Buy Grindwell Norton - Nirmal Bang

Company Overview

Grindwell Norton Ltd (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. It is part of the 42 bn euro multinational group Saint Gobain.

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.

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.

Source : Equity Bulls

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