Grindwell Norton - Robust Absolute and Relative Performance; Result Update Q3FY15 ::Edelweiss

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Grindwell Norton (GWN) delivered a strong Q3FY15 with 18% YoY sales surge and 35% YoY EBITDA jump. Key positives were: (1) robust 19% YoY growth in abrasive sales (3x competitor CUMI); (2) ceramics and plastics jumped a healthy 15% YoY; and (3) EBITDA margin expanded 192bps YoY to 15.1% led by fuel cost savings of 110bps and operating leverage. A 23bps YoY dip in gross margin to 54.6% was key negative. GWN commands superior pricing power with patented products from parent. Also, in view of 70% gross block expansion over FY10-14, current utilisation at ~55-70% of sales and strong new product launches (35% of sales), we anticipate sales CAGR of 23% and EBITDA CAGR of 31% over FY15-17E. With GWN’s superior performance compared to the industry, we are revising our earnings estimates up, leading to 37% earnings CAGR over FY15-17E, core RoCE catapulting 1800bps to 44% and multiple to 22x FY17E P/E (20x earlier) giving target price of INR764.

Robust sales surpass competitor

GWN reported better-than-expected sales growth of 18% YoY, in line with estimate.  Underlying growth was primarily led by 19% YoY surge in abrasives and 15% YoY jump in ceramics pick up in domestic automotives. Also, the growth is commendable in comparison with CUMI’s sales growth of 6% YoY in abrasives. On 9m basis, the company reported healthy 18% YoY jump in sales led by 14% YoY growth in abrasives (4% YoY growth by competitor) and 22% YoY rise in ceramics and plastics.

EBIDTA margin on track; lower power cost benefits

The company’s operating profit grew a strong 35% YoY and EBITDA margin catapulted 192bps YoY to 15.1% primarily on lower fuel cost, which fell 110bps to 5.7% of sales along with dip in other expenses. However, gross margin fell 23bps YoY to 54.6% reflecting lack of price hikes. Overall EBITDA grew a healthy 23%YoY in 9mFY15.

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https://www.edelweiss.in/research/Grindwell-Norton--Robust-Absolute-and-Relative-Performance;-Result-Update-Q3FY15/28218.html