Preheat oven to 350 degrees F (175 degrees C). Grease a 2-quart baking dish.
Beat milk, egg, garlic powder, and hot pepper sauce in a bowl.
Bring water and salt to a boil in a saucepan; cook and stir grits in boiling water until thickened, 3 to 5 minutes.
Remove from heat; add butter and about 1/2 of the Cheddar cheese. Stir egg mixture into grits and pour grits into the prepared baking dish.
Sprinkle remaining Cheddar cheese over grits.
Bake in the preheated oven until cheese is melted and grits are set, about 1 hour. Allow grits to cool 20 to 30 minutes before serving. Grits should be cornbread-like.
