Abrasives Industry

Stock Opportunities
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Request to Donald: Can we have 'Industry Knowledge' section where we can collate our thoughts on a particular industry?

I wrote up something on Orient Abrasives on my blog, and then realized that this forum would be fantastic to secure industry knowledge in this area. I have tried to put up some data on the listed players. Views invited.

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Some important figures for the Abrasives industry (all the return ratios are the medians of the companyâs performance over the past 5 years)

Particulars Carborundum
Universal		 Orient Wendt Grindwell Norton
Sales Growth 3 yr CAGR 18.06% 9.85% 25.42% 24.81%
5 yr CAGR 18.69% 17.94% 12.26% 20.53%
Op. Profit Growth 3 yr CAGR 23.34% 2.02% 34.70% 26.70%
5 yr CAGR 17.81% 34.08% 13.20% 17.00%
Net Profit Growth 3 yr CAGR 44.18% 8.50% 44.96% 26.36%
5 yr CAGR 17.93% 61.53% 17.14% 17.21%
EPS Growth 3 yr CAGR 44.10% -14.27% 34.31% 24.75%
5 yr CAGR 20.61% 31.95% 16.32% 16.80%
OPM (%) 18.41% 20.85% 27.64% 17.72%
NPM (%) 7.75% 12.80% 16.46% 11.34%
RoA (%) 8.13% 16.55% 20.42% 21.25%
RoE (%) 13.48% 24.87% 20.57% 21.25%
RoCE (%) 15.30% 24.37% 31.26% 31.20%
RoIC (%) 10.71% 17.06% 21.88% 21.84%

(Figures in Blue are the highest across the competition for that category. Figures in Red basically means âit sucksâ).

We can easily see that Wendt hasbeen an outperformer in this category, while Grindwell Norton comes a close second (and both are debt-free). Compare these two companies (forget Orient Abrasives for a moment) with Carborundum Universal and youâd see that Wendt and GN are much better performers than CUMI.

But what does the market say? The market says that CUMI is worth 25 times PE multiple, while Wendt isworth only 18.5 times PE multiple and GN is much lesser. In fact, as recently as March 2011, Wendt was quoting at 11 PE multiple, while CUMI was quoting at a19 multiple even though performance of Wendt was much better than CUMI. Delisting mania took over, and Wendt shot up promptly to what I thoughtwas still slightly undervalued figure of 1500 (CMP: 1700)and a 17 PE multiple (currently 18.5).

What does that indicate? It indicates that I should do this industry analysis more often that I doso that we could have had a 60% gain in Wendt, compared to a paltry 25% gain in CUMI off March 2011 figures:)Also, that tells you that Mutual Funds are somehow fascinated with CUMI (most mutual funds have this stock)rather than otherimprovedplays like Wendt (probably, they donât want to get entangled in this delisting mania).

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My analysis excerpt on Orient Abrasives:

Glancing through Orient Abrasives cash flow statement (available in AR 2010-11), we see that -

a) Provision for doubtful debts have shot up more than 900% in one year. Of course, provision doesnât mean actual loss, but then again, why have the provisions shot up by such a significant percentage?

b) The customers donât seem to pay this company at all (look at the increase in sundry debtors) (I donât want to calculate percentage increase here) and

c) Nobody seems to be buying (well, not technically) if you look at the increase in inventories (300% increase!).

d) Also,Finished goods have gone up by 80%. Either the customers are not buying this companyâs products, or the company has grossly overestimated their product demand. Finished goods seem to be sitting in the warehouse.

Sales growth y-o-y has been only 12% though.

