Carborundum Universal: Buy

Carborundum Universal (CUMI) is among the few mid-cap companies to have also emerged as a market leader in its sector. Successful backward integration, strategically located production units in some of the low cost destinations globally and efforts to improve realisations through moving up the value chain all buttress strong earnings growth over the next couple of years.

Investors with at least a two-year perspective can consider exposure to the stock of CUMI. At the current market price of Rs 260, the stock trades at 11.3 times its estimated consolidated per share earnings for FY-13.

CUMI made a breakthrough in securing raw material for itself and significantly diversifying its geographic presence when it made two significant acquisitions in 2007 and 2008 in Russia and South Africa respectively. This gave the company access to key and scarce raw materials – silicon carbide and zirconia used in high-end abrasives and ceramics. While much of these products are currently sold, the company has ensured that its future plans are secure given the access to key inputs at a time when the global thirst for control of raw materials is on the rise.

Successful integration is beginning to show on CUMI”s EBITDA margins, which improved by close to 3 percentage points to over 20 per cent in the March 2011 quarter over a year ago; despite increase in raw material prices.Clearly superior realisation from value-added products has helped. The company focus on high-end ceramic products such as metallised cylinders and attempts to improve products in the coated abrasive segment could all help improve overall realisations.

CUMI's electro minerals division, although not the largest in terms of sales, was the highest contributor to operating profits. However, to this extent, this segment may behave more like a commodity and hence can witness volatility during price declines.

The business as a whole though, does not suffer from cycles/downturns as abrasives and ceramics are bought as part of a plant's capex plan as well as during recurring operating expenses.

CUMI ended FY-11 with a 25 per cent growth in consolidated sales to Rs 1601 crore while net profits expanded 68 per cent to Rs 171 crore. The earnings growth for the standalone unit was higher. Though the company was never been high on debt, it reduced its debt levels further to bring debt equity ratio to 0.3. While expansion and debottlenecking operations are on, growth from some of the segments such as abrasives may be limited for the next one year until capacities are up.