Carborundum Universal: Promising prospects

Lacklustre private investment and subdued utilisation levels in many manufacturing plants across India have impacted capital goods manufacturers.

However, with the organised sector set to gain traction with the passage of the Goods and Services Tax Bill and with demand improving due to favourable monsoon, Seventh Pay Commission pay-outs and lower cost of finance, manufacturing output as well as investment in this segment are likely to improve in the coming quarters. Manufacturers of industrial consumables such as Carborundum Universal (CUMI) will be the first to gain from this revival.

With a healthy balance sheet, strategic capacity expansions on the anvil and strong global presence, CUMI’s prospects seem good. At ₹257, the stock’s current price-to-earnings ratio (trailing 12 months) is about 30 times.

This is lower than the 37 times, its peer, Grindwell Norton, trades at. Further, the Centre’s increased investment push in the infrastructure segment (ports, roads, railway, urban and smart cities) should also assist CUMI’s prospects. The company operates three main divisions — abrasives, ceramics and electro-minerals.

The abrasives, electro minerals (EMD) and ceramics contribute about 42, 34 and 22 per cent each respectively to the total revenue.

Abrasives are classified mainly into two types — bonded and coated abrasives. They are used predominantly in the manufacturing of bearings, camshafts, crankshafts, auto ancillary, flooring and fabrication industries.

On the back of good product mix and volumes for the year ending 2015-16, the abrasive segment registered profit before interest and tax of ₹89 crore, up more than 40 per cent compared with the previous year.

CUMI’s abrasive segment, with a global presence in the mid and high value market segments, is well placed to tap the ₹3,000-crore market. Combined growth in this segment, both domestic and international, in 2015-16 was 9.7 per cent.

Besides this, CUMI’s research and development capabilities allow it to move into composite intensive manufacturing, involving finer finished abrasives, coated abrasives and flexible abrasives. CUMI’s coated abrasives plant now runs on full capacity and the management has indicated that it may increase capacity further if demand increases over the next two to three years.

In case of EMD segment, though consolidated sales revenue remained flat at ₹731 crore for the year ending March 2016 compared to the earlier year, sales growth for the domestic segment was impressive — 35 per cent for the year ending March 2016 compared with the previous year.

The flat revenue at the consolidated level is mainly due to winding down of refractories in South Africa and transfer of some Russian business units to India. But, sales of higher alumina and specialised products helped in improving operating profit by near 60 per cent in 2015-16 compared with the previous year. With the transfer of plants to India, construction of new Bubble Zirconia Micronisation plant and increase in the capacity utilisation of specialised micro grid application above 60 per cent over the next two years, the management expects this segment to grow above 15 per cent per annum.

Ceramics and refractory products are mainly used as insulators against high temperature, corrosion and erosion in kilns and furnaces. Their applications are found in the manufacture of steel, cement and glass, to name a few.

A depressed industrial environment, both domestic and international, decreased profit before interest and tax to ₹66 crore for the year ending March 2016 — a drop of 7 per cent year on year. But domestic business in this segment registered a small profit growth. This segment could do better as thermal power plant utilisation and development of other infrastructure projects improve over the next few years.

The ongoing asset restructuring and the capital expenditure of ₹180 crore should also help growth from FY18 onwards.

The additional capital expenditure after re-commissioning of NTK Japan plant in India and relocation of Thukela plant refractory division to Jabalpur should boost production as they increasingly start catering to the Indian market.

Besides, the decision to entrust manufacture of CUMI’s products to a third-party company in China, a strong market presence in Russia, an established sales team in Russia and other regions, and a good export market should help in the long run. Also, the strong research and development capabilities (filed around 20 intellectual property for year ending March, 2016) places the company in good position.

At the end of March 2016, sales contribution was well diversified — 53 per cent from India, 24 per cent from Europe and Russia, 10 per cent from Asia Pacific, Australia, Japan, 7 per cent from America and 6 per cent from West Asia and Africa.

Between FY14 and FY16, the company’s consolidated sales decreased at an annualised rate of 1 per cent while adjusted profit grew at an annualised 26 per cent during the same period.

The consolidated sales and adjusted profit for the year ending 2015-16 was ₹2,084 crore and ₹145 crore respectively. This is higher by 1.7 and 82 per cent respectively, compared to FY15.

For quarter ending September 2016, the total debt and debt-to-equity ratio stood at ₹319 crore and 0.25 times respectively.

The consolidated revenue and profit for the September 2016 quarter was ₹551 crore and ₹47 crore, up 7.5 and 17 per cent respectively, compared to the previous corresponding quarter.

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