Why would I not invest in this company although I like the sector as such?

a) There is something awry in their collection process through which debtors and doubtful debts are increasing at an alarming rate.

b) There seems to be an unusual buildup in their finished goods â which leads me to believe that the company is not really efficient in managing customer demand.

c) If you look at their Jun 11 quarterly results (Q2 results have not yet been declared), there has been an increase of 17% in sales, but a degrowth in profit (and is evident for the entire year 2010-11).

d) Debt has increased considerably over the past year. Although interest is easily covered by its earnings for now, we need to keep a watch on this figure. If it jumps again, we have a cause for concern.

e) Letâs try to estimate FY12 EPS. The median NPM over the past 5 years is 12.48%. Assume a 15% increase in sales (3yr CAGR is just 10%, but letâs be a little optimistic here). We end up with 420cr sales, which translates into 52cr net profit. EPS will be around Rs. 4.4. Letâs take a PE band of 8-12 (I donât expect a PE rating higher than 12 for the simple reason that there is no kicker in sales/profits/new ventures etc over the past 3 years and recent quarters). That gives us an optimistic PE range of Rs. 35-Rs. 52. Not too much margin of safety, is there?

Disc: Not invested

Views invited.

Kiran

kiraninvestsandlearns.wordpress.com

1 Like
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A bettercomparison would be if you take the consolidated financials for CUMI. It’s now trading at 168 which is around 15x its trailing 12 months EPS. It’s also the co-promoter of Wendt & market leader in India.

Disclosure: I’m invested in CUMI.

hasbeen youad isworth a19 thoughtwas 1700)and doso figures:))Also, stock)rather than otherimprovedplays donat

)–

Kiran

3

I am holding Carborandum Universal and Grindwell Norton in my long term portfolio from years and neverregrettedmyinvestmentsdecisiondone in the year 1978/1882.

Regulardecent dividends one or two rights and few bonus .

Recently added WENDT at 985 as company WENDT EUROPE was purchased world wide by 3 M.

In India Wendt is owned by CUMI /WENDT Europe so we may see some kind of fireworks in future.

In this sector there is one more company available slightly cheap ORIENT ABRASIVE at 30 and it worthstudyingin detail . Heard some marketrumor about some European company taking stake in the same. Study well and if you findinteresting let us discuss more in detail.

My investmentsdecisionin this sector looks ok to me

1 Like
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[quote="dkirand, post:1, topic:708766612"] to Donald: Can we have 'Industry Knowledge' section where we can collate our thoughts on a particular I wrote up something on Orient Abrasives on my blog, and then realized that this forum would be fantastic to secure industry knowledge in this area. I have tried to put up some data on the listed players. Views invited. Some important figures for the Abrasives industry (all the return ratios are the medians of the performance over the past 5 years) 3 yr CAGR | 24.81% 5 yr CAGR | Op. Profit Growth | 3 yr CAGR | 26.70% 5 yr CAGR | 17.00% Net Profit Growth | 3 yr CAGR | 26.36% 5 yr CAGR | 17.21% EPS Growth | 3 yr CAGR | 24.75% 5 yr CAGR | 16.80% OPM (%) | 17.72% NPM (%) | 11.34% RoA (%) | 21.25% RoCE (%) (Figures in Blue are the highest across the competition for that category. Figures in Red basically means We can easily see that Wendt an outperformer in this category, while Grindwell Norton comes a close second (and both are debt-free). Compare these two companies (forget Orient Abrasives for a moment) with Carborundum Universal and see that Wendt and GN are much better performers than CUMI. But what does the market say? The market says that CUMI is worth 25 times PE multiple, while Wendt only 18.5 times PE multiple and GN is much lesser. In fact, as recently as March 2011, Wendt was quoting at 11 PE multiple, while CUMI was quoting at multiple even though performance of Wendt was much better than CUMI. Delisting mania took over, and Wendt shot up promptly to what I still slightly undervalued figure of 1500 (CMP: a 17 PE multiple (currently 18.5). What does that indicate? It indicates that I should do this industry analysis more often that I that we could have had a 60% gain in Wendt, compared to a paltry 25% gain in CUMI off March 2011 that tells you that Mutual Funds are somehow fascinated with CUMI (most mutual funds have this like Wendt (probably, they want to get entangled in this delisting mania). My analysis excerpt on Orient Abrasives: Glancing through Orient Abrasives cash flow statement (available in AR 2010-11), we see that - a) Provision for doubtful debts have shot up more than 900% in one year. Of course, provision mean actual loss, but then again, why have the provisions shot up by such a significant percentage? b) The customers seem to pay this company at all (look at the increase in sundry debtors) (I want to calculate percentage increase here) and c) Nobody seems to be buying (well, not technically) if you look at the increase in inventories (300% increase!). d) goods have gone up by 80%. Either the customers are not buying this products, or the company has grossly overestimated their product demand. Finished goods seem to be sitting in the warehouse. Sales growth y-o-y has been only 12% though. would I not invest in this company although I like the sector as a) There is something awry in their collection process through which debtors and doubtful debts are increasing at an alarming rate. b) There seems to be an unusual buildup in their finished goods which leads me to believe that the company is not really efficient in managing customer demand. c) If you look at their Jun 11 quarterly results (Q2 results have not yet been declared), there has been an increase of 17% in sales, but a degrowth in profit (and is evident for the entire year 2010-11). d) Debt has increased considerably over the past year. Although interest is easily covered by its earnings for now, we need to keep a watch on this figure. If it jumps again, we have a cause for concern. e) try to estimate FY12 EPS. The median NPM over the past 5 years is 12.48%. Assume a 15% increase in sales (3yr CAGR is just 10%, but be a little optimistic here). We end up with 420cr sales, which translates into 52cr net profit. EPS will be around Rs. 4.4. take a PE band of 8-12 (I expect a PE rating higher than 12 for the simple reason that there is no kicker in sales/profits/new ventures etc over the past 3 years and recent quarters). That gives us an optimistic PE range of Rs. 35-Rs. 52. Not too much margin of safety, is there? Views invited. Kiran kiraninvestsandlearns.wordpress.com [/quote]

