Carborundum Universal Ltd 18 th July, 2011 BUY

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1 Company Report BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY Carborundum Universal Ltd 18 th July, 2011 BUY CMP Rs Target Price Rs Large capacity expansions and major business acquisitions, both in India and overseas, have marked CUMI s growth and globalisation on strategies in recent years. Pursuing its next phase of growth, the company rolled out capacity augmentation on plans for specific product categories. BSE Code NSE Code CARBORUNIV Market Cap (Rs Mn) Week High/Low / Industry Other Industrial products Face Value Rs2.00 Shares O/S EPS Book Value P/E P/B 3.79 Shareholding Pattern A new facility for making non-woven abrasives with technology from USA was commissioned at Chennai towards the end of the year, expanding the company s product portfolio in coated abrasives. The company has registered strong numbers for the quarter ending March A decent increase of about 19% in the sales to Rs million was observed for the quarter ended March 2011 as against Rs million during the year-ago period. The Company has registered bottom line of Rs million, a sharp growth of above 50% over Rs million achieved in the corresponding quarter of last year. Operating profit surged to million, a jump of around 37%. There is also a wide expansion in margins during Q4FY11. Abrasives business grew around 11% in quarter ended March 2011 at Rs.1853 million from year ago quarter. Electro minerals witnessed a sharp growth of 40% at Rs million while Ceramics zoomed 27% at Rs million from the like quarter last year. Cumi enjoys diversified revenue mix and is independent of any customer. No customer represent more than 1% of consolidated sales and no industry represents more than 10% of such sales. Valuation Presently, the stock is trading at Rs.302 which is at a consolidated PE of 19.16x to its FY11 EPS of Rs Since the stock offers good investment opportunity, we initiate a BUY signal on the stock with a target price of Rs.360 expecting an appreciation of about 20% from the current level with the short to medium term investment horizon. For Private Circulation Only 1 Hem Research

2 Business Details Carborundum Universal Ltd was incorporated in the year 1954 as a joint venture between Carborundum company, USA, Universal Grinding Wheel company, UK and Murugappa Group. They pioneered the manufacture of coated and bonded abrasives in India, besides super refractories, electrominerals, industrial ceramics and ceramic fibres. The company's major customers include bearing, automobile and auto ancillary, alloy steel, foundry and forging, fabrication and general engineering industries. The company products are manufactured in fourteen locations across various parts of the country in which all their manufacturing units are ISO 9001:2000 certified. The company has their presence in 43 countries and also has 200,000 retail outlets. CUMI is one of the five manufacturers in the world with fully integrated operations that include mining, fusioning, wind and hydro power stations, manufacturing, marketing and distribution. Its operations spread across three business segments: Abrasives- This business comprises of the following major product groups viz. bonded abrasives, coated abrasives (including non-wovens), super abrasives (through a joint venture), and power tools. The operations are carried out through eleven manufacturing Facilities located in India, Russia and China. The subsidiaries/ related entities located in North America, Middle East and Thailand support this business in getting an extended customer reach. Ceramics- The ceramics business operates in three niche product groups viz. industrial ceramics, super refractories and anti corrosives. Industrial ceramics business offers alumina and zirconia products of technical ceramic grades addressing wear & corrosion protection, electrical insulation, thermal protection and ballistic protection requirements. The key user industries for ceramics business are power generation and transmission, coal washeries, grain handling, sanitary tiles and ware, ballistic protection, cement, non ferrous metals, iron and steel industries, carbon black, cement, non-ferrous metals, iron and steel, insulators, furnace building, glass, petro-chemical and construction industries. The operations are carried out through eight manufacturing facilities located in India and Russia. Electro minerals- The major product groups of this business segment are fused alumina (comprising brown and white alumina), silicon carbide and fused zirconia. The operations are carried out through 6 manufacturing facilities located in India, Russia and South Africa. Key user industries for this business are abrasives, refractories and steel. CUMI's constant innovation and product up gradation, through in-house R&D and strategic alliances with global leaders in grinding technology, have not only ensured it market leadership in India and abroad, but also international recognition as a manufacturer of quality abrasives and a provider of total grinding solutions. For Private Circulation Only 2 Hem Research

