Grindwell Norton

Investors with moderate risk and return expectations can consider taking exposure in the abrasive and industrial ceramics manufacturer, Grindwell Norton. Pick-up in capex spending by user industries, ability to retain significant market share and profit margins, despite competition and pricing pressures, and technology support from the French parent shore up the earnings prospects for this company.

At the current price of Rs 144, the stock discounts its likely per share earnings for FY-11 by 12 times. The valuations are at a steep discount to peer Carborundum Universal.

While the company's earnings grew at a compounded annual rate of 10 per cent over the last three years, muted growth in 2008 and partly in 2009 pulled down the overall performance.

Given the increased activity in auto, auto components and steel and non-ferrous sectors — key end-users of the company's products — we expect earnings growth to scale up over the next two years.

A low-debt profile and utilisation of internal accruals also augur well, given the expectations of a climb in interest rates by end-2010.

Demand for abrasives

Grindwell Norton derives over 70 per cent of its revenues from sale of abrasives, predominantly used in industries such as automobiles, auto components, steel, foundry and fabrication as well as a number of other manufacturing industries.

The planned increase in capacity with the entry of overseas players in sectors such as auto and steel, could see significant traction in demand for Grindwell Norton; the company is part of the Saint-Gobain group, which is a world leader in bonded abrasives.

In the local market, Carborundum Universal and Grindwell Norton together garner around 65-70 per cent of the abrasive market, with the former, in a slightly more dominant position. However, the abrasives market is not entirely insulated from competition, despite heavy investment.

Small players catering to specific low-end products, high-end precision tools offered by players from Europe through local marketing networks as well as Chinese imports post a competitive challenge. As a result, the abrasive market faces pricing pressure.

However, backing of the group's brand name could well act as a good reference for players such as Grindwell Norton, when it comes to dealing with bigger clients in the metal and auto industry.

Besides, cost-advantage by way of manufacturing units in India as well as backward integration into silicon carbide, a key raw material for abrasives, provide some edge for the company. With the aid of its parent, Grindwell Norton has also expanded in to export markets.

That the abrasive division is limping back to normalcy after a tough year in 2008, is evident from the segment's revenues for the 12 months ended December 2009 (the company plans to change its accounting year to March). Abrasives sales of Rs 366 crore for the above period is, in fact, 10 per cent higher than that of the year ending December 2007; in other words, the company has managed to beat a year of peak performance.

Operating profit of the segment, though, remains lower than the corresponding level in 2007, suggesting that pricing power could be weak.

Key demand drivers

The company's ceramics and plastics segment which produces silicon carbide and high performance refractories has witnessed robust growth and maintained profit margins, thanks to its key demand drivers — metallurgy (iron and steel) and construction industries, apart from internal consumption of silicon carbide for the abrasives division. However, this segment would be sensitive to any steep increase in input costs.

The segment could nevertheless benefit from improved volumes from any global increase in commodity demand, as the usage of its products in steel manufacturing as well as in refractories used for processing metals is quite extensive. For the 12 months ending December 2009, sales grew by a tepid 5.6 per cent to Rs 530 crore while net profits expanded by 11 per cent to Rs 61 crore.

Pick-up in business was, however, evident with a 30 per cent growth in sales and 42 per cent jump in profits in the latest ended quarter over a year ago.

via BL