Carborundum Universal

Carborundum Universal

Cairn India, Carborundum Universal, CESC, Ceat, Colgate Palmolive, Crompton Greaves, Cummins India

Cairn India, Carborundum Universal, CESC, Ceat, Colgate Palmolive, Crompton Greaves, Cummins India

Carborundum

Carborundum

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.

Carborundum Universal

Strong growth in revenues, a highly diversified geographical base and increasing focus on the high-growth solar wafer business spell long-term potential for Carborundum Universal (CUMI), a leading player in the abrasives and industrial ceramics space. Those with a two-three year investment horizon can consider buying this stock.
Valuations

At the current market price of Rs 102, CUMI trades at about 11 times its likely FY09 per share earnings. While this may appear pricey when compared to some of the other manufacturing companies whose price earning multiples have been reduced to the single digits, that CUMI is fairly shielded from the impact of an economic slowdown may justify the ‘premium’ valuation accorded to it. For one, it has a highly fragmented user industry base, which may cushion it from the fallout of any significant slowdown in a particular user industry. That despite the slowdown in the auto industry, CUMI has managed to put in modest growth numbers is a case in point.

Two, CUMI’s access to low-cost funds for sustaining its capacity expansion and working capital requirements (at an average of 9 per cent) also allays concerns regarding funding constraints, the reason oft cited for marking down manufacturing companies. Three, a chunk of the demand for CUMI’s products is ‘maintenance and repair’ driven. So, to that extent the demand for its products will continue to remain healthy.
Access to minerals

Another factor in CUMI’s favour is access to rich yet cheaper reserves of minerals (alumina and SiC), essential raw materials for all its products. The company has strategically set up manufacturing facilities in countries such as China and Russia, which not only hold rich reserves of minerals but are also the target market for some of its products; Russian presence also holds significance in terms of providing proximity to CUMI’s clients in Europe.
Financials

For the quarter ended September 2008, helped by a strong performance in India, Russia and Australia, CUMI’s consolidated revenues and profits registered an increase of over 67 per cent, each. It has also turned around its Canadian operations. Further, Volzhsky Abrasive Works, the Russian company that CUMI acquired last year, is expected to report higher revenue contributions from this year. On a standalone basis, the company registered a sales growth of over 20 per cent. Margins, however, remained flat at 16.3 per cent as the quarter saw a 41 per cent increase in power costs. This was because CUMI’s manufacturing facilities in TN and Kerala have been battling with intermittent power cuts. An increase in raw material costs across all business segments also led to a cost push.

Segment-wise, abrasives registered 15 per cent growth in sales, while the sale of ceramics and electrominerals increased by 28 per cent and 27 per cent respectively. Forex loss and high interest outgo during the quarter however capped the profit growth at 6 per cent.
Margins to remain stable

The mismatch in supply and demand of minerals globally had driven CUMI to raise the price of its products to the extent of 5 per cent twice this year. The company may yet again hike the price of its products this quarter. Despite the price hikes, CUMI still counts among the low-cost manufacturer of abrasives and ceramics and this may help it sustain both revenue growth and margins.

Margins may also get a lift from the improving product mix and addition of ‘high value’ products to its kitty. From over 10 per cent of revenues last year, the contribution of value-added products has increased to 25 per cent last quarter.

On that note, the company’s proposal to set up a Silicon Carbide Microgrit facility (high-margin products) to cater to the increasing demand from the photovoltaic industry also leaves sufficient scope for margin expansion in the long-term.

Carborundum Universal: Buy

Investors with a two-three year perspective can consider taking exposure to the stock of Carborundum Universal (CUMI), a leading player in the abrasives and industrial ceramics space.

Ongoing expansion in capacity, growing focus on export markets, and a foray into the power tools business make CUMI an attractive investment. Besides, CUMI’s recent acquisition of VAW, a Russian abrasives manufacturer, also holds potential given the global shortage of alumina grains.

At current market price of Rs 161, the stock trades at about 14 times its likely earnings for 2008-09. Investors can, however, accumulate the stock in lots given the volatility in the broad markets.

With strong demand drivers in place, CUMI has embarked on a timely expansion in capacities. Apart from leveraging on the buoyant domestic demand, CUMI may also benefit from an increased exposure to exports.

The management expects to increase its export contribution to about 40 per cent from the current levels of about 22 per cent in two-three years.

CUMI plans to set up marketing presence in Europe, US and South-East Asia through subsidiaries or strategic partners. These apart, CUMI’s planned foray into power tools business (market size of about Rs 400 crore) also holds significant potential.

