Carborundum Universal -The grind is getting over :: HDFC Sec,

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The grind is getting over
CUMI is a leading domestic manufacturer of
abrasives, industrial ceramics and refractories. It
also has manufacturing plants in Russia (Silicon
Carbide) and South Africa (Zirconia and
refractories). 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 value the stock at 20x FY17E EPS to arrive at TP
of Rs 225/sh. Our target multiple is at 30% premium
to 10-yr average but is reasonable in our view given
the high visibility of an industrial capex revival in
India and company’s creditable track record. CUMI
has generated positive operating cash flow across
cycles and has managed a nearly debt free balance
sheet despite an asset intensive business, three
acquisitions and a prolonged global slowdown. BUY
for an immediate play on industrial recovery and a
32% EPS CAGR over FY14-17E.
 Within India, CUMI’s products are used across a wide
gamut of industries. Revenue growth is linked directly
to pick up in industrial capacity utilisation (abrasives,
electrominerals) and/or investments (ceramics and
refractories). We expect manufacturing activity in
India to recover from multi-year lows. Consequently
revenue growth for domestic business (50% of total
revenues) should pick up smartly.
 From being an India focused company, CUMI has
successfully diversified globally (despite some
hiccups, which the company is addressing now). It has
managed to do so while facing multiple global and
domestic economic crises and has (importantly) not
overpaid for these acquisitions. Balance sheet
remains strong and company is well poised to benefit
from the domestic industrial recovery.
 With positive operating leverage, spare capacity (65%
utilisation), favourable product mix movement in
abrasives and reduction of overseas losses
(restructuring of operations at Thukela and Foskor)
we expect operating margins and RoEs to recover
sharply from FY16 onwards. Thus earnings are set for
32% CAGR over FY14-17E.
 We believe that given its strong track record and
leadership position in its target markets, CUMI will
continue to trade at premium valuations. Key risks to
our BUY call include (1) Delay in industrial revival in
India (2) Sharp deterioration of Russian economy and
(3) Inability to reduce losses at Thukela and Foskor