Grasim Industries: Key reasons why Morgan Stanley sees 36% upside on the stock

Morgan Stanley has turned overweight on Aditya Birla Group flagship Grasim Industries Ltd, with the foreign brokerage upping its target price on the diversified Indian company to Rs 3,500 from Rs 2,975 earlier, saying it sees multiple strands to the Grasim story.

Grasim has multiple opportunities playing out that could lift the share price medium term, Morgan Stanley said as it sees further value being unlocked for the paints business and strong earnings compounding at UltraTech Cement. The foreign brokerage said the new-age businesses are scaling up fast and Grasim's Holdco discounts could moderate going ahead. 

Following the Morgan Stanley upgrade, the stock rose 4.84 per cent to hit a high of Rs 2,735 on BSE. 

"Grasim surprised us positively during the first leg of execution, with strong market share gains over the past couple of quarters. Though this may fall short of the guided revenue target of Rs 10,000 crore by F2028, Grasim is on track to become a formidable Number 3 player by F2028, in our view. We raise our paints business valuation across scenarios, and now estimate Rs 360 per share in our SOTP against Rs 150 per share previously," Morgan Stanley said. The brokerage had an 'Equal-weight' recommendation on the stock earlier.

Calling UltraTech Cement an earnings compounder, Morgan Stanley said potential for gains in market share coupled with cost optimisation levers mean Ultratech Cement has a strong multi-year earnings compounding story. 

This should drive strong stock performance over the medium term, and be a key driver of stock returns, the foreign brokerage said.

"We expect large core businesses (cellulose/chemicals) to continue growing steadily, albeit at a nominal pace, given 1) near full utilization levels; and 2) relatively lukewarm demand near-term. However, new-age businesses (B2B e-commerce/Renewables) are growing rapidly, providing earnings growth and a potential valuation boost," Morgan Stanley said.

Meanwhile, Morgan Stanley said the implied holding company discount for Grasim Industries has narrowed sharply over the past couple of years. As the paints business scales up, it sees a case for sustained moderation of holdco discounts. "We believe there is a strong case for the above opportunities to play out for Grasim over the next few years, making a case for both a re-rating and compounding potential. We upgrade our price target to Rs 3,500, implying 36 per cent upside from current levels," it said.