Yes i have also heard that some German company isinterestedin buying stake in Orient Abrasive . Stock is remaining firm with decent volume .

I am holding small qty pre bonus/pre -split.

Grindwell Norton was alsointerestedin buying out this company in past.

Managment quality is average .

I would not add at current levels as high price is due to onlyrumorin market about stake selling . If nothing comes out stock may see figure of 30/31 or even 25/26 levels.

I have seen few insider trading also in this company in last few months.

I would prefer Grindwell Norton at 230/240 levels and Carborandum Universal at 140/142 for LTinvestmentspurpose

Request industry?

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companyâs
Particulars Carborundum
Universal		 Orient Wendt Grindwell Norton
Sales Growth 18.06% 9.85% 25.42% 18.69% 17.94% 12.26% 20.53% 23.34% 2.02% 34.70% 17.81% 34.08% 13.20% 44.18% 8.50% 44.96% 17.93% 61.53% 17.14% 44.10% -14.27% 34.31% 20.61% 31.95% 16.32% 18.41% 20.85% 27.64% 7.75% 12.80% 16.46%
8.13% 16.55% 20.42% 21.25% RoE (%) 13.48% 24.87% 20.57%
15.30% 24.37% 31.26% 31.20%
RoIC (%) 10.71% 17.06% 21.88% 21.84%
âit sucksâ). hasbeen youâd isworth a19 thoughtwas 1700)and doso figures:)Also, stock)rather than otherimprovedplays donât

--

doesnât donât donât Also,Finished companyâs

Why such?

â Letâs letâs Letâs donât

Disc: Not invested

5

Abrasives are basically required for surface preparations and finishing work in steel works.The purpose of this is to facilitate good welding penetration and good welding joint.Normally one grinding wheel/abrasive consumable are required for consuming 10 packets of electrodes. Hence if at all there is offtake in infra/ind sector the most beneficiary product would be electrodes. Also presently there are talks about assigning ratings to housing sector this would also compel builders to use branded welding products.

