Hold Carborundum Universal; target of Rs 274: Axis Direct

CUMI is a proxy to industrial demand, as it falls into consumable product categories. Abrasives (43% of rev) and Ceramics (23% of rev) cater majorly to 5 key industrial needs: (1) Material removal (cutting, polishing, grinding, finishing), (2) heat containment, (3) corrosion management, (4) wear management, and (5) electro-resistivity. These product/applications are required by virtually every industry like Automotive, Auto-after, Steel, Cement, Copper, General engineering, Tooling, Fabrication, Glass, Rubber, Furniture, Road construction, Power generation and transmission, General Engineering, etc.

Every industry needs it – Abrasives and Industrial ceramics & refractories – Carborundum’s key products. Hence business is proxy to industrial demand with 10-year revenue growth averaging to 2x IIP growth. Since inception in 1955, CUMI has always been profitable, has continuous dividend paying record, and has grown mainly from internal accruals. Over the last few years, the company has backward integrated (organic - India and inorganic - overseas) to ensure raw material security (Electro-minerals). While gross margin remains strong (consistent 65% gross margin over a decade), the PAT saw a hit over FY12-15, mainly due to weak India macro (nil IIP growth), meltdown in photovoltaic business due to Europe financial crisis and losses in South African acquisition (now shut down). FY16 profits increased ~40% owing to restructuring efforts taken by CUMI to eliminate losses, mainly in South African entities. The company has used the last few years for creating capacity and strengthening its balance sheet, which makes it well placed to capture the next industrial upcycle. Maintain HOLD with TP of 274.