Company Overview
Grindwell Norton Ltd (GNO) is India’s leading manufacturer of Abrasives (Bonded,
Coated, Non-Woven, Superabrasives and Thin Wheels) and Silicon Carbide. It also
manufactures and markets High Performance Refractories and Performance Plastics
products. It is part of the 42 bn euro multinational group Saint Gobain.
Investment Rationale
Market leadership position in the Abrasives market in India
GNO is a market leader in the Abrasives market in India. It is one of the two major
players and together they have a market share of ~70% split among them equally. The
estimated market size of Abrasives in India for FY12 was ~Rs 2500 cr. The demand for
abrasive products in India is steady and any revival in the capex can lead to significant
improvement in the demand.
Wide range of products to cater to different industries
The abrasive products are used in a number of industries such as Steel, Automobiles,
Auto Components, General Metal Fabrication and Woodworking. GNO makes wide
range of products like Bonded, Super and Coated in the abrasives segment. Most of
these products are made indigenously or sourced from Saint Gobain plants across the
world. The dependence on any single industry for these products is less than 15%. The
largest customer accounts for less than 2% of the sales and the largest dealer accounts
for less than 3% of the total sales. This coupled with wide range of products helps
diversify the business risk for the company.
Expansion of capacity will help the company grow
Grindwell is looking to make a capital expenditure of Rs 100 crore per annum over the
next 2-3 years. It plans to set up Phase II of its High Performance Refractories (HPR)
plant in Gujarat this fiscal. Also, it would be investing in capacity expansion at bonded
abrasives plant in Nagpur and thin wheels and coated abrasives plant in Himachal
Pradesh. It is setting up a new non-woven abrasives line along with new plant for
performance plastics at Bangalore, too. The expansion projects (the major ones being
the Bonded expansion at Nagpur and the new Non-Woven plant at Bangalore)
planned are progressing as per schedule and are expected to be completed in the first
half of the current financial year. GNO has already done a capex of close to Rs 100 cr
in FY12 and is expected to invest similar amount in FY13 to expand its capacity. The
benefit of this capex will be seen in the coming years.
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Valuation & Recommendation
GNO has been able to maintain its growth in terms of topline and bottomline inspite
of flat volume growth in FY12 as it was able to increase the prices of its products.
Being a market leader in the abrasives segment helps GNO in terms of pricing power.
It is a debt free company with a consistent growth record since last 10 years (Sales
grew at a CAGR of 17.4% and PAT grew at a CAGR of 21.4% over 10 years). The end
market of its products is very diverse which significantly reduces its business risk. With
Saint Gobain’s backing it has access to the latest technologies for its product line.
At CMP, the stock trades at 12.2x its FY13E EPS and 7.4x its FY13E EV/EBITDA. At
current valuations and strong fundamentals we feel that the stock has an upside
potential of 15-20%. We recommend a Buy on the stock.
Investment Rationale
Market leader in the Abrasives markets in India
GNO is one of the major players in the Abrasives market in India. The only other major competition is
Carborundum Universal. These two players have a combined market share of ~70% split equally amongst
them. With a duopolistic nature of the market, GNO has pricing power over its products which reflects in
its ability to grow sales in FY12 inspite of flat growth in product volumes. This helps the company maintain
its profitability margins. The Abrasives market in India in FY12 was around Rs 2500 cr. Global market for
industrial abrasives is projected to touch US$ 27 billion in 2012 and projected to reach US$ 36 billion by
2018. Asia-Pacific is estimated to be both largest and the fastest growing market for industrial abrasives
with a Compounded Annual Growth Rate (CAGR) of 6.5% between 2008 and 2018 to account for 58% of
global market share in 2018. Demand for industrial abrasives will remain steady due to the consumable
nature of the product and will see an increase more so in Asia-Pacific due to boost in the construction and
manufacturing sectors and per capita incomes. GNO stands to benefit from these developments.
Wide range of products to cater to different industries
The abrasive products are used in a number of industries such as Steel, Automobiles, Auto Components,
General Metal Fabrication and Woodworking. GNO makes wide range of products in the abrasives
segment.
Bonded Abrasives are used for various applications ranging from polishing or lapping to remove high
quantities of materials. Bonded Abrasives are used in precision applications such as lapping, honing,
super-finishing, race grinding, thread grinding, fluting, OD grinding, ID grinding, surface grinding etc. They
are also used in rough applications such as snagging, cutting-off, burr removal, weld preparation etc.
Bonded Abrasives are used by a very large number of users. GNO makes over 15,000 different products in
a year.
Super Abrasives are made of diamond (synthetic or natural) or cubic boron nitride and are used in
precision applications.
Coated Abrasives products are engineering composites comprising of a backing, bond system and
abrasive grains and are designed for material removal and surface generation.
Most of these products are made indigenously or sourced from Saint Gobain plants across the world. The
dependence on any single industry for these products is less than 15%. The largest customer accounts for
less than 2% of the sales and the largest dealer accounts for less than 3% of the total sales. This coupled
with wide range of products helps diversify the business risk for the company.
Strong backing from Saint-Gobain (parent company) in terms of research and product supply
Saint-Gobain is uniquely positioned in the Abrasives industry as it can leverage the capability of
developing grain technologies suited for Abrasive applications. This helps GNO in bringing in new
technology to India faster than other players. Backed by strong R&D facility of Saint Gobain, GNO initially
imports products to India. Once these products are established here it starts manufacturing the product
domestically.
Expansion of capacity will help the company grow
The company, which has its own Silicon Carbide (SiC) grains manufacturing, is less dependent on external
sources for raw materials and this helps to improve margins as well. It has a capacity to produce 13,000
tonne of SiC at its subsidiary in Bhutan, which it plans to augment further.
Grindwell is looking to make a capital expenditure of Rs 100 crore per annum over the next 2-3 years. It
plans to set up Phase II of its HPR plant in Gujarat this fiscal. Also, it would be investing in capacity
expansion at bonded abrasives plant in Nagpur and thin wheels and coated abrasives plant in Himachal
Pradesh. It is setting up a new non-woven abrasives line along with new plant for performance plastics at
Bangalore, too. The expansion projects (the major ones being the Bonded expansion at Nagpur and the
new Non-Woven plant at Bangalore) planned are progressing as per schedule and are expected to be
completed in the first half of the current financial year. GNO has already done a capex of close to Rs 100
cr in FY12 and is expected to invest similar amount in FY13 to expand its capacity. The benefit of this
capex will be seen in the coming years.
Risks
Extended slowdown in the industrial production and capex activities in India and overseas may pose
threat to company’s revenue growth. Also, a rise in input costs of petroleum coke and electricity may
impact the company’s margins if it is not able to pass on the hikes.
Valuation & Recommendation
GNO has been able to maintain its growth in terms of topline and bottomline inspite of flat volume
growth in FY12 as it was able to increase the prices of its products. Being a market leader in the abrasives
segment helps GNO in terms of pricing power. It is a debt free company with a consistent growth record
since last 10 years. The end market of its products is very diverse which significantly reduces its business
risk. With Saint Gobain’s backing it has access to the latest technologies for its product line.
At CMP, the stock trades at 12.2x its FY13E EPS and 7.4x its FY13E EV/EBITDA. At current valuations and
strong fundamentals we feel that the stock has an upside potential of 15-20%. We recommend a Buy on
the stock.
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