This foray, apart from helping CUMI capture a share of this relatively high-growth and less tapped market, will also help it make the transition to an integrated player. This may be beneficial to profit margins.

The company already supplies consumables to the power tool industry (they account for 30 per cent of the power tool price).

For the quarter ended September 2007, CUMI recorded a lower net profit of Rs 12.3 crore, despite a 23 per cent growth in revenues.

Higher depreciation and interest cost in addition to an exceptional expenditure because of VRS payment explains the 21-per cent dip in earnings.

Given CUMI’s high reliance on debt for funding capex, the pressure on earnings may remain over the next year.

Nonetheless, this is no cause for concern given the healthy growth in revenues across all business segments and expected payoffs from the capex.

Via BL

Carborundum Universal: Buy

Investors with a three-four year perspective can consider buying the stock of Carborundum Universal (CUMI), a leading player in the abrasives and industrial ceramics space. CUMI’s capacity expansion, growing focus on export market and its venture into new businesses are likely to help it scale up future revenues.

However, given the company’s plan to partly fund its acquisitions and capital expansion through debt, earnings over the next couple of years may witness some pressure.

It could take over two-three years for CUMI to enjoy the full benefit of its acquisitions and capex, thus underscoring the importance of a long-term perspective on the stock.

At current market price of Rs 163, the stock trades at about 14 times its likely FY09 per share earnings. Investors may accumulate the stock in lots given the volatility in the broad markets.

Expanding capacities and markets

CUMI’s prospects appear promising in view of the buoyant demand trends in its user industries such as fabrication, construction, auto, auto components and OEMs (original equipment manufacturers).

Besides, factors such as increased focus by government on infrastructure and a likely increase in outsourcing to Indian component manufacturers could also keep the demand for refractories/abrasives upbeat.

CUMI, with its planned expansion in capacities, appears well-placed to meet such an increase in demand. It has lined up a capital investment of about Rs 120-130 crore to expand capacity in its super refractories, abrasives and ceramics division.

Further, contributions may also flow in from its joint venture in China, which has capacity to produce about 3,000 tonnes bonded abrasives and is expected to commence commercial production from the third quarter of FY08.

Capacity of the industrial ceramics division is also set to increase to 5,200 tonnes from the current 3,000 tonnes. Nevertheless, it may be noted that effective contributions from the increased capacities are likely from financial year 2008-09 only.

Leveraging on the advantage of a low-cost manufacturing base in India and China, CUMI plans to set up marketing presence in Europe, the US and South-East Asia through subsidiaries or strategic partners.

This appears tactical given the increasing demand for abrasives and ceramics in the target markets, where CUMI’s cost advantage could help give it a competitive edge over local players.

The management expects renewed focus on these markets to improve export revenue contribution from the current levels of about 22 per cent to about 40 per cent in two-three years.

New initiatives

CUMI recently announced its plan to enter the power tools business. This venture holds significant potential, considering the industry estimates, which peg the worldwide power tools market at about $12 billion and the Indian market at about Rs 400 crore. Besides, with companies such as Bosch growing more than 70 per cent in the last two years, this foray could add significantly to CUMI’s markets.

Additionally, since CUMI already supplies consumables to the power tool industry (30 per cent of the power tool price), it will make the transition to an integrated player in the sector.

CUMI’s presence in Silicon Carbide powder and bio ceramics space also holds promise. Notably, with the recent acquisition of VAW, a Russian manufacturer of silicon carbide (SiC) grain and bonded abrasive, CUMI has become the second largest producer of SiC.

This is significant since SiC is used in manufacturing abrasives and in powdered form is used for cutting polysilicon into thin wafers, a critical step for manufacturing photovoltaic cells. With only a few manufacturers of high quality SiC powder, this could help CUMI vault into the big league.

Financials

For the quarter ended June 2007, CUMI reported a 23 per cent growth in revenues. However, lower margins, higher interest cost and depreciation led to a 12 per cent drop in earnings.

Operating margins dipped by about 1.4 percentage points to 17.3 per cent on the back of increased raw material costs.

Going forward, this pressure could ease in the light of the shift in focus to products enjoying higher margin and on export markets, over a two-three year time frame.

On a segmental basis, abrasives contributed to about 64 per cent of the total revenues, while ceramics (19 per cent) and electrominerals (17 per cent) contributed the rest. This apart, any slowdown in capex and an unexpected rupee fluctuation could affect CUMI’s earnings.

Besides, increase in sourcing of abrasives from the Indian counterparts of its competitors could also pose a risk to CUMI.