Grindwell Norton Ltd

Grindwell Norton Ltd

4 Recommendation BUY Company Overview Grindwell Norton Ltd (GNO) is India s leading manufacturer of Abrasives (Bonded, CMP (11/07/2012) Rs. 258 Coated, Non-Woven, Superabrasives and Thin Wheels) and Silicon Carbide. It also Target Price Sector NA Industrial Products manufactures and markets High Performance Refractories and Performance Plastics products. It is part of the 42 bn euro multinational group Saint Gobain. Stock Details BSE Code NSE Code Bloomberg Code Market Cap (Rs cr) 506076 GRINDWELL GWN IN 1450 Investment Rationale Market leadership position in the Abrasives market in India GNO is a market leader in the Abrasives market in India. It is one of the two major players and together they have a market share of ~70% split among them equally. The estimated market size of Abrasives in India for FY12 was ~Rs 2500 cr. The demand for abrasive products in India is steady and any revival in the capex can lead to significant improvement in the demand. Free Float (%) 41.37 52- wk HI/Lo (Rs) 295/190 Avg. volume BSE (Quarterly) 2118 Face Value (Rs) 5 Dividend (FY12) 130% Shares o/s (Crs) 5.5 Relative Performance 1Mth 3Mth 1Yr GNO 5.8% -3.9% 9.4% Sensex 5.3% 2.1% -6.5% Shareholding Pattern 31 st Mar 12 Promoters Holding 58.63% Institutional (Incl. FII) 10.99% Corporate Bodies 3.03% Public & others 27.35% Amish Pansuria Research Analyst (+91 22 3926 8174) amish.pansuria@nirmalbang.com Sunil Jain Head of Research (+91 22 3926 8196) sunil.jain@nirmalbang.com Year Net Sales (Rs cr) Growth (%) Wide range of products to cater to different industries The abrasive products are used in a number of industries such as Steel, Automobiles, Auto Components, General Metal Fabrication and Woodworking. GNO makes wide range of products like Bonded, Super and Coated in the abrasives segment. Most of these products are made indigenously or sourced from Saint Gobain plants across the world. The dependence on any single industry for these products is less than 15%. The largest customer accounts for less than 2% of the sales and the largest dealer accounts for less than 3% of the total sales. This coupled with wide range of products helps diversify the business risk for the company. Expansion of capacity will help the company grow Grindwell is looking to make a capital expenditure of Rs 100 crore per annum over the next 2-3 years. It plans to set up Phase II of its High Performance Refractories (HPR) plant in Gujarat this fiscal. Also, it would be investing in capacity expansion at bonded abrasives plant in Nagpur and thin wheels and coated abrasives plant in Himachal Pradesh. It is setting up a new non-woven abrasives line along with new plant for performance plastics at Bangalore, too. The expansion projects (the major ones being the Bonded expansion at Nagpur and the new Non-Woven plant at Bangalore) planned are progressing as per schedule and are expected to be completed in the first half of the current financial year. GNO has already done a capex of close to Rs 100 cr in FY12 and is expected to invest similar amount in FY13 to expand its capacity. The benefit of this capex will be seen in the coming years. Valuation & Recommendation GNO has been able to maintain its growth in terms of topline and bottomline inspite of flat volume growth in FY12 as it was able to increase the prices of its products. Being a market leader in the abrasives segment helps GNO in terms of pricing power. It is a debt free company with a consistent growth record since last 10 years (Sales grew at a CAGR of 17.4% and PAT grew at a CAGR of 21.4% over 10 years). The end market of its products is very diverse which significantly reduces its business risk. With Saint Gobain s backing it has access to the latest technologies for its product line. At CMP, the stock trades at 12.2x its FY13E EPS and 7.4x its FY13E EV/EBITDA. At current valuations and strong fundamentals we feel that the stock has an upside potential of 15-20%. We recommend a Buy on the stock. EBITDA (Rs cr) Margin (%) PAT (Rs cr) Margin (%) FY11A 797 13.5 137 17.2 83 10.2 14.9 17.3 20.6 EPS (Rs) PE (x) ROE (%) FY12A 906 13.7 161 17.7 103 11.2 18.6 13.9 22.3 FY13E 1033 14.0 186 17.9 118 11.2 21.2 12.2 21.9 11-Jul-12 Please refer to the disclaimer towards the end of the document P a g e 1