ESAB India seems like obvious beneficiary of this expected turnaround. Ador is also present in this field but is you ask any welder he will tell you their products are nowhere near ESAB.

I was holding ESAB and grindwell both for long time and ultimately ran out of patience

and sold them.ESAB seems to have corrected a lot after that and is trading at lower end of price band. So far chinese have not able to penetrate this field globally and mostly brands like unitor,esab and few japanese brands dominate this sector. Hence chinese cheap imports do not pose serious threat.

Views invited regarding this (comparism between abrsive and electrode ind)

regards

6
Carborundum Universal held a conference call the company was represented by K Srinivasan, MD; Sridharan Rangarajan, CFO and Raja Mukherjee, DGM (Internal audit & strategy).

Key takeaways of the conference call by Capital Mkt;

Overall the mineral business did well in 2013-14, which really aided the company in a year when the other businesses particularly the project dependent business ceramic did not do as well as the company liked.

The electro minerals division witnessed better volumes in silicon carbide business in Russia and Zirconia business in South Africa. Thukela also picked up in terms of volumes. The Indian business also did well in FY14. All this has facilitated 21% growth in consolidated sales of electro minerals for FY2014.

Abrasives division registered a consolidated sales growth of about 6% for FY2014 but its profitability came under pressure with PBIT declining 28% for the fiscal.The division witnessed an increase in cost push which had an adverse impact on the profits. In Indian market, the biggest for abrasives the company's profitability was hurt on account of unfavourable product mix. The standard business (sold through trade/channel) margins are at stress due to cheap inputs and level of downgrading. On the other hand the sales to direct customers such as automotives and other large customers though margin are intact the volume were down by 5-20%. The company's growth in 2013-14 came from taking on the lower end business at a lower margin. The company isholding market share but that is coming at the cost of margin. In India the bottom end of the market which is about 20% of the overall market is growing at a rate of 25%yoy.

The company which is in the process of scaling up of production in its new Uttaranchal abrasives plant during 2013-14 has to absorb some unusual high losses interms of production in last 2 quarters, which the company is hopeful of going away from current quarter or the second quarter of FY15.

Re-organization of abrasives business in Russia where the company has resized its capacity to less than 15000 tonnes of useful capacity with market reorientation addressing new industries and exports from about 25000 tonnes during the year. The original capacity at the time of acquisition was 50000 tonnes and was subsequently reduced to 25000 tonnes and that was now further reduced in current year. This capacity resizing and reorientation of products to new markets has resulted in some onetime costs and now this is behind the company and hopefully expects the Russia abrasive business to grow profitably from here on. The expenses incurred (or impact at PBIT level) on taking out capacity at Russia abrasive business is about Rs 4-5 crore.

Electro minerals registered strong growth in sales and profits largely on the back of higher volumes at both Russian and South African subsidiaries from a lower base in the corresponding year.

Ceramics segment registered degrowth in sales for FY2013-14 due to postponement of projects in domestic market during most parts of the year. However for Q4FY14 the division has registered a good growth on sequential basis. While the ceramics business from India had the challenges of project postponement, the Australian entity too have registered lower sale.

In electro minerals, the specialties are gradually picking up in India and going forward this would really help this segment of EM business. Considering 2012-13 which was a bad year because of the photovoltaic fault but from there this has come and come back reasonably well in 2013-14.

Ceramics have bottomed out and in Q4FY14 the numbers are coming back especially for specialty ceramics. Going forward is to be better for ceramics business.

Consolidated capex for FY2014 is about Rs 94 crore and majority of it spent on India and Russia abrasives business. The company incurred capex on India coated abrasives business primarily looking at discs, flap wheels etc. The other major capex spent is on re-organisation of Russian abrasives business towards new industries and exports. Otherwise there was no major addition of capacities in 2013-14. Capex for FY15 would be in the range of at least Rs 75 to 80 crore and this will be spent on capacity building across all areas of business. A lot of it is very specific capability building towards the niche markets because the company wants to get the margins back.

