Grindwell Norton — Buy

Vidya Bala BL Research Bureau | Updated on June 04, 2012


Investors with a two-year perspective can consider exposure to the stock of abrasives and industrial ceramics maker Grindwell Norton.

Robust financials, nil debt status and technology backing of French parent Saint-Gobain buttress our recommendation. Strong earnings growth of 25 per cent annually in the last couple of years has brought valuations to attractive levels.  

At the current market price, the stock trades at 10.3 times its expected per share earnings for FY-13. This is at a marginal discount to peer Carborundum Universal (CUMI). While valuations between the two stocks were wider a few years ago, with CUMI enjoying a premium, the range has narrowed now. This can be attributed to CUMI becoming a part-commodity play (which typically receives lower valuations) through increased exposure to electro minerals.

Business resilience

Grindwell Norton expanded its sales and kept profitability intact at a time when the manufacturing sector has been reeling under a slowdown. This is evidence to the resilient nature of its business. Such performance was possible partly because the company's products are in the nature of industrial consumables. That means their demand is not too linked to the capex cycles of industries.

Besides, its products are used across various industries that have machining processes or use refractory materials. These include sectors such as metals, cement, glass auto and auto ancillaries. No single sector accounts for over 15 per cent of its revenue. This diversification has helped the company stay relatively insulated from slowdown in individual sectors. The backing of its parent too, has steadily improved its export market.  Both Grindwell Norton and CUMI account for over two-thirds of the market for abrasives. Strong client patronage has helped the companies from losing market share to the Chinese players that pose intense competition in certain product segments.

That said the abrasives segment of Grindwell Norton had a sedate March quarter with sales remaining flat compared with the year-ago figures. But segment margins have remained intact, which suggest that pricing and cost pressures are not an issue.

Steady raw-material supply

Grindwell Norton secures its key input, silicon carbide, from its subsidiary in Bhutan as well as a unit in India. This, to some extent, has enabled steady raw material sourcing in an industry grappling with erratic supplies from the Chinese players.

Grindwell Norton ended FY-12 with a 13 per cent growth in sales to Rs 884 crore. Net profits expanded 21 per cent to Rs 104 crore.  Dividend yield at 2.6 per cent is quite high, considering that it is a mid-cap stock. Operating profits at 15.3 per cent expanded marginally over the previous year. While the abrasives segment may not prop margins by much, the refractories and ceramics division, with 19 per cent segment margins, can drive profitability. 

Published on June 02, 2012

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