Investment Rationale Market leader in the Abrasives markets in India GNO is one of the major players in the Abrasives market in India. The only other major competition is Carborundum Universal. These two players have a combined market share of ~70% split equally amongst them. With a duopolistic nature of the market, GNO has pricing power over its products which reflects in its ability to grow sales in FY12 inspite of flat growth in product volumes. This helps the company maintain its profitability margins. The Abrasives market in India in FY12 was around Rs 2500 cr. Global market for industrial abrasives is projected to touch US$ 27 billion in 2012 and projected to reach US$ 36 billion by 2018. Asia-Pacific is estimated to be both largest and the fastest growing market for industrial abrasives with a Compounded Annual Growth Rate (CAGR) of 6.5% between 2008 and 2018 to account for 58% of global market share in 2018. Demand for industrial abrasives will remain steady due to the consumable nature of the product and will see an increase more so in Asia-Pacific due to boost in the construction and manufacturing sectors and per capita incomes. GNO stands to benefit from these developments. 700 600 500 400 300 200 100 0 Abrasives Market Size Rs 2500 cr in FY12 30% 10% 60% Bonded abrasives Coated Abrasives Special & Super Abrasives Source: Industry Reports, Nirmal Bang Research CY08 FY10 FY11 FY12 Abrasives Ceramic & Plastics Others 1000 800 600 400 200 0 91.2% 87.8% 89.6% 91.5% 92.6% 100.0% 80.0% 60.0% 40.0% 20.0% 8.8% 12.2% 10.4% 8.5% 7.4% 0.0% 1 2 3 4 5 Domestic (Rs Cr) Exports (Rs Cr) Domestic (%) Exports (%) Source: Company, Nirmal Bang Research 11-Jul-12 Please refer to the disclaimer towards the end of the document P a g e 2

Wide range of products to cater to different industries The abrasive products are used in a number of industries such as Steel, Automobiles, Auto Components, General Metal Fabrication and Woodworking. GNO makes wide range of products in the abrasives segment. Bonded Abrasives are used for various applications ranging from polishing or lapping to remove high quantities of materials. Bonded Abrasives are used in precision applications such as lapping, honing, super-finishing, race grinding, thread grinding, fluting, OD grinding, ID grinding, surface grinding etc. They are also used in rough applications such as snagging, cutting-off, burr removal, weld preparation etc. Bonded Abrasives are used by a very large number of users. GNO makes over 15,000 different products in a year. Super Abrasives are made of diamond (synthetic or natural) or cubic boron nitride and are used in precision applications. Coated Abrasives products are engineering composites comprising of a backing, bond system and abrasive grains and are designed for material removal and surface generation. Most of these products are made indigenously or sourced from Saint Gobain plants across the world. The dependence on any single industry for these products is less than 15%. The largest customer accounts for less than 2% of the sales and the largest dealer accounts for less than 3% of the total sales. This coupled with wide range of products helps diversify the business risk for the company. Strong backing from Saint-Gobain (parent company) in terms of research and product supply Saint-Gobain is uniquely positioned in the Abrasives industry as it can leverage the capability of developing grain technologies suited for Abrasive applications. This helps GNO in bringing in new technology to India faster than other players. Backed by strong R&D facility of Saint Gobain, GNO initially imports products to India. Once these products are established here it starts manufacturing the product domestically. Expansion of capacity will help the company grow The company, which has its own Silicon Carbide (SiC) grains manufacturing, is less dependent on external sources for raw materials and this helps to improve margins as well. It has a capacity to produce 13,000 tonne of SiC at its subsidiary in Bhutan, which it plans to augment further. Grindwell is looking to make a capital expenditure of Rs 100 crore per annum over the next 2-3 years. It plans to set up Phase II of its HPR plant in Gujarat this fiscal. Also, it would be investing in capacity expansion at bonded abrasives plant in Nagpur and thin wheels and coated abrasives plant in Himachal Pradesh. It is setting up a new non-woven abrasives line along with new plant for performance plastics at Bangalore, too. The expansion projects (the major ones being the Bonded expansion at Nagpur and the new Non-Woven plant at Bangalore) planned are progressing as per schedule and are expected to be completed in the first half of the current financial year. GNO has already done a capex of close to Rs 100 cr in FY12 and is expected to invest similar amount in FY13 to expand its capacity. The benefit of this capex will be seen in the coming years. 11-Jul-12 Please refer to the disclaimer towards the end of the document P a g e 3

