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Investment Rationale
~ Well geo-graphically diversified player
~ Capex will augment future top line
~ Integrated Player
~ Diversified revenue mix and less customer dependency
~ Focus on high profitability business and synergies
Company Description
CUMI is the Murugappa Group's flagship company based out of
Chennai. Carborundum Universal Limited (CUMI) is engaged in the
manufacture of coated abrasives and bonded abrasives. It also
manufactures super refractories, electro minerals, industrial ceramics
and ceramic fibers. The Company operates through three business
segments: abrasives, ceramics and electrominerals. All of its
manufacturing facilities are located in India.
Abrasive segment comprises of bonded, coated, processed cloth,
polymers, powertools and coolants.
Ceramics comprises of super refractories, industrial ceramics, anticorrosives
and bioceramics.
Electrominerals include abrasive / refractory grains, micro grits for the
photovoltaic industry and captive power generation from hydel power
plant.
Its subsidiaries include CUMI America Inc., Net Access (India) Pvt Ltd,
Southern Energy Development Corporation Ltd, Sterling Abrasives
Ltd, CUMI Australia Pty Ltd, CUMI Canada Inc and CUMI Middle East
FZE.
~ Well geo-graphically diversified player
Cumi’s products are exported to 43 countries spread across North
America, Europe, Australia, South Africa, Russia and Asia. It has its
manufacturing base in India, Russia, China and South Africa. The
company has 10 subsidiaries, three joint ventures (JV) and one
associate company. Broadly, consolidated revenue from India and
rest of world is about 56:44. In a normal year, 50% of the turnover
comes from Abrasives, 30% from electro minerals, and the rest from
ceramics.
~ Capex will augment future top line
After spending about Rs 75 crore consolidated capex in FY 2011,
Cumi has earmarked about Rs 225 crore capex in FY 2012. Major
projects include a 3,600-tonne alumin ceramic capacity, addition of
3,000-tonne fired capacities in refractory, 100-tonne value-added
grain in the electro mineral segment, 12,000-tonne silicon car- bide
capacity in Russia, and doubling of the zirconia capacity.
~ Integrated Player
Carborundum Universal (Cumi) pioneered the manufacture of
coated abrasives and bonded abrasives in India in addition to the
manufacture of super refractories, electro minerals, industrial
ceramics and ceramic fibres. Its range of over 20,000 different
varieties of abrasives, refractory products and electro-minerals are
manufactured in 10 locations across various parts of the country.
Cumi’s unique strength lies in its integration. It is able to captively
access raw materials such as silicon carbide, brown and white fused
alumina and zirconia used to manufacture of abrasives, ceramics and
refractory.
With raw material prices creating havoc for every industrial player,
Cumi its operating on the full backward integration model to have an
edge. It has sufficient capacities for its raw materials to feed in-house
abrasive requirement as well as to sell electro minerals in the open
markets. Thus, the company can gain the advantage of higher raw
material realisation as well. As a result, Cumi has indirectly emerged
as a major mineral player in silicon carbide and zirconia businesses in
the world.
~ Diversified revenue mix and less customer dependency
The best part of the company is that it is neither dependent on a
single customer nor single business segment. CUMI operates in three
business segment and different sub-segments. Revenue mix is so
diversified that any single sub-segment contribution in overall revenue
is limited to 10-12% and customer dependency is also limited that any
single customer revenue is limited up to extent of 5%.
~ Industry Growth and Business Synergies
Abrasives are hard, tough-wear resistant materials used to shape or
finish the final product. Broadly, the user industry is categorized
into automobiles and auto ancillaries including precision casting and
forgings, constituting about 25% of sales in value terms; construction
and fabrication including general and specialized engineering,
constituting about 20% in value terms; polishing, food-related
products, textiles and such others, constituting about 10%; and all the
other industries, constituting the rest.
Cumi has about 35% market share in India. In abrasives, Cumi is into
bonded, coated, super and thin wheels. This abrasives market is
predominately catered from India and by the Russian subsidiary. The
growth momentum is expected to be even better in the fiscal ending
March 2012 (FY 2012) compared with the already strong in FY 2011.
Moreover, due to restructuring of its Chinese JV, about 30% of the
Chinese manufacturing capacity was utilized in FY 2011 and will be
utilized significantly in FY 2012 to cater to both the Chinese and
Indian requirement.
Industrial ceramics are basically wear- and-the tear and corrosionresistant
materials. They are also consumables used in equipment
and furnaces to manufacture cement, steel, aluminum, and coal
washeries. The products are in the form of wear-resistant liners, ring
ceramics, engineered ceramics and metalised cylinders. Specialised
alumina and zirconia are the key raw materials for ceramics. Nearly
50% of the industrial ceramics are sold in India and the rest exported,
predominately to North America. Ceramics growth will, by and large,
be determined by global markets. Cumi Canada and Australia play a
very strong role for this division’s growth in global markets. In
Australia, the ceramics division caters to the coal washeries and has
extremely high margin. The company expects the Indian division to
grow steadily, with stupendous growth expected from the metallised
cylinder unit.
Valuation
At CMP of Rs. 266 stock is quoting at 11x and 9x for FY 12e & FY
13e. We expect the capex will help to add top line and profitability and
inorganic growth will help CUMI to enhance its penetration in different
markets. We recommend to buy the stock with a 12 months target of
Rs. 330 which is around 24% upside from current level.
