Carborundum Universal - Set to ride the economic recovery :: HDFC Securities

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Set to ride the economic recovery CUMI’s 3QFY15 APAT of Rs 146mn was in line with our estimate. Segmental performance was also broadly in line. Abrasives and Ceramics demonstrated YoY improvement (albeit there was sequential weakness in domestic abrasives) while revenues and profits of Electrominerals segment were (expectedly) impacted by sharp depreciation of Russian Ruble vs. INR. Management remains upbeat about prospects of domestic business. Restructuring of Thukela and Foskor is on track while Russian business environment is slowly stabilizing. With an expected pick up in domestic industrial activity, demand for abrasives and industrial ceramics should recover, driving a sharp pickup in CUMI’s domestic revenue growth. Aided by operating leverage and restructuring of its international operations, CUMI’s margins and RoE are thus set to improve substantially. We retain our estimates and maintain BUY on the stock with a Mar-16 TP of Rs 225/sh based on 20x FY17E EPS.  Standalone PAT went up 111% YoY from a low base. However, there was a 31% sequential decline in APAT as company lost some market share to new entrants in the bonded abrasives market. Management is confident of getting back the lost market share (without sacrificing margins) in forthcoming quarters.  Performance of VAW was impacted by weak Russian business environment and translation loss due to sharp depreciation of Russian Ruble. Company held back sales of abrasives in Russia due to cash flow concerns. Despite short term headwinds, depreciation of Ruble is favourable for VAW as its export competitiveness improves while it gains price advantage over imports in the domestic markets.  Restructuring of Thukela refractories is expected to be finished by Mar-15 while progress on moving Foskor’s bubble Zirconia plant to India is also on schedule. Together the two subs had PBT loss of Rs 510mn in 9MFY15 and this is not expected to recur in FY16.  Our target multiple is at 30% premium to 10-yr average but we believe that given its strong track record, high visibility of domestic business turnaround and leadership position in its target markets, CUMI will continue to trade at premium valuations. Retain BUY.

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