The Hindu Business Line : Orient Abrasives: Buy

THE pick up in the core sectors of the economy has started seeping into industries at the lower end of the manufacturing cycle. Orient Abrasives is one such company that has bright business prospects on the back of the buoyant core sector. At its current price of Rs 185, the stock trades at five times its trailing 12 month per share earnings.

Business: Orient Abrasives makes fused alumina abrasive grains and refractory raw material. The grains are used in core sectors such as cement, steel and copper and zinc smelters, refractories, ceramic industry and in manufacturing grinding wheels. It supplies to all the major core sector companies such as Tata Steel, Jindal Strips, Gujarat Ambuja, L&T Cement, Hindustan Zinc, Hindustan Copper. Its other clients include OCL India, Grindwel Norton, Carborundum Universal, Premier Abrasives, Tata Refractories and ACC Refractories.

Orient caters to almost 70 per cent of the domestic demand for fused aluminium oxide grains. Over 60 per cent of the demand for calcined products and 20 per cent for monolithic products is met by the company. Orient's presence in the overseas market is less than one per cent, but the exports tripled in 2002-03.

The company's performance in the last four-five quarters indicates the pick up in demand from the user industries. Earnings almost doubled in 2002-2003. The performance for the half-year ended September 2003 was also encouraging as sales grew 20 per cent to Rs 60.7 crore. Aided by lower interest costs and a 3.2 percentage point increase in operating margins (17 per cent), earnings almost doubled to Rs 6.1 crore.

The growth prospects for user industries in the core sectors and engineering sector appear bright in the near-to-medium term. This would, in turn, generate higher revenues and earnings for the company.

Comfortable cash flows generated from operations would enable the company to retire debt at a faster rate, improving the earnings for shareholders. Over the last couple of years, the company has trimmed debt by 23 per cent. The possibility of reduction in interest costs, coupled with improving operating margins, would also enhance earnings.

Further, the reduction in the dividend rate for preference shareholders form 12 per cent to 9 per cent would leave a larger portion of the earnings for distribution to equity shareholders.

Shareholders can consider small exposures. The low floating stock could be a deterrent, as it would limit trading interest in this stock. Another constraint could be that the stock is traded only in the BSE.

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