3 Strong growth ahead Cumi expects FY12 to be as good as last year in terms of growth and it has started on a high note too. The order intake continues to be strong. Growth is on the back of revival of strong growth in Australia together with pick up of growth in US after some three quarters. Both the Australian and the North American market together represents less than 15% of company s consolidated revenue. Carborundum consolidated has 44% of the revenues coming from outside India as of last year. It expects this trend to go up further with 47% of the revenue coming from outside India and 53% within India. Further, average tax rate in the future is expected to maintain at rates. Overall, it looks like a year of 15% plus growth going forward even tough volume increase will be gradual. Growth in India would be price driven while in abroad there would be capacities to support growth. Further, on a long term basis PBIT margin on abrasives on a consolidated basis is expected to be about 15% to 16%, 18%to 20% for both electro minerals and ceramics. Abrasives continue to perform well Abrasives business, which is the largest business segment, registered a topline increase of 27% for the year. Sales were Rs.6990 million against Rs.5507 million for last year. This growth was made possible by the continuing buoyancy in the Indian and Russian markets and the revival in the US and Canadian markets. It was first year of operations in China which too helped and yet a long way to go in terms of capacity utilization for the same. Despite increase in input costs, the overall profitability margins improved to 14% due to improved price realization, better product mix and improvement in internal efficiencies. PBIT increased to Rs.957 million from Rs.517 million, a growth of sharp 85%. Cumi is a dominant player in the Indian abrasives industry with a market share of about 35%. The company is benefitted mainly on account of raw material sourcing as it procures raw material through its international subsidiaries through backward integration, thus giving an edge over its competitors. For Private Circulation Only 3 Hem Research

4 Capacity expansion on the cards In terms of projects and Capex, Cumi did Rs.50 crores last year on a standalone basis and another Rs.25 crores additional on a consolidated basis, so it is Rs.75 crores overall capex. It is planning capex of Rs.125 crores on standalone and another Rs.100 crores on consolidated. This Capex, it intends to fund through internal accruals but if any inorganic opportunity or investment requirements comes that would be funded through debt. Major projects the company is planning to put up are another 3,600 tonnes of alumina ceramics, an additional 3,000 tones of fired capacities in refractories. Cumi is also looking at value added grain of 100 tonnes in the electro mineral business. As far as bonded abrasives in India current capacity is approximately about 20,000 tonnes, the company is planning for a 15% increase in volume by the end of September 11. It is also looking at an additional module to produce 12,000 tonne of SiC in Russia and 4,500 tonnes additional capacity for Zirconia in South Africa. The company through debottlenecking hits 0.75 million pieces of metz cylinders at around last year end and expects to run at this level for full year Such expansion would add to the revenue of the company. Strong financials was a year of excellent all round performance for the company across the world. Consolidated sales grew sharply by 25% translating in operating profits of Rs million, also up by 25%. The bottom line skyrocketed around 46% to stay at Rs million. This growth was on account of improvement in internal efficiencies (like power and fuel consumption rates, raw material input-output norms, identification of alternate sources for inputs, development of alternate raw materials and recycling of materials) and externally by price rationalization. In terms of absolute sales in the different geographies 56% was sold in India and 44% in the rest of the world. Europe had strong growth, North American market also grew, Russian market had exceptionally strong growth. The Indian market had an outstanding performance. For Private Circulation Only 4 Hem Research