GNO has been delivering strong financial performance The company s gross sales grew at a CAGR of 17.4% from 2002-12. Similarly its PAT grew at a CAGR of 21.4% over 2002-12. GNO has been able to maintain consistent growth and profitability over the years. It is a debt free company. The RoE grew from 17.4% in CY08 to 22.3% in FY12. The RoCE improved from 23.4% in CY08 to 30.4% in FY12. The company improved its EBITDA margin from 14.4% in CY08 to 17.7% in FY12. It has been able to maintain these levels since past 3 years. PAT margin has been consistently maintained in the range of 10.5%-11% over the last 4 years. It has a consistent track record of paying dividends over the years. It paid a dividend of Rs. 6.5 per share on a share of FV 5 in FY12. 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1000 800 600 400 200 CY08 FY10* FY11 FY12 RoE (%) RoCE (%) Source: Company, Nirmal Bang Research *Figures for FY10 are for 15 months (from Jan 09-Mar-10). 0 CY02 CY03 CY04 CY05 CY06 CY07 CY08 FY10* FY11 FY12 Gross Sales (Rs Cr) PAT (Rs Cr) Risks Extended slowdown in the industrial production and capex activities in India and overseas may pose threat to company s revenue growth. Also, a rise in input costs of petroleum coke and electricity may impact the company s margins if it is not able to pass on the hikes. Valuation & Recommendation GNO has been able to maintain its growth in terms of topline and bottomline inspite of flat volume growth in FY12 as it was able to increase the prices of its products. Being a market leader in the abrasives segment helps GNO in terms of pricing power. It is a debt free company with a consistent growth record since last 10 years. The end market of its products is very diverse which significantly reduces its business risk. With Saint Gobain s backing it has access to the latest technologies for its product line. At CMP, the stock trades at 12.2x its FY13E EPS and 7.4x its FY13E EV/EBITDA. At current valuations and strong fundamentals we feel that the stock has an upside potential of 15-20%. We recommend a Buy on the stock. 20.0% 15.0% 10.0% 5.0% 0.0% CY08 FY10* FY11 FY12 EBITDA (%) PAT(%) 11-Jul-12 Please refer to the disclaimer towards the end of the document P a g e 4

Company Background Grindwell Norton Ltd (GNO) is one of the subsidiaries of Saint Gobain a multinational group headquartered in Paris with sales of 42bn euros in 2011. GNO is India s leading manufacturer of Abrasives (Bonded, Coated, Non-Woven, Superabrasives and Thin Wheels) and Silicon Carbide. It also manufactures and markets High Performance Refractories and Performance Plastics products. GNO s Project Engineering Group (PEG), with its portfolio of diverse projects, is a proven engineering resource for Saint- Gobain companies in India and internationally. Headquartered in Mumbai, GNO has six manufacturing locations (Mora near Mumbai, Nagpur, Bangalore, Tirupati, Himachal Pradesh and Bhutan) and 11 sales offices across the country. Products & Services Abrasives: The Company makes following types of abrasives: bonded, coated, nonwoven, super, construction products and thin wheels. Ceramics & Plastics: The major businesses in this segment are: i) Silicon Carbide ii) High performance refractories Product Engineering Group (PEG): PEG was established primarily for setting up Grindwell Norton's plants and equipment in house. PEG provides services in the field of Design & Engineering, Planning, Project Management, Environmental Management / Consultancy / Total Solutions, Construction and Supervision, Erection and Commissioning. Manufacturing Facilities The Abrasives business has 4 manufacturing sites: Mora (near Mumbai), Bangalore, Nagpur and Himachal Pradesh. Silicon Carbide (Plastics & Ceramics business) is manufactured at the company s factory in Tirupati. The refractories plant is located in Bangalore. GNO is also setting up a Greenfield plant near Vadodara, Gujarat. Commercial production is expected to start in second half of 2012. 11-Jul-12 Please refer to the disclaimer towards the end of the document P a g e 5

