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Healthy growth, but margins shrink

Grindwell Norton (GWN) reported 9.3% YoY growth in its Q3FY22 revenues led by 12.7% YoY growth in ceramics & plastics, and 6.8% YoY in abrasives, respectively. However, EBITDA for the quarter fell 9.5% YoY to Rs893mn impacted by higher input costs. Raw material / other expenses / employee costs to sales expanded 200bps / 100bps / 70bps YoY respectively, resulting in 370bps YoY contraction in EBITDA margin to 18%. APAT grew 5% YoY on higher other income. Factoring-in margin headwinds, we trim our FY22E and FY23E earnings estimates by 4% and 10% respectively. Due to the recent run-up in stock price, we downgrade our rating to ADD. We roll forward valuations to FY24E and revise our SoTP-based target price to Rs2,084 (previously: Rs1,914).

Abrasive segment performance: In Q3FY22, revenues from this segment grew 6.8% YoY and fell 8% QoQ to Rs2.8bn on a strong base YoY. Margin for the segment contracted 120bps YoY and 270bps QoQ to 12.3%. In order to minimise the impact of slow domestic market, GWN has been focussing on improving export margins. Company has an edge globally due to strong parentage from Saint-Gobain in terms of sourcing of technology and development of exports.

Ceramic & plastic segment performance: In Q3FY22, segmental revenues grew 12.7% YoY and 5.5% QoQ to Rs1.7bn. Margins for the segment contracted 250bps / 40bps YoY / QoQ to 22.5%. This segment has a relatively higher exposure to global supply chains, and it supplies to sectors like automotive, construction, and oil & gas. GWN is focusing on increasing its penetration in the new lucrative areas of performance plastics (PPL) and improving manufacturing efficiency in ceramics and refractories (PCR).

Gradually tapping export markets: GWN benefits from its parent company in terms of access to developments in products and process technology, sourcing of products and development of exports. GWN’s exports have been largely towards the global subsidiaries of Saint-Gobain and this trend is likely to continue going forward. The parent has plans to make India a global sourcing hub for 2-3 product segments and this can further boost overall export prospects.

Strong growth to support premium valuation: Government’s recent announcements towards building a holistic infrastructure in the country is likely to spur capex growth. This would likely increase capacity utilisation across industries and prompt greenfield investments in sectors like electronics, consumer durables, and electric vehicles, which augur well for GWN’s long-term growth. However, due to the recent run-up in valuation and near-term headwinds in terms of inflationary input costs, we downgrade our rating on the stock to ADD.

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