Concern
Slow down in global Market, Slow down in capex
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Rationale
~ Well geo-graphically diversified player
~ Capex will augment future top line
~ Integrated Player
~ Diversified revenue mix and less customer dependency
~ Focus on high profitability business and synergies
Company Description
CUMI is the Murugappa Group's flagship company based out of
Chennai. Carborundum Universal Limited (CUMI) is engaged in the
manufacture of coated abrasives and bonded abrasives. It also
manufactures super refractories, electro minerals, industrial ceramics
and ceramic fibers. The Company operates through three business
segments: abrasives, ceramics and electrominerals. All of its
manufacturing facilities are located in India.
Abrasive segment comprises of bonded, coated, processed cloth,
polymers, powertools and coolants.
Ceramics comprises of super refractories, industrial ceramics, anticorrosives
and bioceramics.
Electrominerals include abrasive / refractory grains, micro grits for the
photovoltaic industry and captive power generation from hydel power
plant.
Its subsidiaries include CUMI America Inc., Net Access (India) Pvt Ltd,
Southern Energy Development Corporation Ltd, Sterling Abrasives
Ltd, CUMI Australia Pty Ltd, CUMI Canada Inc and CUMI Middle East
FZE.
~ Well geo-graphically diversified player
Cumi’s products are exported to 43 countries spread across North
America, Europe, Australia, South Africa, Russia and Asia. It has its
manufacturing base in India, Russia, China and South Africa. The
company has 10 subsidiaries, three joint ventures (JV) and one
associate company. Broadly, consolidated revenue from India and
rest of world is about 56:44. In a normal year, 50% of the turnover
comes from Abrasives, 30% from electro minerals, and the rest from
ceramics.
~ Capex will augment future top line
After spending about Rs 75 crore consolidated capex in FY 2011,
Cumi has earmarked about Rs 225 crore capex in FY 2012. Major
projects include a 3,600-tonne alumin ceramic capacity, addition of
3,000-tonne fired capacities in refractory, 100-tonne value-added
grain in the electro mineral segment, 12,000-tonne silicon car- bide
capacity in Russia, and doubling of the zirconia capacity.
~ Integrated Player
Carborundum Universal (Cumi) pioneered the manufacture of
coated abrasives and bonded abrasives in India in addition to the
manufacture of super refractories, electro minerals, industrial
ceramics and ceramic fibres. Its range of over 20,000 different
varieties of abrasives, refractory products and electro-minerals are
manufactured in 10 locations across various parts of the country.
Cumi’s unique strength lies in its integration. It is able to captively
access raw materials such as silicon carbide, brown and white fused
alumina and zirconia used to manufacture of abrasives, ceramics and
refractory.
With raw material prices creating havoc for every industrial player,
Cumi its operating on the full backward integration model to have an
edge. It has sufficient capacities for its raw materials to feed in-house
abrasive requirement as well as to sell electro minerals in the open
markets. Thus, the company can gain the advantage of higher raw
material realisation as well. As a result, Cumi has indirectly emerged
as a major mineral player in silicon carbide and zirconia businesses in
the world.
~ Diversified revenue mix and less customer dependency
The best part of the company is that it is neither dependent on a
single customer nor single business segment. CUMI operates in three
business segment and different sub-segments. Revenue mix is so
diversified that any single sub-segment contribution in overall revenue
is limited to 10-12% and customer dependency is also limited that any
single customer revenue is limited up to extent of 5%.
~ Industry Growth and Business Synergies
Abrasives are hard, tough-wear resistant materials used to shape or
finish the final product. Broadly, the user industry is categorized
into automobiles and auto ancillaries including precision casting and
forgings, constituting about 25% of sales in value terms; construction
and fabrication including general and specialized engineering,
constituting about 20% in value terms; polishing, food-related
products, textiles and such others, constituting about 10%; and all the
other industries, constituting the rest.
Cumi has about 35% market share in India. In abrasives, Cumi is into
bonded, coated, super and thin wheels. This abrasives market is
predominately catered from India and by the Russian subsidiary. The
growth momentum is expected to be even better in the fiscal ending
March 2012 (FY 2012) compared with the already strong in FY 2011.
Moreover, due to restructuring of its Chinese JV, about 30% of the
Chinese manufacturing capacity was utilized in FY 2011 and will be
utilized significantly in FY 2012 to cater to both the Chinese and
Indian requirement.
Industrial ceramics are basically wear- and-the tear and corrosionresistant
materials. They are also consumables used in equipment
and furnaces to manufacture cement, steel, aluminum, and coal
washeries. The products are in the form of wear-resistant liners, ring
ceramics, engineered ceramics and metalised cylinders. Specialised
alumina and zirconia are the key raw materials for ceramics. Nearly
50% of the industrial ceramics are sold in India and the rest exported,
predominately to North America. Ceramics growth will, by and large,
be determined by global markets. Cumi Canada and Australia play a
very strong role for this division’s growth in global markets. In
Australia, the ceramics division caters to the coal washeries and has
extremely high margin. The company expects the Indian division to
grow steadily, with stupendous growth expected from the metallised
cylinder unit.
Valuation
At CMP of Rs. 266 stock is quoting at 11x and 9x for FY 12e & FY
13e. We expect the capex will help to add top line and profitability and
inorganic growth will help CUMI to enhance its penetration in different
markets. We recommend to buy the stock with a 12 months target of
Rs. 330 which is around 24% upside from current level.
Concern
Slow down in global Market, Slow down in capex
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