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Resilient quarter, global uncertainties remain key monitorables

Carborundum Universal (CUMI) has reported a mixed set of numbers with margins getting impacted by one-offs. Consolidated revenue grew 15% YoY to Rs8.7bn led by 15% and 17% YoY growth in abrasives and electrominerals segments, respectively. However, EBITDA margin declined to 12.8% (vs Q4FY21 margin of 20.9%) on account of i) one-time cost related to Maniyar operations (EMD - standalone operations), ii) new acquisition-related costs and iii) partial absorption of commodity costs. Other income was also up 24% YoY. As per the management, the impact of Russia-Ukraine war was limited to supply-chain disruption and logistical challenges as their products are not a part of the sanction list; however, situation continues to be volatile. The company is focusing on strengthening its core portfolio by expanding its end user industry base. It is able to leverage its presence across multiple geographies by expanding its presence further through value-accretive M&As. We have cut our EPS estimates by 4.9/1.7% for FY23/24E, respectively, sighting geopolitical uncertainty, supply-chain disruptions and logistic challenges. Key risk to our estimates remain adverse impact from ongoing war which has been limited so far. Maintain BUY with revised TP of Rs986 (previously: Rs1,043).

* Revenue outperformance in electrominerals: Revenue grew 17% YoY to Rs3.4bn due to: i) China+1 strategy adopted by customers, coupled with disrupted supply chain and stringent emission norms by the Chinese government, resulting in some players exiting the market, ii) increase in demand of these products. However, margins contracted 170bps YoY to 12.9% due to one-time payment of ~Rs320mn to Kerala State Electricity Board.

* Expanding footprints in global abrasive markets: CUMI has recently made three acquisitions including two in abrasives (RHODIUS Abrasives and AWUKO Abrasives) and one in niche technology (PLUSS) for thermal energy storage. The company paid Rs6.6bn (funded through internal accrual) for all the three acquisitions. The abrasive acquisitions offer large installed capacities in cutting/grinding discs, thin wheels, coated abrasive, string distribution network in Europe/America and others, access to key minerals. We believe the acquisitions are in-line with the company’s aspirations to expand footprints in global abrasive markets.

* Limited impact on Russian operations: As per the management, VAW (Russia) sells ~42% of its revenue in its domestic market, which was not impacted by the onoing war so far. While the balance ~58% of exports to multiple geographies, faced logistics issues, the company managed to export via alternate routes. None of the products/materials were under any sanctions; however, situation remains a key monitorable. As domestic demand in Russia remains high, VAW is likely to ramp up its domestic supply which may lower margins marginally due to change in sales mix.

* Maintain BUY; multiple levers at play: Inflationary input cost scenario bodes well for electrominerals segment and this momentum is likely to continue in the near term. The geographical expansion and high value customised solutions are likely to drive growth in both abrasives and ceramics segments. We maintain BUY rating on the stock as we remain long term believers of Industrial recovery and cost pressures being transient.

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