For 2013-14, the absolute increase in consolidated sales and PBT is Rs 152 crore and Rs 2.4 crore. Out of the incremental sales of 152 crore and 2.4 crore of PBT, standalone sales increase was at Rs 48 crore with PBT drop by about Rs 5.6 crore. And this means the subsidiaries and JVs contributed Rs 104 crore to incremental sales and Rs 8 crore to PBT.

Lower standalone FY14 PBT by about Rs 5.6 crore came due to increase in employee costs, power costs, and raw material costs. Given the tight market the company could not pass on the entire cost push through price hikes and hence the PBT margin dropped. On the other hand the PBT margin of consolidated entity increased marginally owing to increase in favorable swing in foreign exchange gain (by Rs 9 crore) and higher other income and other operating income (of about 6 crore). However higher forex gain and other income was largely negated by the cost push witnessed in the power and fuel costs and employee costs.

Guidance for Electro Mineral business: The standalone Indian business will see improvement in 2014-15, with growth coming largely from specialties getting scaled up. As far as Russian EM business is concerned there cannot be too much of improvement in terms of tonnage as the company has already hit the peak. The company is not expecting prices to go up with all these new challenges that it have. So at best, the Russian EM business should be about flat. So in EM business both challenges as well as opportunities lies in South Africa i.e. both at Foskor and Thukela. Q4 FY14 was very good and if the company keeps the momentum, which it hope to do, will result in significant improvements coming in from the South African EM business. So double-digit growth in standalone EM business is possible but achieving double digit growth at consolidated level is a challenge given flat growth at Russia.

Power cost at consolidated level has gone up due to increase in cost of power at Russia and higher capacity utilization at Thukela even as Foskor capacity utilization is lower. But at standalone level it has come down largely because of incremental power coming from Maniyar and less utilization of captive power plants at most locations with improvement in power scenario in southern region compared to FY13.

Capacity utilization across all facilities will average about 75%.

Foskor's Zirconia plant is currently having an output of about 4000 tonnes. But the new bubble plant where the company has invested 115 million rand is producing just 500 tonnes against a capacity of about 6000 tonnes. In next year the company expects the output of bubble plant to increase to about 3000 tonnes from current 500 tonnes. This additional volume of 2500 tonnes will bring in an incremental sale of about USD 10 million.

At Thukela, the company did a sale of about 30 odd million Rand in Q4FY14. The company expects that it will continue and get better. If it sustains this level it get to on definitely a no loss situation at the PBT level and that is the target of the company for current fiscal.

For FY2014-15 the company expects double-digit growth in top line and double-digit plus margin at PBIT level or PBT level.

If there is complete embargo of Russian goods into US then probably about 3000 to 4000 tonnes will be the impact which the company can take into India without an issue. If it is going to be complete trade embargo of all Russian goods coming into Europe which is very, very unlikely because all the gas everything is Russian, the impact will be about 18000-20000 tonnes, for which the company will find markets elsewhere. Since the company sells significantly into Russia, CIS, Asia and other parts, the trade embargo will hurt, but not kill it.

In Indian market, the company's market share is not significant as it is a niche player. It has a sales of Rs 150 crore on a total refractory market size of about Rs 5500 crore. On the other hand the company has a market share of about 35 plus in abrasives.
7

