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Strong growth despite headwinds

Grindwell Norton (GWN) has reported strong 90% YoY growth in Q1FY22 over a low base, which is better than expectations. Margins have improved in ceramics vs expectations, while abrasive margins are stable leading to 131% YoY growth in adjusted PAT. Improvement in overall utilisation of the domestic industry along with demand from healthcare and chemicals is likely to support growth.

We believe revival in domestic industrial segment coupled with increased traction from life sciences and chemicals will support the growth prospects of the company. Hence, maintain our BUY rating on the stock with an unchanged SoTPbased target price of Rs1,527.

* Ceramic & plastic segment margin uptick continues: Leveraging the support of the parent’s research and global product portfolio, GWN will be able to penetrate new lucrative areas under performance plastics (PPL), performance ceramics and refractories (PCR). The margins under ceramics & plastics increased to 24% in FY21 vs 14% in FY20, Q1FY22 ceramics margins increased to 24.7%. Given the solutionsbased approach and strong growth under performance plastics, margins are likely to sustain at these elevated levels. The management is confident to double revenues of PPL in 3-4 years.

* Strong growth rebound: For the past 5 years, C&P segment growth stood at a CAGR of 11% vs 1% for abrasives, resulting in 4% overall revenue CAGR. In Q1FY22, on a low base, abrasives grew 135% YoY and ceramics & plastics grew 79% YoY. This indicates a revival in demand from the core industries under abrasives in addition to the traction from life sciences under ceramics and plastics. PCR caters to high-end refractory requirements, a niche market with higher 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.

* Strong growth to support premium valuation: GWN has witnessed positive free cashflow consistently in the past 12 years irrespective of the macro environment. This has resulted in a strong balance sheet at a net cash of Rs6.4bn and consistent overall RoCE of 16% and core RoCE of 29% for FY21. Taking into account the domestic leadership, technology edge and stable growth profile, we value the abrasive business at 50x FY23E earnings, ceramic & plastic at 60x and ‘others’ at 30x. Given the revival in domestic industrial activity and benefit to C&P from newer applications, we maintain our BUY rating with an unchanged SoTP-based target price of Rs1,527.

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