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Strong performance across key segments…

About the stock: Grindwell Norton (GNL) is the market leader in the India abrasive market with ~26% market share. The segments include abrasives (contributing ~57%), ceramics & plastics (33%) and IT services & others (10%).

* GNL has witnessed strong & positive free cash flows consistently over more than a decade irrespective of the macro environment

* It has consistently operated with high (>16%) margins & return ratios

Q1FY22 Results: GNL reported robust Q1FY22 results.

* Revenues came in at | 439.3 crore, up 89% YoY on a low base

* EBITDA in Q1FY22 came in at | 87 crore, up 345% YoY with margins at 19.8% aided by positive operating leverage and stronger growth

* Consequently, PAT grew 123.4% to | 63.2 crore, YoY

What should investors do?

Going forward, accelerated growth in performance plastics & ceramics and exports is expected to drive long term incremental growth.

* Considering strong growth outlook, margins, we maintain BUY rating

Target Price and Valuation: We value GNL at | 1510 i.e. 48x P/E on FY23E EPS

Key triggers for future price performance:

* Ambition to maintain market share in abrasives and increase market share in ceramic & plastics with gradual penetration of new value added products

* High margin value added products and solutions oriented approach to drive margin expansion (from ~16.7% in FY20 to 20.6% in FY23E)

* We expect revenue, EBITDA to grow at CAGR of 16.7%, 19.2%, respectively, over FY21-23E

* Net debt free b/s, double-digit return ratios & strong cash generation

Alternate Stock Idea:

Apart from GNL, in our coverage we also like Elgi Equipment.

* Among leaders in domestic compressor market with strong b/s and return ratios, gaining traction in international markets would drive growth

* BUY with target price of | 260

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