Investors can consider taking an exposure in Grindwell Norton, a leading player in abrasives and industrial ceramics with one-two year perspective.
At the current market price, the stock trades at about 11 times its expected calendar year 2007 per share earnings. A healthy demand outlook stemming from increased capex in user industries, increased focus on exports combined with Grindwell's strong foothold in the domestic market in certain product categories are likely to spur future earnings growth. It is also likely to benefit from the access to newer export markets and product sourcing from Saint Gobain, its parent company.
In the abrasives industry, Grindwell and Carborundum Universal together cater to about 75 per cent of the domestic demand. The abrasives segment of Grindwell is likely to drive future growth, given the positive demand environment for user industries such as steel or infrastructure. For the calendar year 2006, while the revenue contribution of the abrasives segment increased by 21 per cent, the segment profit jumped by 42 per cent. This apart, its recent acquisition of Orient Abrasives is also expected to contribute to the earnings stream. However, significant contributions from Orient Abrasives are likely to flow in from the second half of 2007 only. Contribution from the ceramics and plastics segment, however, is likely to be maintained.
For the calendar year 2007, Grindwell has outlined capex plans of Rs 20 crore for maintenance and de-bottlenecking. This is likely to help improve margins, which have been under pressure during the second half of 2006. The operating profit margins, during the quarter ended December 2006 had dipped by 280 basis points to 15.6 per cent. However, the pressure on margins is expected to ease with the company's cost reduction efforts. Any slowdown in the capex plans of the user industries and increase in imports from China remain principal risks.