• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

Mr K. Srinivasan, MD.

Srividhya Sivakumar

Advertisement

Carborundum Universal (CUMI) appears an attractive investment option considering its strong revenue visibility, well-diversified user industry base and expanding presence across new geographies and product segments.

At the current market price of Rs 115, the stock now trades at a modest valuation of 11 times its likely FY-09 per share earnings.

Besides compelling valuations, the likely reduction in the overall debt burden of the company by next year suggests strong earnings growth. However, given the broad market volatility, investors can consider accumulating the stock in lots.

CUMI’s ability to weather waning demand from one or two of its user industries and post good growth numbers holds considerable merit in the current market scenario. Unlike most other capital goods makers, CUMI has a highly fragmented user base and does not have significant exposure to any particular user industry or sector.

For instance, CUMI’s revenues grew by about 47 per cent in FY-08 despite the tepid growth in demand from the auto sector last year. The stable or growing demand from sectors such construction, steel and cement more than compensated for the weakening demand for CUMI’s products from the auto sector.

Over the last five years, CUMI’s revenues have grown at a compounded rate of over 22 per cent. Newer capacities coming on stream may help push these growth rates into a higher level.

On a segmental basis, revenues may largely be driven by the abrasives division, which has long been CUMI’s biggest revenue contributor.

The extensive usage of abrasives in many essential and critical applications across sectors may help keep its demand buoyant.

The company’s industrial ceramics division, which finds application in grinding media, liners and wear resistance products, may also see growth in contribution.

For the year ended March 2008, on a consolidated basis, the abrasives division contributed to over 53 per cent of the total revenues while the ceramics and electrominerals chipped in with 20 per cent and 25 per cent respectively.

Besides manufacturing facilities in India, CUMI has also strategically set up units in countries such as China and Russia. Presence in these countries holds considerable potential. For one, both Russia and China are endowed with rich reserves of minerals, which are an essential raw material for all CUMI’s products.

Second, for some of its products, China is also a significant market. Russia, on the other hand, provides CUMI a logistical advantage in terms of proximity to its clients in Europe.

So, apart from ensuring a steady and secure supply of raw materials, this has also helped CUMI expand its target market. As for other markets such as North America, Europe and Australia, the company has marketing presence through either subsidiaries or strategic partners.

Volzhsky Abrasive Works (VAW), the Russian company that CUMI acquired last year, is expected to report higher revenue contributions from this year. Access to high-margin markets, better utilisation levels and tagging on with the CUMI brand of products are likely to help VAW bring in more value on the table.

The management also plans to move a considerable amount of debt from CUMI’s books to its overseas holding company, CUMI International Ltd (CIL). It also plans to make CIL hold all its overseas businesses, which can later be diluted to reduce debt. These will not only help CUMI reduce the debt on its book; it will also create headroom for further growth. That apart, the management has also indicated that, if need be, it may also liquidate a few of its non-core assets — IT business and land, which enjoy value much higher than the company’s total debt of Rs 290 crore.

For the financial year ended March 2008, CUMI reported a 58 per cent growth in profits on the back of a 47 per cent increase in revenues. Operating profit margins, however, came under pressure and fell by over 4 percentage points during the year.

This was primarily due to the steep rise in raw material cost and the relatively lower utilisation levels of its VAW facility. To offset this, the company has planned to effect price hikes of its products. This plus better utilisation levels at VAW from this year, may help expand margins.

Any sudden slowdown in capex across user industries, unexpected fluctuations in rupee or increased sourcing of abrasives by multinationals from their respective Indian counterparts, may pose a downside risk to the company’s earnings.

More Stories on : Abrasives | Stocks | Recommendation

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
An NRI plans to meet his goals

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line