Investment Focus - Carborundum Universal: Buy



Investors with a three-year perspective can consider buying the stock of Carborundum Universal (CUMI) in phases. The company's ability to operate almost all its divisions at near-full capacity, sustained pricing power in its electro minerals segment and presence in product segments that are less prone to a capex downturn have all resulted in strong financial performance in the first half of FY-12. At the current market price of Rs 139, the stock trades at 11.5 times its expected consolidated per share earnings for FY-13.

While the current scorching pace of performance may not continue, earnings growth can comfortably stay ahead of valuations. CUMI's abrasives division has bucked the broader trend this year, to operate at over 90 per cent capacities for several quarters now. This is partly to do with the fact that abrasives need periodic replacement and, therefore, do not depend entirely on new capex spending. Despite such high utilisation, CUMI has been cautious not to immediately add capacities. It is instead de-bottlenecking the Indian abrasives unit.

High contribution from non-standard products also propped profit margins. Segment profits for this division expanded a healthy 23 per cent in September quarter over a year ago.

The company's ceramics division is expanding, running as it is on almost full capacities since FY-10. It has, in fact, exceeded capacities in its high-value metalised cylinder business. Concerns have been raised on the sustainability of growth for this cylinder as Europe is a major consumer.

The company though, has stated that European power companies have chalked out a 15 per cent increase in their production in the coming year.

The ceramics segment, although smaller than abrasives in terms of revenue, boasts of a high 23 per cent operating profit margins.

CUMI's second largest division and a play on commodity are the electro minerals of Silicon Carbide (SiC) and Zirconia. Exceptional performance in the September quarter was driven by SiC demand in India, besides currency benefit in the Russian unit as a result of the Russian Ruble depreciating against the Euro. The Russian unit is booked with orders for FY-13 but the currency benefit is likely to fade in the current quarter with the Ruble gaining strength against Euro.

While Europe recently lifted the anti-dumping duty ban for SiC on China, CUMI's substantially lower prices and slightly varied product profile are likely to keep competition at bay. This said, the commodity-like nature of this business may cause volatility. To mitigate this, the company would be doubling its value-add product from SiC in Russia before FY-13. With this, we hope it will consume most of this commodity internally and sell less, thus allowing more value-added product sales. Until then, CUMI may not enjoy the PE of high 20s that it did earlier.

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