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Our Take:

Grindwell Norton Ltd. (GNL) is a part of the High Performance Materials division, which is a part of the Innovative Materials Sector of the Saint-Gobain Group. GNL holds ~25% of the abrasives marketshare in India and derives 58% of its total revenue from the abrasives segment. GNL provides its expertise in the areas of innovation and co-development through a wide range of high-performance materials for demanding applications in diverse segments such as the automotive, health, defense, security and even the food & beverage industries. GNL enjoys the benefit of high quality R&D facilities of its parent Saint Gobain helping it with newer and better products to gain share in the highly competitive market. It is a cash rich company with no leverage and robust operating cash flows. In Abrasives, it is part of a duopoly market, being the No.2 player after Carborandum Universal. Capacity utilization of its facilities are ~60% on an average and there is enough headroom to accommodate growth over the next 3-4 years. GNL sees strategic relevance of exports for incremental growth, which contributes ~15% to topline. GNL aims to focus on exports of niche high value products in some cases to replace Chinese products and penetrate neighbouring countries of US, South East Asia markets and enter newer market to drive for stronger growth.

Valuations & Recommendation:

Revival in automotive, engineering and industrial activities would be key for the growth of the company. Changing product mix and high margin new initiatives of the company in performance plastics should aid in margin expansion. Going forward, GNL with its strong parentage and leadership in the domestic market with a proven track record and superior balance sheet provides comfort. We expect segment-wise 6.6%, 9.4% and 17.4% CAGR in abrasives, ceramics and new initiatives of the company over FY20E-FY23E resulting in EBITDA margin expansion of 200bps and RoE improvement to 17.6% from 16% in FY20. We believe GNL is well placed to further gain from gradual economic revival in key segments. Investors can buy the stock on dips to Rs 905-910 (37.5x FY23E EPS) and add further in Rs 820-825 (34x FY23E EPS) band for a base case fair value of Rs 993 (41x FY23E EPS) and bull case fair value is Rs 1054 (43.5x FY23E EPS) in the next two quarters.

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