Financials Profitability (Rs. Cr) FY10A* FY11A FY12A FY13E Financial Health (Rs. Cr) FY10A* FY11A FY12A FY13E Y/E - March Y / E - March Revenues - Net 702.2 796.8 906.3 1033.2 Share Capital 27.7 27.7 27.7 27.7 % change 40% 13% 14% 14% Reserves & Surplus 327.70 372.54 433.51 509.22 EBITDA 121.6 137.2 160.7 185.6 Net Worth 355.38 400.22 461.19 536.90 % change in EBIDTA 68.3% 12.8% 17.1% 15.5% Total Loans 26.1 23.3 18.9 20.0 Depreciation 21.9 21.2 21.6 26.8 Minority Interest 6.37 5.9 5.78 5.78 Other Income 23.5 10.1 12.1 15.0 Deferred Tax Liab 8.1 9.1 10.8 10.8 EBIT 123.2 126.1 151.2 173.8 Total Liabilities 395.9 438.5 496.7 573.5 Exceptional Item 7.7 0.0 0.0 0.0 Net Fixed Assets 225.8 226.7 232.4 315.6 Interest 2.5 3.4 3.2 3.5 CWIP 7.7 16.0 84.5 70.0 PBT 128.4 122.7 148.1 170.3 Investments 34.26 36.76 28.49 30 Tax 42.5 40.1 45.4 52.8 Inventories 97.9 131.5 165.9 175.6 PAT 85.9 82.6 102.7 117.5 Sundry Debtors 85.0 91.4 95.5 113.7 Shares o/s ( No.in Cr.) 5.5 5.5 5.5 5.5 Cash 82.0 93.8 73.2 65.7 EPS 15.6 14.9 18.6 21.2 Loans & Advances 28.0 30.0 56.0 67.2 Dividend 33.2 33.2 36.0 36.0 Other Current Asset 0.2 0.3 0.3 0.3 DPS 6.0 6.0 6.5 6.5 Current Liab & Prov 164.9 187.9 239.6 264.5 Total Assets 395.9 438.5 496.7 573.5 Quarterly (Rs. Cr) Jun-11 Sep-11 Dec-12 Mar-12 Cash Flow (Rs. Cr) FY10A* FY11A FY12A FY13E Revenue 201.2 226.8 222.1 240.6 Operating EBITDA 29.7 32.55 30.62 43.49 Operating Income 121.6 137.2 160.7 185.6 Interest 0.1 0.09 0.15 0.06 Change in WC 0.0-19.1-12.8-14.2 Dep 4.2 4.25 4.11 4.13 Taxes Paid -42.5-40.1-45.4-52.8 Other Inc. 8.7 7.22 10.08 3.70 Other Adj 7.7-0.3 1.6 0.0 Extraordinary 0.0 0.0 0.0 0.0 CF from Operation 86.8 77.8 104.2 118.7 PBT 34.1 35.4 36.4 43.0 Investment Tax 10.4 11.0 11.2 12.8 Capex -30.1-29.6-95.8-95.5 PAT 23.7 24.5 25.3 30.2 Other Investment 16.1-2.5 8.3-1.5 EPS (Rs.) 4.3 4.4 4.6 5.5 Total Investment -14.05-32.1-87.56-96.98 Financing Operational Ratio FY10A* FY11A FY12A FY13E Dividend Paid -38.7-38.6-41.8-41.8 EBITDA margin (%) 17.32 17.22 17.73 17.97 Share Capital 0.0 0.0 0.0 0.0 PAT margin (%) 11.83 10.24 11.18 11.21 Premium / Reserve 0.3 0.9 0.1 0.0 Price Earnings (x) 16.5 17.3 13.9 12.2 Borrowing 9.6-2.8-4.4 1.1 Book Value (Rs.) 64.2 72.3 83.3 97.0 Interest -2.5-3.4-3.2-3.5 ROE (%) 24.16 20.64 22.27 21.89 Other Income 23.5 10.1 12.1 15.0 ROCE (%) 31.11 28.75 30.45 30.31 Total Financing -7.9-33.9-37.2-29.2 Debt Equity Ratio (x) 0.1 0.1 0.0 0.0 Net Chg. in Cash 64.9 11.7-20.5-7.5 Price / Book Value (x) 4.0 3.6 3.1 2.7 Cash at beginning 17.2 82.0 93.8 73.2 EV / EBIDTA (x) 11.3 9.9 8.5 7.4 Cash at end 82.0 93.7 73.2 65.7 Source: Company, Nirmal Bang Research *Figures for FY10 are for 15 months (from Jan 09-Mar-10). 11-Jul-12 Please refer to the disclaimer towards the end of the document P a g e 6

Disclaimer: NOTES This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities PVT LTD). The information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in any way be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. Nirmal Bang Research (Division of Nirmal Bang Securities PVT LTD) B-2, 301/302, Marathon Innova, Opp Peninsula Corporate Park Off Ganpatrao Kadam Marg Lower Parel (W), Mumbai-400013 Board No. : 91 22 3926 8000/8001 Fax. : 022 3926 8010 11-Jul-12 Please refer to the disclaimer towards the end of the document P a g e 7