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Moving towards a new orbit

Grindwell Norton (GWN) during the annual analyst interaction shared its future growth strategies and growth drivers. Despite a challenging FY21, the company was able to gain 100bps market share in domestic abrasives with strong margins. It witnessed strong growth in the performance plastics segment driven by life sciences, pharma, chemicals and F&B. Exports grew by a strong 14% YoY and the management foresees good potential in the same supported by the parent, eyeing India as a global sourcing hub. Factoring-in the higher margins and growth outlook, we raise FY22E and FY23E earnings by 1.9% and 6.1% respectively. Maintain BUY with a revised SoTP-based target price of Rs1,287 (earlier: Rs1,220).

* Strong margins and cashflows aided by solutions approach:

Leveraging the support of the parent’s research and global portfolio, GWN will be able to penetrate lucrative areas under performance plastics (PPL), performance ceramics, and refractories (PCR). Margins under ceramics & plastics increased to 24% in FY21 vs 14% in FY20, given the solutions-based approach and the strong growth in performance plastics. Margins are likely to sustain at these elevated levels. Management is confident about doubling the revenues from PPL in 3-4 years.

* PCR and PPL – the twin growth engines:

For the past five years, C&P segment growth was at a CAGR of 11% vs 3% for abrasives, resulting in 6% overall revenue CAGR. Going forward, we believe, PPL and PCR will increasingly take the mantle of growth. GWN has plans to introduce various unique solutions in oil & gas, chemicals, pharma and other process industries. PCR caters to high-end refractory requirements, a niche market with better margins.

* Gradually tapping export markets:

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 in future and this can further boost the overall prospects from export markets.

* Stable growth, healthy cashflow to support premium valuation:

GWN has witnessed positive free cashflow consistently for the past 12 years irrespective of the macro environment. This has resulted in a strong balance sheet with net cash of Rs6.4bn and consistent overall RoCE of 16% and core RoCE of 29% for FY21. Given the varying growth profile and return profiles of various segments, we value them separately. Taking into account the company’s domestic leadership, technology edge and stable growth profile, we value the abrasive business at 40x FY23E earnings, ceramic & plastic at 50x and ‘others’ at 30x. Given the revival in domestic industrial activity and benefit to C&P from newer applications, we maintain our BUY rating on the stock with a revised SoTP-based target price of Rs1,287 vs Rs1,220 earlier.

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