Wendt (India) - Buy

Sound technology and dominant position in the super abrasive market give the company an edge.

Abrasives and precision component maker Wendt India displays characteristics not typical of small-sized companies. The company is almost free of debt, cash-rich and pays high dividends consistently.

Above all, it expanded its earnings 23 per cent compounded annually over what can be considered as among the most turbulent three years for capital goods companies. Sound technology obtained from its German parent, dominant position in the growing domestic super abrasive market and the few organised players in India in this segment strengthen the prospects of this niche player.

Investors can consider limited exposure to the stock of Wendt India. At the current market price of Rs 1,400, the stock trades at 10 times its expected consolidated per share earnings for FY-13. While there are no strict comparisons, it is at a discount to larger peers such as Grindwell Norton. The stock does not enjoy high trading volumes and can best be transacted in small quantities.

While we are sanguine about the company's long-term prospects, any attractive open offer from its parent or a move to delist the company may call for a review, based on the offer price.

Dominant position

Wendt India makes super abrasives. While conventional abrasives can also be used for grinding or polishing work, super abrasives, made from industrial and synthetic diamonds with cubic boron nitride , derive extreme hardness. This provides them longer life and ‘super' performance.

Industries such as automobile, construction, aerospace, fabrication and other engineering segments have been slowly shifting from conventional abrasives to super abrasives to achieve precision in their cutting tools and other components. This has been the main driver of business for Wendt India.

The company enjoys sole vendor status with many clients and, thus, high pricing power. Grindwell Norton has a smaller presence in the super abrasives segments.

Bosch, Hero Motors and SKF India are some of Wendt India's large clients. Super abrasives account close to 65 per cent of the company's revenues. With a 25 per cent segment profit margin, this business can be expected to drive revenues, thanks to the scarcity premium that super abrasives enjoy locally. Competitive pressures can be expected to be minimal unless domestic companies resort to technology tie-ups.

To ensure that the company does not become too dependent on the super abrasives business, Wendt India has renewed its focus on one other segment, grinding machines and precision components. These components are used in almost all manufacturing units. Once again, given the high technology involved, much of these are imported, if the user is particular on quality.

Price-conscious approach

Besides the usual consumers from sectors such as auto, steel and so on, the above segment has been making inroads in gaining customers in railways, infrastructure, and oil and gas.

This segment enjoyed profit margins of 32 per cent for the half-year ended September 2011. However, the margin is lower than the 37 per cent enjoyed a year ago. The company appears to be adopting a more price-conscious approach, unlike quite a few foreign-parent backed firms that are stiff on the pricing front. This strategy may help the segment remain competitive in the ASEAN markets, which Wendt India focuses on.

Wendt India imports over 50 per cent of its raw materials and is, therefore, exposed to currency fluctuations, especially during periods of rupee depreciation. However, this is partly hedged by its export revenue which account for a fifth of sales.

The company expanded consolidated sales by 16 per cent annually to Rs 92 crore in FY-11, while net profits grew 23 per cent to Rs 17 crore. It has been consistently paying high dividends and currently has a dividend yield of 2.4 per cent, higher than the blue-chip Nifty companies. Its promoter's parent — Winterthur — was recently bought by 3M Corp of the US. A recent open offer attempt by 3M was contested by Wendt's other promoter, Carborundum Universal, which has stated that it has the right of first refusal. The matter is with the Company Law Board and the offer postponed indefinitely.

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