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MORNING INSIGHT

November 25, 2014

CARBORUNDUM UNIVERSAL LTD (CUMI)

INITIATING COVERAGE
Ruchir Khare
ruchir.khare@kotak.com
+91 22 6621 6448

PRICE: RS.174
TARGET PRICE: RS.240

RECOMMENDATION: BUY
FY16E P/E: 14.5X

We initiate coverage on Carborundum Universal Ltd (CUMI) stock with 'BUY'
rating and a target price of Rs 240 based on 20x FY16E earnings. We believe
that CUMI valuations can get rerated considering 1) potential case of
turnaround in the overseas business 2) strong growth in company's
estimated consolidated PAT through FY14-16E and 3) strong positioning in
the domestic abrasives market. We project 54% CAGR between FY14-16 in
consolidated profits from Rs.950 mn in FY14 to Rs 2.2 Bn in FY16E. At
current price of Rs 174, CUMI stock is trading at 14.5 x P/E and 8.2 x EV/
EBITDA on FY16E earnings.

Key Investment Rationale

Stock details
BSE code
NSE code
Market cap (Rs.bn)
Free float (%)
52-wk Hi/Lo (Rs)
Avg. Daily Volume BSE+NSE
Shares o/s (mn)

:
:
:
:
:
:
:

513375
CARBORUNIV
32.61
57.9
221/113
135000
187

Summary table
(Rs mn)

FY14 FY15E FY16E

Sales
21,253 23,929 26,028
Growth (%)
9.5
12.3
9.0
EBITDA
2,514 2,871
4,295
EBITDA margin (%)
11.8
12.0
16.5
PBT
1542
1750
3161
Net profit
950 1,243
2,245
EPS (Rs)
5.1
6.6
12.0
Growth (%)
5.5
30.8
80.6
CEPS (Rs)
9.9
11.9
17.4
BV (Rs/share)
59.0
63.7
72.1
DPS (Rs)
1.3
1.7
3.0
ROE (%)
8.8
10.8
17.6
ROCE (%)
6.4
8.3
13.4
Net cash (debt)
(3,015) (2,917) (2,388)
NW Capital (Days)
89.7
87.4
90.9
EV/Sales (x)
1.6
1.4
1.3
EV/EBITDA (x)
14.3
12.6
8.4
P/E (x)
34.3
26.2
14.5
P/Cash Earnings (x)
17.5
14.7
10.0
P/BV (x)
2.9
2.7
2.4
Source: Company,
Kotak Securities - Private Client Research

 Leadership position in the domestic abrasives market; strong positioning
in global electrominerals and industrial ceramics market. CUMI is a prominent player which enjoys leadership position in Indian abrasive market on back
of 1) strong brand in abrasive space 2) robust distribution network offering pan
India presence 3) efficient cost controls providing price advantage to the end
user.
 Geographically diversified operations: Recovery expected in overseas
business; business uptrend across verticals. Management believes that this
should result in improved sales across verticals and margin for the company over
FY15-16. Overseas business that has been under stress for several quarters in the
past has stated to witness signs of revival. CUMI's South African business
(Thukela and Foskor) been reporting revival and can further observe pick up in
revenue/margin profile over FY15-16. CUMI is also likely to benefit from expected favourable product mix in Russia operation over the next few years. In
Australia CUMI is one of the leading players in lined equipment and industrial
ceramics. Management has indicated that the volumes have bottomed out and
expect recovery through FY15-16.
 Sustained emphasis on research & development initiatives provides competitive edge to the company. CUMI pays considerable emphasis on the research and development capabilities. It constantly ventures into new initiative
related to technological advancement. Company consistently deploys resources
for adding products valuable to the end users. R&D activities involve development of new products and improvement of existing products. Recently added
products contribute to over 15-18% of company's revenues.
 Company to maintain high growth in revenue; recovery in operating
margins likely to aid to free cash flow generation. We project 11% CAGR
between FY14-16 in consolidated revenues from Rs.21.2 Bn in FY14 to Rs 26 Bn
in FY16E and 54% CAGR in EPS from Rs 5.1 in FY14 to Rs 12 in FY16 on back
of 1) recovery in demand for abrasives in the domestic/international market 2)
pick up in international subsidiaries business and margin improvement at key
subsidiaries. Within the revenue streams, we expect volume growth across all the
divisions over FY14-16 and also expect that the pricing would likely improve on
back of global economic recovery.

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
Kotak Securities - Private Client Research