**Carborundum Universal held a con call & company was rep by K Srinivasan, MD; Sridharan Rangarajan.**Key takeaways of the conference call by Capital Mkt;
Consolidated net sales of CUMI were lower by 2% to Rs 570 crore, due to adverse translation loss and EMD restructuring issues, while Abrasives business continued to do well. Ruble has depreciated by about 17% in one quarter alone against US $, so there was good amount of conversion loss upon translation of Russian operations.
On Abrasive side, both volumes and realizations were better YoY domestically. However challenges for Abrasives in Russia and China continued.
For Electro minerals, the Zirconia businesses from South Africa and Fusion from Thukela refractories are hurting the overall operations. The company is really thinking at various possibilities including shifting or transferring some of the assets to India and closing down the plant there.
Ceramic business was more or less flat, as while Australia adjusted itself fast compared to lower coal prices, Aluminum industries in Russia is taking time to adjust itself to the falling and uncertain prices. Margins on ceramics improved as sales on industrial ceramic side picked up well than the refractory side.
Company is going slowly on capex as its recalibrating some of its businesses. Overall it spent around Rs 38 crore in Q2 FY’15 and will end the year with total capex of around Rs 75 crore.India which constitutes about 48% of CUMI’s business continues to do well and with economy recovering, the business will be even better. However the 24% of business which constitutes EU including Russia is where much of the problems are. Because of depreciation of Ruble and problems in Russia due to lower crude oil and slowing economy is hurting the business. Company is trying various avenues to increase its exports from Russia to EU and is progressing gradually. US which is about 8% of company’s business is actually in the best shape and is getting even better.
There was about Rs 8 crore of additional costs for VRS in South Africa, Thukela Refractory and some provisions were made for inventory and fixed assets as the company is trying to reposition the entire businesses. Costs are also high in Foskor Zirconia as company is doing many trials to control the bubble. This together with higher electricity costs together with higher exchange losses affected the overall business of Electro Minerals. Total put together there was about Rs 21 crore of additional costs for EMD in Q2 FY’15.
Mgt. made it clear that it will go on for its plans to shift the entire bubble plant of South Africa to India. Still the plant is not stabilized there & issues continue to remain. Within next couple of quarters, more clarity will emerge on the outcome of the same.
Overall, the management is confident of minimizing the impact of EMD business for next 2 quarters on the overall business of the company. Management is confident that the whole process of restructuring will be over in next couple of quarters. While most of the impact has come in Q2, some more will be there in Q3. Overall EMD should see the margins of around 8-9% at consolidated level once, the issue is settled. Management is equally confident that as and when EMD business stabilizes, margins will be back to as high as 10-12%. Abrasives margin can also inch up further as and when China and Russia stabilizes.In all FY 2016, one can expect higher margins leading to an overall higher bottom line growth as per the management.Consolidated debt in the books of account is about Rs 445 crore as on Sep’14.

8

Co was rep by K Srinivasan, MD ;Key takeaways of the call by Capital Mkt;

Consolidated sales for the quarter ended Dec 2014 declined by 3.7% to Rs 497 crore compared to corresponding previous period. But the Earnings before interest, depreciation and amortization (EBITDA) was up by 41% to Rs 71 crore. Forex gain for the quarter was about Rs 10.73 crore compared to Rs 1 crore in the corresponding previous period and excluding that the EBITDA grew by 22% to Rs 59.82 crore. The growth at PBT was 89% to Rs 39 crore and the net profit more than doubled by 111% to 22.11 crore.

The drop in sales on quarter on quarter basis and sequential basis were largely impacted owing to the weak Rouble. Profitability of all divisions improved compared to similar quarter last year. However on a sequential basis, there was pressure in Abrasives and Ceramics business.

Abrasives )- Sales of the abrasives business on a consolidated basis was constant at Rs 213 crore. Profit before interest and tax on a consolidated basis recorded a gain of 47%yoy to Rs 13 crore. On a sequential basis, the sales was a drop of 8% and the PBIT was a drop of 32%.

Electro Minerals - Consolidated net sales were lower by 16% to Rs 172 crore compared to Rs 204 crore in the corresponding quarter of last year. On a sequential basis the sales was down by 12%. The drop was due to weak Rouble. PBIT stood higher at Rs 17.9 crore compared to Rs 15.8 crore in corresponding previous period. The business challenges in South African entities are being addressed.

