Grasim: Investors bet on paints, ignore weakness in core business

Investors and analysts are betting on a fast ramp-up in paints division and its e-commerce venture of selling construction goods

The AV Birla group flagship Grasim Industries has been an outperformer on the bourses. The company’s stock price is up 56.5 per cent in the last two years, compared to 30.8 per cent rally in the benchmark Nifty 50 during the period. The stock has also outperformed in the recent rally and is up 10.7 per cent since the start of 2025 calendar year, compared to 6.2 per cent rise in the benchmark index in the period. 

The numbers, however, suggest that the rally has been driven by a valuation rerating of Grasim rather than underlying rise in its earnings. The company’s market capitalisation reached a record high of ₹1.84 trillion on Tuesday, while earnings have declined in recent quarters due to weakness in core business and losses in new ventures. 

The company’s consolidated net profits (adjusted for exceptional gains & losses) were down 12.4 per cent year-on-year (Y-o-Y) to 

₹1,546 crore during January-March 2025 quarter (Q4FY25), while it reported a net loss of ₹174 crore on standalone basis in Q4FY25 against adjusted net profit of ₹222.2 crore a year. The company's consolidated profits on trailing 12-month basis in Q4FY25 at ₹3,986 crore was lowest since September-December 2020 quarter and down 33.8 per cent on Y-o-Y basis. 

“Grasim’s Ebitda in Q4FY25 was below our estimates due to lower-than-estimated profitability in both Viscose Staple Fibre (VSF) and chemical segments. The two segments are experiencing margin pressure due to global challenges, as demand remains subdued and new capacities for caustic soda are being introduced,” write analysts at Motilal Oswal Securities post Grasim's fourth quarter result. 

This has led to earnings downgrade for Grasim and its forward estimates for earnings per share (EPS) has been cut by 30 per cent and 12 per cent for FY26 and FY27, respectively due to continuing margin pressure in core businesses and higher investments in newly-launched business of paints and B2B ecommerce. 

At the consolidated level, however, Ultratech Cement, the country’s biggest cement maker is the biggest contributor to its earnings. Grasim owns 56.11 per cent stake in the cement maker. It is also the majority owner of Aditya Birla Capital, the holding company of the group financial services business with 52.54 per cent stake. The company’s trailing price to earnings multiple (on consolidated basis) has now shot-up to 47x from 25x at the end of December 2024 and pre-pandemic average earnings multiple of 17x. 

Investors and analysts are betting on a fast ramp-up in the paints division and its ecommerce venture of selling construction goods. 

“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 ₹100 billion by FY28, it’s on track to become a formidable number-three player by FY28, in our view,” write analysts at Morgan Stanley India in their recent update on the company. 

The brokerage is also betting on a faster earnings growth at Ultratech Cement, its cement subsidiary. It accounted for nearly 40 per cent of Grasim consolidated profit before interest and taxes in FY25. 

Now it has to be seen if Grasim can still deliver a market beating performance given its rich valuation, a slowdown in consumer demand and rising competition in cement and paints business.