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Healthy growth despite challenges

Carborundum Universal (CUMI) has reported healthy execution in Q1FY22 led by outperformance of abrasives and electro mineral segments. Ceramic segment issues in terms of logistical bottlenecks may be streamlined in Q2FY22. The company is gearing up to tap into future growth areas like electric vehicles, batteries, high purity silicon carbide used in 5G technology etc.

The loss from overseas subsidiaries has reduced, and export market is expected to perform well. Improvement in domestic utilisation along with investments due to PLI scheme are expected to fuel growth. Factoring in strong growth outlook, we raise our FY22/FY23 earnings estimates by 14%/5.7%. We maintain our BUY rating with a revised target price of Rs817

* Healthy growth despite second covid wave impact and logistical issues: Localised lockdown arising due to the second wave of the pandemic had impacted the execution in April/May. Despite that the company was able to improve its performance due to focus on domestic markets, gain in market share and preference of local suppliers by most clients.

* Logistic bottlenecks and commodity prices impacted ceramics, expected to streamline: The performance of ceramics segment was impacted by logistical issues in terms of availability of containers for exports and disruption of Hosur plant. However, this is expected to streamline and margins will increase with growth of value added high margin sales.

* Focus on exports and value-added products to propel ceramic segment: With the installation of new coater maker, the company is set to exploit new export opportunities under wear ceramics. It has identified certain high-potential markets and will gradually increase its supply to the same. Metz cylinders is the key product segment under engineered ceramics; CUMI also caters to specialised injection moulding segments like spark plugs, 3D printing and base materials used in fuel cells, etc. under engineered ceramics. We believe engineered ceramics will be the major driver of margins going forward.

* Maintain BUY; focus on value addition will improve returns: We believe the company will gradually move up the value chain with lucrative products, thereby, increasing margins and returns. Opening up of export markets, Atmanirbhar impetus in domestic market and gradual increase in factory utilisation levels lend growth visibility despite second wave covid challenges. Hence, we maintain our BUY rating with a revised target price of Rs817 (previously: Rs771).

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