Ceramics - The ceramics segment recorded an 11% increase in sales on a consolidated basis to Rs 124 crore. On a sequential basis the sales was down by marginal 1%. Last year similar quarter the sales volumes from CUMI India were low owing to postponement in project orders. The situation has comparatively improved. Australian entity had a better performance. PBIT of the ceramics business on a consolidated basis increased to Rs. 19 crore compared to Rs 12 crore in corresponding previous period.

South African Operations: The company is addressing the challenges in South African market. As strategy to improve the South African operations, the company propose to wind up Tukhela (sale of assets) and relocate the buble zirconia plant of Foskar to India. While the tapped furnace plants will continue to operate from South Africa and only the new buble zirconia plant will be relocated to India. Restructuring of Thukela refractory will be completed by March 2015. Together these two subsidiaries had a PBT loss Rs 51 crore in 9mFY15 and the losses are not expected to continue in FY2015-16.

**Russia operations: **The sales and operating profit of Russian operation grew by 5% and 6-7% for the 9mFY15 but on translation the sales and profits get hurt due to currency variation. The sales got hurt by Rs 64 crore and operating profit by Rs 6-8 crore for 9mFY15. The capacity utilization in Russian EM capacity is 95%, with ceramics doing a production of about 7000 tonnes against a capacity of 15-20000 tonnes and refractory doing a capacity of 7000 tonnes against a capacity of 30000 tonnes.

The Tukela Refractories (South Africa), Foskar (South Africa) and China operations together accounts for a loss of Rs 55-65 crore for 9mFY15. While the winding up of operations in case of Tukela will stop any further losses from it, but in case of Foskar portion of the loss will stop. Moreover the topline will be impacted until the plant is getting relocated.

Of the two segments of ceramics business the industrial ceramics visibility is clear. The traction is strong with significant inflow of orders. The refractory shows strong growth. With ceramics accounting just 25% of consolidated sales, these positive is not to greater impact at consolidated level. The abrasives business with 75% coming from Indian market the focus is on garnering market share and thus the growth will be led by topline. Within Electro Minerals business the Russian operations is profitable but lost in translation.

The Margin will show upward trend but that largely depends on the geography mix and currency impact.

9

CONFERENCE CALL - from Capital Markets

Carborundum Universal

Confident of attaining its FY16 sales guidance

Carborundum Universal held a conference call on Feb 8, 2016 to discuss the performance for the quarter and nine month ended December 2015. In the conference call the company was represented by its K Srinivasan, MD.
Key takeaways of the call

Electro minerals sales were higher due to better performance from India business as well as Russian operation. The Russian operation notwithstanding weak Rouble delivered a growth. The profitability of this business has also improved significantly compared to corresponding previous period with benefits of closing down of loss making operations of TRI & restructuring of Foskor Zirconia as well as better India business.

Bubble Zirconia project update - De commissioning is over, put into containers and shifted/transported out to Cochin. Installation and commissioning is expected to start within 3 months and the plant is expected to go commercial by end of Sep 2016.

In abrasives the company is wresting back its market share in India which it has earlier lost to smaller players who catered to the local market with imports.

The abrasives market parse though is not growing; the company is expected to improve its market share with client resort to get back to local manufacturers. So topline and margin are improving in India business.

Ceramics currently accounts 10-12% of the overall business. But it is a good product line to be in. The company to focus more on engineered ceramics a segment in industrial ceramics apart from weird ceramics which largely depends on projects.

The electro minerals products basket of the company is now wider with more value added specialty products compared to earlier just 3 products including White, brown abrasives. The volume of specialty products is on increase. Since this Specialty products come with high margin, the profitability is also improving.

Russia Electro Minerals business - Currently not everything is metallurgical. Mix is worked on with more value added products added to the basket and volume. Event then the mix is still highly skewed towards metallurgical and the non metallurgical is not at the earlier levels of 50% of overall volume accounted by crystalline during the peak of Photovoltaic.

The focus for VOW will be improving volume as the profitability of the company is already good. Going forward looks at a growth of 15% in Rouble terms for Vow.

Typically December ended quarter is a low volume quarter for Vow so the margin gets impacted and which is in line with expectations only.

