Carborundum Universal - Q4FY21 Result Update - ICICI Securities

Healthy growth and margins lift earnings

Carborundum Universal (CUMI) has reported healthy execution coupled by strong margins propelling better-than-expected earnings in Q4FY21. The company is gearing up to tap into future growth areas like electric vehicles, batteries, high purity silicon carbide used in 5G technology etc. The loss from overseas subsidiaries has reduced, and export market is expected to perform well. Improvement in domestic utilisation along with investments due to PLI scheme is expected to fuel growth. Factoring in near-term growth stress due to the second wave of covid, we marginally cut our FY22/FY23 earnings estimates by 0.5% each and maintain our BUY rating with an unchanged SoTP-based target price of Rs660.

- Second wave to impact near-term demand, impact to be limited: Localised lockdown arising due to the second wave of the pandemic is likely to curtail near- term growth. However, given the continuation of factory activities, and the gradual peaking out of the cases along with vaccination drive will limit the damage. Factoring in the same, we have cut the growth assumptions; however, higher margins will limit any major impact on the earnings.

- Healthy cashflow with no major capex will support strategic investments: Supported by higher payables, cashflow has been healthy with current net cash at Rs6.5bn. With not major capex plans, this opens up options for inorganic growth opportunities in the Europe and the North American markets. The company also has plans to explore niche opportunities under high purity silicon carbide used in 5G technology, advanced materials used to store food, pharma etc. It is also focusing on catering to electric vehicles and battery opportunities.

- Focus on exports and value-added products to propel ceramic segment: With the installation of new coater maker, the company is set to exploit new export opportunities under wear ceramics. It has identified certain high-potential markets and will gradually increase the supply to the same. Metz cylinders is the key product segment under engineered ceramics; CUMI also caters to specialised injection moulding segments like spark plugs, 3D printing and base materials used in fuel cells, etc. under engineered ceramics. We believe engineered ceramics will be the major driver of margins going forward.

- Maintain BUY; focus on value addition will improve returns: We believe the company will gradually move up the value chain with lucrative products, thereby, increasing the margins and returns. Opening up of the export markets, Atmanirbhar impetus in domestic market and gradual increase in factory utilisation levels lend growth visibility despite the second wave covid challenges. Hence, we maintain our BUY rating assigning an unchanged SoTP-based target price of Rs660.

Shares of CARBORUNDUM UNIVERSAL LTD. was last trading in BSE at Rs.546.7 as compared to the previous close of Rs. 522.85. The total number of shares traded during the day was 71113 in over 3100 trades.

The stock hit an intraday high of Rs. 570 and intraday low of 509.5. The net turnover during the day was Rs. 39091321.

Source : Equity Bulls

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