5 Other segments too growing nicely At CUMI, all business segments had a golden run, registering growth both in domestic as well as international revenues. The ceramics business on consolidated basis recorded a 22% increase in sales, from Rs.2857 million to Rs.3476 million. Strong growth in topline, 24% on standalone and 22% on consolidated. Sales of metalized cylinders and wear resistant liners continued to grow at a brisk pace with important new customers being added. There has been a small fall in margin due to floods in Australia which affected operations. The alumina ceramic business was strong and earned good margins. Sales of super refractories increased by 31% compared to last year, driven by the strong off take for fired and monolithic super refractories in major user industries like carbon black, cement and steel industries. Electro minerals, the second largest business segment had a very good year too. Sales registered a growth of 25% from Rs.4789 million to Rs.5978 million. The business witnessed steep increases in key input costs viz power and raw petroleum coke, because of which there was erosion in margins. Indian operations achieved a growth of 34% and the Russian 24%, South African 21%. The increase in sales was both on account of volume increases and also escalation in prices. In the domestic market, off take from all user industries viz abrasives, refractories and engineering was strong. The focus on enhancing production of silicon carbide microgrits (high margin) contributed to the business growth and value addition. Key risks CUMI operates in multiple countries with each location having sizeable trade flows in the form of imports or exports leading to the risk of wild currency fluctuations. Further, any slowdown in such economies would hinder profitability. Any delay in capacity expansion plans would impact profitability of the company. For Private Circulation Only 5 Hem Research

6 Consolidated Profit & Loss Account Rs. Million Particulars FY08 FY09 FY10 FY11 Net sales Growth % 7.27% 25.08% Expenditure EBITDA Growth % 27.39% 25.18% EBITDA margin 15.46% 13.91% 16.52% 16.54% Other income Depreciation EBIT EBIT margin 14.98% 13.72% 15.75% 16.34% Interest PBT Tax PAT Minority Interest Share of Associates (2.08) Adjusted PAT Growth Net Profit margins 6.83% 6.24% 7.89% 9.20% Exceptional item Reported PAT Equity Capital Res. & Surplus Equity Shares EPS CEPS Ratios Particulars FY08 FY09 FY10 FY11 Return on Equity 13.90% 14.77% 17.04% 19.76% Return on Capital employed 16.46% 16.09% 19.56% 22.70% Debt/Equity Asset turnover Current Ratio For Private Circulation Only 6 Hem Research

7 Balance Sheet Rs. Million Particulars FY08 FY09 FY10 FY11 Share Capital Capital Reserve on Consol Reserves & Surplus Shareholders funds Minority interest Secured Loans Unsecured Loans 1, , Long term Lease Liability Deferred tax Liability Sources of funds Gross block 6, , , Accumulated Depreciation 2, , , , Net block Capital work in progress Investments Goodwill on consol- Subsidiaries Joint Venture Inventories 1, , , , Sundry debtors 2, , , , Cash and bank balance Other current assets Loans and advances Total current assets 4, , , , Deferred tax asset Current liabilities & provisions 1, , , , Net current assets 3, , , , Miscellaneous Exp Uses of funds 8, , , , For Private Circulation Only 7 Hem Research

8 Quarterly Financial Highlights Rs. Million Particulars Q4FY11 Q4FY10 Q3FY10 YoY% QoQ% Sales Expenditures (0.44) Operating Profit Net Profit OPM% bps 280bps NPM % bps 265bps EPS Past Price movement of the stock For Private Circulation Only 8 Hem Research

9 HEM SECURITIES LIMITED MEMBER-BSE,CDSL MUMBAI OFFICE: 14/15, KHATAU BLDG., IST FLOOR, 40, BANK STREET, FORT, MUMBAI PHONE FAX JAIPUR OFFICE: , JAIPUR TOWERS, M I ROAD, JAIPUR PHONE FAX GROUP COMPANIES HEM FINLEASE PRIVATE LIMITED MEMBER-NSE HEM MULTI COMMODITIES PRIVATE LIMITED MEMBER-NCDEX, MCX HEM FINANCIAL SERVICES LIMITED SEBI REGISTERED CATEGORY I MERCHANT BANKER HEM FINANCIAL SERVICE Disclaimer: This document is prepared on the basis of publicly available information and other sources believed to be reliable. Whilst we are not soliciting any action based on this information, all care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. This information is not intended as an offer or solicitation for the purchase or sell of any financial instrument. Hem Securities Limited, Hem Finlease Private Limited, Hem Multi Commodities Pvt. Limited and any of its employees shall not be responsible for the content. The companies and its affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may from time to time, have long or short positions in, and buy or sell the securities there of, company (ies) mentioned here in and the same have acted upon or used the information prior to, or immediately following the publication For Private Circulation Only 9 Hem Research