Jun 20, 2011, 04.00 PM | Source: Moneycontrol.com
Sushil Finance is bullish on Carborundum Universal (CUMI) and has recommended Accumulate rating on the stock with a target of Rs 325 in its June 17, 2011 research report.
, Sushil Finance |
“Carborundum Universal (CUMI) a part of the Murugappa Group - is engaged in the business of manufacturing abrasives (45% of revenues), ceramics includes industrial ceramics & refractories (20% of revenues) & electro minerals (35% of revenues). Abrasives are industrial consumables which find wide application in metals, auto, construction, fabrication & various machining industries. CUMI is a leading player in the Abrasives market with a dominant market share of about 35%. It has managed to maintain & enhance its leadership position competing against Global leader Saint Gobain’s Indian subsidiary Grindwel Norton (GNL). The Indian abrasives market has been growing at about 10% annually and CUMI & GNL together account for 70% of the market. CUMI has managed to maintain its leadership position in industry mainly due to its low-cost efficient operating structure and its relative cost advantage over their competitors due to backward integration for sourcing raw materials through its international subsidiaries. CUMI has also realigned its product mix in this segment to address high value and better margin products. With Revenues of Rs.6.9 bn in FY11, this segment comprises of 42% of its Revenues, with the overall EBIT margins of ~13.7%. Going ahead, we believe CUMI’s leadership position & customized products along with the strong demand for abrasives in the industry would drive strong revenue growth in this segment.”
“CUMI is moving up the value chain by focusing and expanding the niche businesses viz. Metallised (Metz) cylinders (part of Ceramics business) and Silicon Carbide (SiC) microgrit (part of Electrominerals business). These are value added products which enjoys high margins. In Metz cylinders, CUMI is doubling its capacity from 0.35 mn. pcs to 0.75mn pcs. Furthermore in SiC microgrit, CUMI has capacity of 4,800 tons and is adding further 7,200 tons by FY12. Going ahead, we believe that these niche businesses will help CUMI maintain high margins of ~18-19.5% in Ceramic Business and ~20% in Electrominerals business. CUMI has invested aggressively to augment capacities through both organic and inorganic route, which is helping to capitalize on growth opportunities in domestic as well as global markets. CUMI has substantial operations outside India and derives almost 45% of total revenues from its international operations. CUMI has opted for backward integration for sourcing its critical raw materials through international acquisition viz. Volzhsky Abrasive Works Russia (97% stake) (raw material for Abrassives) and ANF Foskar Zirconia, South Africa (51% stake) the world’s largest manufacturer of Zirconia (raw material for Super Refactories).”
“The Indian abrasives industry has been highly concentrated, but many global players have entered the Indian market due to slowdown in Europe & the US. CUMI continues to maintain leadership position (35% market share) despite heavy competition in the changing domestic market scenario. During FY11, CUMI’s consolidated revenues grew 26% (7% value growth & 18% volume growth) to Rs. 16.4 bn. Its EBIDTA grew by 31% to Rs. 3.1 bn, while its EBIDTA margins increased by 80 bps to 18.8%. Its APAT grew 46% to Rs. 1.5 bn and it registered AEPS of Rs. 15.8 for FY11. We believe that CUMI is well-placed to capitalize on the growth opportunities domestically, as the demand continues to be robust. Internationally also, its subsidiaries should perform well, as the demand begins to recover in Europe, US & Russia. Going forward, we expect its Con. Revenues to grow by 14.7% & 19.7% in FY12 & FY13, while it’s APAT to grow by 14.1% & 20.3% in FY12 & FY13 respectively. We initiate our coverage on the Company with an “ACCUMULATE” rating and a target price of Rs.325 (15x FY13E EPS of Rs.21.6),” says Sushil Finance research report.
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