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Carborundum Universal (CU)
Others
Steady performer. Carborundum Universal is an Indian manufacturer and global
supplier of abrasives, ceramics and electro-minerals. CUMI has a strong business model
reinforced by its finished products manufacturing base in India and access to low-cost
production units for raw materials through foreign acquisitions. Having diligently
integrated the foreign acquisitions with the parent company, CUMI is poised to emerge
as a big player in the global abrasive and ceramics industry. We initiate coverage with a
BUY rating and a target price of Rs300.
Robust business model; backward integration achieved through foreign acquisitions
CUMI has built a robust business model with (1) the bulk of its finished products manufacturing
done in India, (2) backward integration built through foreign acquisitions and (3) access to lowcost
production facilities for electro-minerals (raw materials). Having successfully integrated its
foreign acquisitions and established a global base (across 27 countries), it is poised to emerge as
one of the major players in the global abrasive industry.
Steady growth ahead; linked to general manufacturing and infrastructure
Growth in the abrasive and ceramics industry is linked to increase in activity in general
manufacturing and infrastructure sectors. Both segments are poised for 2-3 years of strong growth
in India on the back of steady growth in GDP (KIE estimates: GDP growth at 8.1% and 8% in
FY2012E and FY2013E, respectively). The global economy is also picking up with reasonable levels
of growth (IMF has projected 4.5% growth in global GDP in CY2011E, after 4.4% in CY2010).
CUMI’s wide global presence (production bases + sales offices) places it well to leverage this
growth momentum.
Momentum in earnings to sustain; ROCE to improve
CUMI’s EBITDA has grown from Rs1.2 bn in FY2007 to Rs2.11 bn in FY2010 at a CAGR of 20%.
The track record is impressive given the fact that growth (including inorganic) was based on
internal accruals from the business. We expect the momentum in earnings to sustain and expect
EBITDA to grow at a CAGR of 18% in FY2010-14E. Also, we expect ROCE for the company to
improve to ~15% (~10% in FY2010) backed by higher capacity utilization.
Key risks—rising share of profits from electro-minerals and manufacturing slowdown
(1) CUMI’s high share of profits from commodity electro-minerals would lend high volatility to
earnings, and (2) a general slowdown in manufacturing and infrastructure sectors could lead to
lower-than-projected growth rates.
Valuations
We find CUMI reasonably valued at 13.5X FY2012E EPS and 8X FY2012E EBITDA, supported
by reasonable earnings (PAT) growth at a CAGR of 15% in FY2011-14E. CUMI is a major
global player in the abrasives and ceramics segment. Abrasive/ceramics products find use in
general manufacturing and infrastructure. We believe CUMI is ideally placed to capture
growth in these segments by virtue of its superior product profile and capability of its
management. We like the business model of the company, with the bulk of its finished
products manufacturing base in India and assured access to low-cost manufacturing
locations for raw materials (on account of foreign acquisitions done in the past). We believe
the company has a strong strategic positioning and is well-placed to emerge a dominant
player in the global abrasive/ceramics industry.
We value the stock at Rs300 based on 15X FY2013E EPS
We value CUMI at Rs300 based on 15X FY2013E EPS. The stock has traded at an average
1-year forward P/E multiple of 20X in FY2005-10. We are valuing the stock at ~20%
discount to its historical average as we expect electro-minerals to form a much higher
proportion of profits in the future as compared to the past. As per our estimates, electrominerals
would form 50% of the PBIT of the company in FY2013E as compared to a range
of 15-45% of PBIT in FY2007-10. We consider electro-minerals more of a commodity
product and therefore are of the opinion that multiples used to value future profits of the
company should be lower than the historical averages.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Carborundum Universal (CU)
Others
Steady performer. Carborundum Universal is an Indian manufacturer and global
supplier of abrasives, ceramics and electro-minerals. CUMI has a strong business model
reinforced by its finished products manufacturing base in India and access to low-cost
production units for raw materials through foreign acquisitions. Having diligently
integrated the foreign acquisitions with the parent company, CUMI is poised to emerge
as a big player in the global abrasive and ceramics industry. We initiate coverage with a
BUY rating and a target price of Rs300.
Robust business model; backward integration achieved through foreign acquisitions
CUMI has built a robust business model with (1) the bulk of its finished products manufacturing
done in India, (2) backward integration built through foreign acquisitions and (3) access to lowcost
production facilities for electro-minerals (raw materials). Having successfully integrated its
foreign acquisitions and established a global base (across 27 countries), it is poised to emerge as
one of the major players in the global abrasive industry.
Steady growth ahead; linked to general manufacturing and infrastructure
Growth in the abrasive and ceramics industry is linked to increase in activity in general
manufacturing and infrastructure sectors. Both segments are poised for 2-3 years of strong growth
in India on the back of steady growth in GDP (KIE estimates: GDP growth at 8.1% and 8% in
FY2012E and FY2013E, respectively). The global economy is also picking up with reasonable levels
of growth (IMF has projected 4.5% growth in global GDP in CY2011E, after 4.4% in CY2010).
CUMI’s wide global presence (production bases + sales offices) places it well to leverage this
growth momentum.
Momentum in earnings to sustain; ROCE to improve
CUMI’s EBITDA has grown from Rs1.2 bn in FY2007 to Rs2.11 bn in FY2010 at a CAGR of 20%.
The track record is impressive given the fact that growth (including inorganic) was based on
internal accruals from the business. We expect the momentum in earnings to sustain and expect
EBITDA to grow at a CAGR of 18% in FY2010-14E. Also, we expect ROCE for the company to
improve to ~15% (~10% in FY2010) backed by higher capacity utilization.
Key risks—rising share of profits from electro-minerals and manufacturing slowdown
(1) CUMI’s high share of profits from commodity electro-minerals would lend high volatility to
earnings, and (2) a general slowdown in manufacturing and infrastructure sectors could lead to
lower-than-projected growth rates.
Valuations
We find CUMI reasonably valued at 13.5X FY2012E EPS and 8X FY2012E EBITDA, supported
by reasonable earnings (PAT) growth at a CAGR of 15% in FY2011-14E. CUMI is a major
global player in the abrasives and ceramics segment. Abrasive/ceramics products find use in
general manufacturing and infrastructure. We believe CUMI is ideally placed to capture
growth in these segments by virtue of its superior product profile and capability of its
management. We like the business model of the company, with the bulk of its finished
products manufacturing base in India and assured access to low-cost manufacturing
locations for raw materials (on account of foreign acquisitions done in the past). We believe
the company has a strong strategic positioning and is well-placed to emerge a dominant
player in the global abrasive/ceramics industry.
We value the stock at Rs300 based on 15X FY2013E EPS
We value CUMI at Rs300 based on 15X FY2013E EPS. The stock has traded at an average
1-year forward P/E multiple of 20X in FY2005-10. We are valuing the stock at ~20%
discount to its historical average as we expect electro-minerals to form a much higher
proportion of profits in the future as compared to the past. As per our estimates, electrominerals
would form 50% of the PBIT of the company in FY2013E as compared to a range
of 15-45% of PBIT in FY2007-10. We consider electro-minerals more of a commodity
product and therefore are of the opinion that multiples used to value future profits of the
company should be lower than the historical averages.
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