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Geared for growth

We interacted with Mr. N Ananthaseshan, MD at Carborundum Universal (CUMI). The company remains confident of clocking a strong 20% growth while doubling sales over 4–5 years with: i) the Electrominerals division (EMD) benefitting strongly from supply chain constraints in China opening up more structural opportunities; ii) abrasives demand being sanguine led by lower Chinese imports; and iii) ceramics poised for growth driven by power distribution and newer applications—solid oxide fuel cells (SOFC), hydrogen fuel cells and EVs.

Given CUMI’s focus on cutting-edge products in material sciences, and further levers in EVs, fuel cells and newer materials, we build in a 22% EPS CAGR over FY21–24E. Maintain ‘BUY’ with a TP of INR1,000.

Demand trends remain strong across current portfolio

Management continues to see robust demand across segments and plans to expand capacities across division. i) Within EMD, the outlook for white-fused and brownfused alumina products remains healthy with capacity expansion of 25ktpa. Development of high purity graphite materials for applications in lithium-ion energy storage devices continue. ii) Abrasives has the advantage of captive sourcing of input materials, which helps mitigate supply-chain constraints. The outlook for abrasives remains strong led by import substitution in the mass market, and strong demand trends across end-users. iii) In Ceramics, the company plans to expand the Metz cylinder line after FY23. In the Engineered Ceramics product segment, the business has further strengthened its position in the solid oxide fuel cell market and has started foraying into hydrogen applications. Current expansion products and rampups should also enable operating leverage gains.

New product development continues

CUMI lays strong emphasis on R&D with expenditure of ~1% of sales. Management is currently working on products across solid oxide fuel cells, hydrogen fuel cells, EVs, graphene and high-purity silicon carbide, among others. Gradual commercialisation of these products would drive continual gains.

Outlook and valuation: Future-focused; maintain ‘BUY’

Newer products in the pipeline should ensure CUMI’s competitiveness in the future. Being backward-integrated ensures structural opportunities across the value chain given persistent supply-chain constraints across the world. Operational efficiency should aid margin improvement owing to better fixed cost coverage, while substitution of imported raw materials for abrasives should enable further gains.

Given CUMI’s focus on cutting-edge products in material sciences, we forecast a strong 22% EPS CAGR over FY21–24E. Maintain ‘BUY’ with a TP of INR1,000, valuing it at 40x, a 10% discount to its higher band and at a 20% discount to Grindwell Norton’s target PE.

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