Grasim Q1 FY27 beat driven by narrower paint losses and chemical margins

Investment View and Q1 FY27 Summary

Motilal Oswal Financial Services maintains a Buy rating on Grasim with a sum-of-the-parts target price of Rs 3,800. The broker says Grasim’s Q1 FY27 operating performance was ahead of expectations, principally because losses in the paint and B2B businesses were lower than estimated. Chemical-business outperformance was partly offset by lower VSF profitability.

VSF and Chemicals Performance

VSF

VSF sales volume declined around 4% year-on-year, while realisation improved around 16%. Segment EBITDA rose 96% year-on-year and 7% sequentially to Rs 6.3 billion. VSF operating margin expanded 6 percentage points year-on-year to around 14%, and EBITDA per kg increased to Rs 30 from Rs 15 in Q1 FY26 and Rs 24 in Q4 FY26.

Motilal Oswal expects a marginal near-term recovery in VSF margin from higher prices. However, the longer-term outcome depends on global demand and input costs because the business is cyclical.

Chemicals

Chemical volume fell around 6% year-on-year, while realisation increased around 18%. Chemical EBITDA increased around 16% year-on-year to Rs 4.9 billion, and operating margin rose around 1 percentage point to approximately 19%.

The broker expects chlorine integration to increase to around 68% by the end of FY27 from approximately 65% in Q1 FY27, supporting chemical margins.

Paint and B2B E-commerce Outlook

Paint revenue grew 64% year-on-year to Rs 16.6 billion, while B2B e-commerce revenue rose 75% to Rs 25.5 billion. Combined losses in these high-growth businesses narrowed to Rs 1.4 billion from Rs 3.0 billion in both Q1 FY26 and Q4 FY26.

Management remains focused on gaining paint market share. It expects paint margins to be lower in Q2 because of high-cost raw-material inventory and higher advertising expenditure, partly offset by the Q1 price increase. Grasim reiterated its targets of Rs 100 billion paint revenue and break-even by FY28E. Management is also confident that B2B e-commerce will reach break-even by the end of FY27.

Distribution and Business Developments

Birla Opus expanded to 12,100 towns, with more than 55,000 dealers billing at least once and over 1,450 exclusive branded franchise outlets across 800 towns.

In B2B e-commerce, management attributed the sequential moderation in revenue growth to a high base and commodity-market volatility after the Middle East crisis. It described customers’ measured procurement and inventory optimisation as timing effects rather than structural demand loss.

Lyocell Expansion

Lyocell Phase I, with 55 KTPA capacity, is nearing completion of detailed engineering, and civil work is on track. Environmental clearance for the 110 KTPA Phase II is in process.

Leverage and Earnings Estimates

Net debt was Rs 99 billion at June 2026, compared with Rs 69 billion at March 2026. Management guided for net debt to EBITDA below 2 times in FY27.

Following the Q1 outperformance, Motilal Oswal raised its FY27 EBITDA and EPS estimates by around 8% and 4%, respectively. It reduced its FY28 EBITDA and EPS estimates by around 4% and 7%, respectively. The FY28 reduction reflects a group royalty of 0.25% of standalone revenue, estimated to affect earnings by around Rs 1 billion.

Sum-of-the-Parts Valuation

The Rs 3,800 target price is based on the following sum-of-the-parts valuation framework:

• A 35% holding-company discount for stakes in listed subsidiaries, including UltraTech Cement and Aditya Birla Capital.
• 7 times FY28E EV/EBITDA for VSF and chemicals.
• 3 times FY28E paint revenue.
• 1 time FY28E B2B e-commerce revenue.
• 10 times FY28E renewable-business EV/EBITDA.

Key Thesis Sensitivities

• Paint margin pressure from high-cost raw-material inventory and increased advertising expenditure.
• Execution toward break-even in the paint and B2B e-commerce businesses.
• Cyclicality in VSF demand and input costs.
• Development of chemical margins, including the benefits of higher chlorine integration.
• Leverage and progress toward the guided net debt-to-EBITDA level.