex. Their strategy of focusing on 750 cities has resulted in growth. The mgmt is expecting to finish the year (FY24) around 1350 Cr, this is 25% growth over last year. And next year they are targeting to grow beyond 25% (their target is to grow between 30-40%), provided industry grows to its pre-pandemic levels of around 8-10%. The co. is expecting Apple Chemie also to grow to 55-60Cr, and very bullish on the subsidiary outperforming going forward.
The mgmt has, multiple times, alluded to reaching closer to #2 and #3, and if from Fy24, they grow 5x they would still not be #3 by 2029, they will be less than 7000Cr topline. Assuming they maintain their margins (10% NPM), and assuming PE multiple of 40, the mcap could reach 28,000Cr, that would be over 4x from current levels in 5 years (32% CAGR).
The triggers are:
- Focus on 750 cities, increasing the tinting machines, increasing per dealer business, increasing engagement with influencers in these 750 cities
- Foray in projects business
- Foray in retail waterproofing segment
- Taking Apple Chemie’s waterproofing and construction chemicals business to PAN India level from a single state of MAH at the time of acquisition.
A big question is, will the company be able to grow as per its own expectations.
Another big risk to this thesis, and connected to the above risk will be, how Grasim executes its plan. There are fears that Grasim will alter the industry structure significantly and historical profits/returns earned by the incumbents will reduce. If that plays out, then all the parameters like growth, margins, multiples will reduce for the current players and above thesis will fail.
Disc: not invested, but interested
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