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Strong play on industrial growth

Grindwell Norton (GWN) delivered a healthy performance in Q3FY23 benefiting from revival in industrial demand and its recent acquisition, PRS Permacel. Consolidated revenues grew 20.3% YoY to Rs6bn in Q3FY23 – led by 39% YoY growth in ceramics & plastics (lower base), and 9% in abrasives. Gross margin was stable YoY, but improved by 150bps QoQ to 55%. EBITDA margin expanded 180bps YoY on higher operating leverage. EBITDA grew 32% YoY to Rs1.2bn; however, APAT growth was limited to 10% YoY to Rs804mn due to higher finance cost and lower ‘other income’. We believe GWN has been consistently delivering robust earnings led by its strong product portfolio, coupled with sturdy demand in inter alia industrial, construction, paints, infra and metal finishing segments. Recovery in the automotive sector is expected to further boost growth. We introduce our estimates for FY25E and upgrade our rating on the stock to ADD (from Hold) with a revised target price of Rs2,215 (earlier: Rs2,207).

* Abrasives segment performance: In Q3FY23, abrasives segment revenues grew 9% YoY but declined 3.2% QoQ to Rs3bn. Segmental margin expanded 260bps / 210bps YoY / QoQ to 14.9%. As per FY22 annual report, the company has accelerated its capex anticipating high growth in abrasives. With the commissioning of new coated maker facility and overall pick-up in industrial activity, we expect the segment to deliver 14% revenue CAGR over FY22-FY24E.

* Ceramics & plastics segment performance: In Q3FY23, the ceramics segment delivered a strong revenue growth of 39% YoY (largely from its acquisition of PRS Permacel), but declined 10% QoQ to Rs2.4bn. Margin contracted 160bps YoY to 20.5%. We note PRS Permacel’s EBIT margin came in at 20% (10.6% in Q2FY23). This segment has a higher exposure to global supply chains, hence utilisation of the Halol facility expansion is likely to be driven by exports. As per the FY22 annual report, expansion in new markets in industrial, life-sciences and construction segments is likely to drive growth in the plastics segment.

* Increasing market share through new acquisitions: We expect GWN to benefit from its latest acquisitions: 1) PRS Permacel for Rs1.2bn (by GWN in the domestic market), and 2) Monofrax (by Saint-Gobain in the international market). Both the acquisitions are likely to help GWN widen its product portfolio in ceramics & plastics and increase market share.

* Upgrade to ADD (from Hold): With healthy growth in revenues supported by improved EBIT margins, we believe GWN will likely be the prime beneficiary of capex cycle recovery. We therefore upgrade our rating to ADD (from Hold).

Outlook and valuations

GWN’s recent acquisition, PRS Permacel, has become a wholly-owned subsidiary effective May’22. It is a manufacturer of pressure-sensitive adhesive tapes (PSAT) and finds key applications in EVs, railways, aerospace, defence and steel. The purchase consideration is of Rs1.2bn. The target company has major share in aesthetic decals business with major 2-wheeler manufacturers. Permacel has a manufacturing facility in Ambarnath, near Mumbai.

For Q3FY23, combined subsidiaries’ contribution to sales was Rs491mn, which we believe was primarily from Permacel. To factor-in the lower than anticipated revenues in Q3FY23, we cut our earnings estimates for FY23E and FY24E by 4% each year.

We have introduced our estimates for FY25E and accordingly roll forward our valuation. We assign a P/E multiple of 47x to consolidated FY25E EPS (from 50x to FY24E) and arrive at a revised target price of Rs2,215 per share (previously: Rs2,207 per share). Upgrade to ADD.

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