The company maintains the revenue guidance of Rs 2100 crore for current fiscal with margin of abrasives being 10-11%; Ceramics 14-16%; Electro Minerals at about 16-18%.

Against Rs 175 crore of planned capex for FY16 the company spends about Rs 135 crore so far with much of its in capital WIP. The capitalization/commissioned so far is Rs 56 crore.

In another 12 months the restructuring which is currently underway will get completed and new capacities will start contributing leading to improved performance.

The investment currently made by the company has to take it to revenue of Rs 3000 crore on full operation.

Overall the visibility is getting better. While the company is in control of external environment it is working on internal product mix. With the investments and enhancing product mix the company is confident of attaining the sales of over Rs 3000 crore when the ongoing capex projects on stream.

10

CONFERENCE CALL - from Capital Marketa

Carborundum Universal

Expects FY’17 consolidated performance to be better than FY’16

Carborundum Universal held its conference call on 5th May 2016 and was addressed by K Srinivasan Managing Director

Key Highlights

  • Of the total consolidated sales, about 24% business comes from Russia and EU, around 7% from US, around 6% from Middle East and Africa, 10% from SEA and Australia and rest around 53% from Indian Operations.

  • There was a translation loss of around Rs 158 crore in sales in FY’16.

  • Abrasives demand remained strong in domestic market. No price increase in Abrasives was seen in FY’16 and almost entire growth of around 9% is from volumes and better product mix. As per the management, the trend continues to remain positive. In International business of Abrasives as per the management, more inroads have to be made in Russia and in China.

  • For Abrasives about 75% business comes from Indian operations. Abrasive growth generally is around 1.5 times the GDP of the company. Overall, the basic consumption growth continue to happen, so Abrasives will continue growth

  • Ceramics and Refractory business was lower by around 3% in FY’16 at consolidated level, as no major projects are happening and hence the ceramics and refractory business continue to struggle. There were some smaller projects and replacement demand which led to some orders, but for this segment to shape up, investments need to happen and green field projects need to come on stream. Metalized cylinder business demand continues to remain strong but not upto the expected line.

  • In Electro Mineral Division (EMD), consolidated sales were flat at around Rs 731 crore largely due to translation impact. The profit increased to Rs 127 crore from Rs 79 crore in FY’15 largely due to lower losses from South African subsidiary. The entire restructuring exercise in South Africa is complete and there will be no impact in FY’17 of any losses as everything has been booked.

  • During FY’16, around Rs 100 crore is capitalized rest around Rs 80 crore is in WIP. The benefit of capacity addition will accrue in every quarter of FY’17.

  • Consolidated Debt equity ratio is around 0.26

  • More than 20 IP filed during FY’16 for future growth. Some of the IP are product and many are processes. These IP’s are largely in EMD and Industrial Ceramics business. These IP’s are mostly, active IP’s and they will be employed in the company’s business

  • Management expects a significant growth scope of sales of Ceramics and Abrasives in US market, given the lower base and expected growth opportunities in US.

  • The company received around Rs 40 crore benefits of lower fuel costs in FY’16 which was more or less a translation gain impact on conversion of power costs in Russia. Actual benefit of fuel costs was around Rs 6 crore from India.

  • No more captive manufacturing plant in China. But the entire manufacturing will be done through dedicated vendors to whom the company has outsourced. Management expects Chinese business to grow in FY’17 and China will come out of losses in FY’17. Loss for FY’16 from Chinese subsidiary stood at around Rs 11 crore.

  • Management expects higher sales growth in FY’17 as compared to FY’16 growth of around 11% at standalone level. At consolidated level, due to currency and other volatility, it’s difficult to predict, but the growth will definitely improve and management expects better performance than FY’16.

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There has been a lot of buzz around capital good stocks as a theme for the next 3-5 yrs. Are any of the veterans following the abrasive industry and companies like Carborandum and Grindwell Norton?

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