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Strong growth despite headwinds

Carborundum Universal’s (CUMI) Q3FY22 revenue grew 23% YoY to Rs9bn led by 33% and 24% YoY growth in ceramics and electrominerals segments, respectively. The company was able to take price hikes to pass on a part of the increased input costs to the customer (3-4% price hike across all segments) which helped in EBITDA growth of 21% YoY to Rs1.6bn, although margins contracted marginally by 17bps to 17.5%. Segmental performance was robust led by strong performance in EMD segment, which led to APAT growth of 29% YoY to Rs1.1bn. Other income was also up 79% YoY. The company is focusing on strengthening its core portfolio while developing high-value customised solutions across segments. It is able to leverage its presence across multiple geographies by expanding its presence further through value-accretive M&As. Maintain BUY with a revised target price of Rs1,043 (previously: Rs982).

* Outperformance in electrominerals (EMD): Revenue grew 24% YoY to Rs3.6bn largely on the back of two factors: i) Chinese+1 strategy by many customers, and disrupted supply chain and stringent emission norms resulting in some players exiting the market; and ii) increase in demand of these products as raw material for other industries. Due to these factors, the company was able to price its product better, as margin expanded 700bps YoY to 17.4%. Additionally, higher power generation at Maniyar hydroelectric power plant (Kerala) supported margins.

* Pick-up in user industries aided growth in ceramics: Revenue in the segment grew 33% YoY to Rs2.1bn. Demand was supported by repair, overhaul and capacity expansion as various user industries ramped up operations. The margin contracted 130bps YoY to 20% as the company had to partially absorb the increase in input costs. Enhanced infrastructure spends across many countries augur well for base products growth, while the company continues to expand its offering in the engineered ceramics space, which is expected to drive better margins going forward.

* Demand for precision abrasives remains strong: Revenue for the segment grew 13% YoY to Rs3.4bn on the back of both volume growth and price hikes. The competitive intensity in the mass-market offering is intense while demand outlook for precision abrasives remains strong. However, overhang of chip shortage continues to impact growth in the automotive sector. Inflationary input costs impacted the margin which contracted 280bps YoY to 13.7%. The company is driving efforts towards product portfolio and geographical expansion as evident from its recent acquisitions.

* Maintain BUY; multiple levers at play: Inflationary input cost scenario bodes well for electrominerals segment and this momentum is likely to continue in near term. Geographical expansion and high-value customised solutions are likely to drive growth in abrasives and ceramics segments, respectively. The ability of the company to pass on the increased input costs and strengthening its offerings in specialised solutions across segments is likely to drive margin growth in near future.

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