Inflation And Geopolitical Tensions Will Hamper Future Earnings In India's Basic Materials Sectors

Key Takeaways

• Strategic expansions in cement, paints, and chemicals are set to drive significant revenue and long-term growth for Grasim Industries.
  
• Rapid growth in B2B e-commerce and cellulosic fibres positions Grasim to enhance market share and profitability.
  
• Geopolitical tensions and inflationary pressures, coupled with intense market competition, present challenges to Grasim's revenue, operating margins, and short-term earnings growth.

Catalysts

Primarily operates in fibre, yarn, pulp, chemicals, textile, fertilizers, and insulators businesses in India and internationally.

• Expansion of the UltraTech Cement capacity and anticipated acquisitions are expected to significantly increase the cement segment's revenue and long-term growth potential.
  
• The Paints division is ramping up production and distribution with new plants beginning trial runs and a strategic advertising campaign, which should drive revenue growth and market share gains.
  
• The B2B e-commerce business, Birla Pivot, is expanding its reach and product offerings rapidly, with a goal to achieve USD 1 billion revenue in three years, which will contribute to significant revenue growth.
  
• The Cellulosic Fibres business is seeing increased demand and improving global market conditions, which could lead to higher volumes and better profitability, positively impacting net margins and earnings.
  
• Efforts to fully integrate and expand the Chemicals business, including potential increases in ECH and epoxy capacity, position Grasim to improve its EBITDA and market share, especially in higher-margin specialty chemicals.

Grasim Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grasim Industries's revenue will decrease by -42.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 5.4% in 3 years time.
• Analysts expect earnings to reach ₹14.1 billion (and earnings per share of ₹29.77) by about December 2027, down from ₹44.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 144.6x on those 2027 earnings, up from 39.3x today. This future PE is greater than the current PE for the IN Basic Materials industry at 25.5x.
• Analysts expect the number of shares outstanding to decline by 11.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.28%, as per the Simply Wall St company report.

Grasim Industries Future Earnings Per Share Growth

Risks

• Geopolitical tensions and supply chain diversification complexities globally could create growth imbalances, potentially affecting Grasim's revenue and operating margins.
  
• Inflationary pressures in India, with inflation higher than anticipated by the RBI, may impact consumer spending and reduce demand, affecting Grasim's revenue growth.
  
• The paints business is experiencing lower profitability due to intense competition and higher backend discounts, which could pressure net margins despite market expansion efforts.
  
• Grasim's chemical segment faced lower earnings due to oversupply in chlorine affecting realization rates, impacting overall segment profitability.
  
• Execution risks in large-capacity expansions and pending regulatory approvals for acquisitions could delay revenue enhancement from such projects, affecting short-term earnings growth.

Valuation

• The analysts have a consensus price target of ₹2886.27 for Grasim Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3100.0, and the most bearish reporting a price target of just ₹2435.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹259.3 billion, earnings will come to ₹14.1 billion, and it would be trading on a PE ratio of 144.6x, assuming you use a discount rate of 14.3%.
• Given the current share price of ₹2594.15, the analyst's price target of ₹2886.27 is 10.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.