Buy Grasim for target price of Rs. 1715 (19% gain): Motilal Oswal

Forays into B2B e-commerce for Building Products

To invest INR20b over the next five years and launch in six-to-12 months

► GRASIM plans to foray into B2B e-commerce in the Building Materials segment. This will entail an investment of INR20b over the next five years. The commercial launch of this platform is expected in six-to-12 months.

► This business is expected to turn EBITDA positive at the end of the investment period and achieve cash breakeven in seven years. All OPEX and capex have been considered in deciding the required investments in the business.

► The Building Materials Procurement segment (industry size: USD100b) has clocked ~14% CAGR over the last three years. The management said this space offers a huge growth opportunity (current digital penetration of ~2%).

► Lower capital requirements compared to standalone business segments, along with a very high growth potential, makes this an exciting business case. The decision for evaluation of any new business depends on: 1) growth opportunities, 2) scalability, 3) ability to generate better profitability/IRR, and 4) adjacencies with existing business segments.

To focus on the MSME segment initially; reach to be increased gradually

► This vertical will cover the entire gamut of Building Products (like cement, steel, concrete, electrical, construction chemicals, tiles, plywood, etc.). The initial focus will be on the MSME segment as the unorganized nature of the business provides bigger opportunities due to inefficiencies in the value chain. Later, other growth opportunities will be explored.

► GRASIM has undertaken a survey of over 150 customers and vendors to get a sense of the difficulties they are facing. The management will focus on: 1) on-time delivery, 2) better product range, and 3) consistent quality and reliability. The platform will initially be launched in a particular geography, and its reach will be increased gradually.

► This platform will work as an intermediary and there won’t be any need to maintain higher inventory. The platform will be brand agnostic, but the selection of vendors will be controlled and will depend on product quality and cost parameters.

► The management aims to be among the top three players in this space. The capital allocation policy remains unchanged

► Investments in this platform will mostly be through internal accruals, given the lesser deployment of funds annually. The management said there is no change in its capital allocation policy, and this decision has been arrived at considering the attractive proposition of this business.

► We remain positive on GRASIM’s entry into the Paints business, and believe its brand equity as well as its ability to leverage the distribution network of Birla White will help it achieve a reasonable scale in this business.

► We maintain our Buy rating with a SoTP-based TP of INR1,715 per share (6.5x FY24E EV/EBITDA for the standalone business and 35% holding company discount for its holding in subsidiary companies).