Carborundum Universal

Shareholders can continue to hold the stocks of Carborundum Universal, an established player in the abrasives and industrial ceramics space. Helped by a well-diversified user industry base, the company appears to have done well to stave off any drastic slowdown in its revenues.

For the quarter ended March 2009, CUMI reported only a marginal decline in revenues despite the production cutbacks and capex call-offs across its user industries. However, higher interest outgo, fall in contributions from its abrasive segment and forex losses took a toll on its bottom-line.

At the current market price of Rs 102, the stock trades at about 16 times its FY09 per share earnings. Going forward, the earnings may improve, thanks to interest rates cooling off and initiatives by the company to reduce the overall debt burden.
Diversified presence

Besides a diversified user base, CUMI is fairly well spread out in terms of geographical presence and revenue stream. This appears to have helped the company in the present challenging times. Healthy dispatches in the cement sector, pick up in auto numbers and sustained activity in the mining sector too may have supportedthe company’s overall revenues and offset the impact of a lower off-take in other industries such as construction.

In terms of segment-wise revenues for the quarter-ended March 2009, the abrasives division, which is also CUMI’s largest revenue contributor, reported a 12 per cent decline in sales. As a result, its share in the overall revenue pie fell to about 53 per cent from 60 per cent a year ago.

While the slowdown in the manufacturing and capital goods sectors may explain the declining sales of the division, the fall hasn’t been as drastic if we consider the full year sales numbers. With the economy beginning to show signs of a slight revival, abrasive sales may also see an up-tick in the coming quarters.

Besides, since abrasives find extensive usage in essential and critical applications across sectors, this division is unlikely to see any significant fall in its sales.

The quarter also saw the company’s non-abrasive divisions — electro-minerals and ceramics — chip in with better performance. Both electro-minerals (15 per cent) and ceramics (7 per cent) divisions reported healthy growth in sales. While higher depreciation led by the commissioning of a new plant saw the ceramics division report a decline in profits, the electro-minerals division more than doubled its profitability (PBIT). Incidentally, the company had doubled its capacity for producing electro-minerals in December 2008.
Overseas expansions

Consolidated sales for the year recorded a growth on 31 per cent, driven by higher contributions from its operations in Russia and Australia. Volzhsky Abrasive Works (VAW), the Russian company that CUMI had acquired earlier (September 2007), turned in better numbers led by strong silicon carbide sales and improved product-mix.

The abrasive business of VAW however was unimpressive owing to a lacklustre market for it in Russia. CUMI Australia, too, reported healthy performance, what with over a 50 per cent increase in sales.

The management attributed this to the strong order flows from the minerals and coal-handling sectors, which are expanding their capacities. However, CUMI’s joint venture in China turned in only a modest performance owing to lower export off-takes from the facility.
Challenges ahead

Despite the upward revision of product prices that was carried out early last year, CUMI’s operating margins have declined significantly, both for the quarter and for the full year.

The company’s operating profit margins for the quarter declined by over 5 percentage points to 13.5 per cent. This decline, despite flat to moderate growth in sales, suggests that there could be pressure on volumes.

The management has said that its margins may be maintained at current levels and that it has resorted to cost cutting initiatives for this purpose.

Investors may nevertheless have to keep a tab on CUMI’s performance over the next few quarters.

Increasing interest burden is a cause for concern. While the management had earlier said that it planned to move a considerable amount of debt to the books of its overseas holding company, CUMI International Ltd, and later dilute stake in it to reduce debt, there appears to be no visible development on that front.

The company currently has a standalone debt of over Rs 347 crore. Apart from poor profit margin and higher interest outgo, forex losses and lower-non-operating income have played spoilsport and resulted in lower profits.

Profits for the quarter declined by 69 per cent; it fell by 39 per cent on a standalone basis for the full year.