Please see the disclaimer on the last page

For Private Circulation

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Company could contain these pressures by way of using alternate cost effective raw materials. Four major segments of global abrasives industry consists of: Abrasive segments Abrasives Application Loose Abrasives Loose abrasive lapping is widely used to prepare optical glass before its final polishing. electrical. Key Concerns  Delayed recovery in global manufacturing activity. Over the past few years. refractories and electrominerals are used by various industries in their manufacturing activity. gems & jewelry. INDUSTRY OVERVIEW ABRASIVES The global market for abrasives. as well as for high-precision grinding of crystals and ceramic components. However we note that company business can get severely impacted if there are any delays in the recovery  Increased volatility in input prices. CUMI stock is trading at 14. & polishing construction. We note that increased volatility in input prices could pose threat to company's operations. fuel cost and select raw material inputs in Indian. estimated at USD 12. machinery etc.2 x EV/EBITDA on FY16E earnings. At current price of Rs 174. ceramics.5 x P/E and 8. CUMI business has suffered due to languishing macro environment. Abrasives.Private Client Research. blending. improvement in raw material consumption and process improvements. used in automobiles. Russian and South African operations. shaping. estimated at 54% CAGR between FY14-16. In view of adequate upside to our target price we ascribe 'BUY' rating on company's stock.Private Client Research Please see the disclaimer on the last page For Private Circulation 3 . We believe that company's stock can re-rate further to capture significant improvement in company's margin profile and strong presence in Indian/overseas market. demand for abrasives gets affected only during economic slowdown.MORNING INSIGHT November 25. finishing. Source: Kotak Securities . Abrasives are used extensively across industries such as automobiles. Bonded Abrasives Presented in the form of wheels. bearing etc.9 Bn is characterized by a diversified customer base. Industry Kotak Securities . We value CUMI stock at 20x FY16E (11x EV/EBITDA) earnings and arrive at a target price of Rs 240 per share. The dependence on single industry is less than 15% and therefore typically. steel. Super Abrasives They are used to shape materials that are too hard or too fragile for conventional abrasives: glass beveling in the automotive and building sectors. dimensioning. company has faced input cost pressure in the form of hike in power cost. In FY14. Coated Abrasives Surface-treatment applications including grinding. Global manufacturing has started to recover through past few quarters. 2014 Valuation  Current valuations appear attractive vis-à-vis the potential growth in profits.

catering to low end of the market. remaining market is fragmented between several small players.49 Bn. particularly glass. The order inflow from the projects segment. These small players normally specialize in select products and import from China. cement. iron and steel industries. The market. In FY14. ballistic protection. furnace building. insulators. grain handling. The key user industries for Ceramics business are power generation and transmission. dominated by two main players. We believe that the key success factors are quality.MORNING INSIGHT November 25. domestic refractories segment declined due to lower off-take of fired products. Industry Indian abrasives industry is estimated at USD 0. While many global players are setting up their manufacturing in India or expanding on their current infrastructure. We also. With world economy expected to recover over the next few years. CUMI enjoys 2% market share globally. Entry barriers are high by way of capital investment and technology.Private Client Research. mainly from China. over a period of time. We believe that the key requirements for success in this business are quality and cost competitiveness.CUMI and Grindwell Norton. In domestic industrial ceramic market. Domestic Industrial Ceramics business is dominated by few large players including CUMI. weak economic activities (mainly in power generation) and deferment of projects impacted sales of wear resistant liners which is one of the key product for the industry. Also. Kotak Securities . It is highly concentrated. coal washeries. Industrial Ceramics Global Industrial ceramics market is pegged at USD 13 Bn. carbon black. prices fell in the second half globally. triggered by price cut from Chinese players. petrochemicals and construction industries. 2014 Abrasives Coated Abrasives Bonded Abrasives ABRASIVES Super Abrasives Loose Abrasives Source: Kotak Securities . The market is also catered by imports. we believe that the Industry should witness growth over the previous years. service and capability to provide total grinding solutions. cheap imports from China have also been on an increasing trend. cost. non-ferrous metals. While these players enjoy over 60% of market share. Various Industry players have highlighted that the prices have now started to bottom out and are expected to recover through the second half of the current year.Private Client Research Please see the disclaimer on the last page For Private Circulation 4 . glass. dropped sharply. out of which Alumina based ceramics material is around USD 5 Bn. has become price sensitive. believe that the domestic abrasives Industry is evolving from two players market to a multi-player market.

In India. The key success factors in this industry are cost and quality.5 billion. CUMI was founded as collaboration between the Murugappa Group.. The global market size for electro minerals is estimated at around USD 2. Apart from CUMI. Ltd. Silicon carbide (one of the major Electrominerals products) also finds application in metallurgical industries.000 different varieties of abrasives. Entry barriers are high capital investment. CUMI has grown consolidated revenues at 9% CAGR mainly boosted by electrominerals business. refractory products and electro-minerals in ten locations across various parts of the country. Europe. Kotak Securities . dental care and skin therapy. CUMI is one of the leading players in aluminum oxide grains..MORNING INSIGHT November 25. The Carborundum Co. Company currently manufacturers over 20. USA and the Universal Grinding Wheel Co.K. Australia. Imports from China are also a major source of electro minerals in India. limited market and technology.Private Client Research Over the last five years.Private Client Research Please see the disclaimer on the last page For Private Circulation 5 . ceramics and electro minerals. Orient Abrasives and SNAM Abrasives are the others. 2014 Electrominerals Electro minerals are used as basic raw material in the manufacture of abrasives and refractories. Availability of alternatives and product differentiation are the main challenges in this business. CUMI’s products are being exported to 43 countries spread across North America. CUMI’s focus on R&D initiatives and strategic alliances with global leaders in grinding technology ensured international recognition as a manufacturer of quality abrasives and a provider of total grinding solutions. Kotak Securities . Carborundum Universal Ltd (CUL) is a global supplier of abrasives. South Africa and Asia. COMPANY OVERVIEW Incorporated in year 1954. They are also increasingly being used for silicon wafer slicing in solar cell manufacture. With an extensive distribution network and highly qualified and motivated personnel base. U. CUMI enjoys leadership positioning in Indian abrasives industry and globally second and third position in silicon carbide and zirconia respectively. Key Revenue Streams Carborundum Universal (CUMI) Electrominerals (35% of revenues) Abrasives (40% of revenues) Coated Abrasives Bonded Abrasives Super Abrasives Ceramics (25% of revenues) Industrial Ceramics Super Refractories Anti corrosives Source: Company. CUMI aims at establishing itself as meaningful global player in its core products. Grindwell Norton. Company operate on 55-60% capacity utilization and major capex programs are over.