Grindwell Norton - Strong growth, healthy cashflow - ICICI Securities

Grindwell Norton (GWN) has reported strong 42% YoY growth over a low base, which is better than expectations. Margins have improved both under abrasives and ceramics segment leading to 86% YoY growth in adjusted PAT. Cash from operations has also witnessed healthy improvement supporting the overall cash balance. Improvement in overall utilisation of the domestic industry along with demand from healthcare and chemicals is likely to support growth. Factoring in better-than-expected growth and margins, we raise FY22E and FY23E earnings by 9% and 11.5%, respectively. We maintain our BUY rating on the stock with a revised SoTP-based target price of Rs1,220 from Rs990 earlier.

- Innovation-led model backed by strong parentage: Leveraging the support of the parent's research and global product portfolio, GWN will be able to penetrate new lucrative areas under performance plastics (PPL), performance ceramics and refractories (PCR). GWN has a shared access to the parent's global R&D for which the latter has a fee model; the shared expense for GWN is ~3% of revenues, which is in addition to the royalty of ~2%.

- PCR and PPL - the twin growth engines: For the past 5 years, C&P segment growth stood at a CAGR of 11% vs 1% for abrasives, resulting in 4% overall revenue CAGR. Going forward, we believe, PPL and PCR will increasingly take the mantle of growth. GWN has plans to introduce various unique solutions in oil & gas, chemicals, pharma and other process industries. PCR caters to high-end refractory requirements, a niche market with higher margins.

- Gradually tapping export markets: GWN's exports have been largely towards the global subsidiaries of Saint-Gobain and this trend is likely to continue going forward. We, however, believe given the new innovative product additions in PPL and PCR segments, the parent can use GWN's domestic facilities to cater to certain select export markets. Exports to non-group companies, too, can witness growth.

- Stable growth, healthy cashflow to support premium valuation: GWN has witnessed positive free cashflow consistently in the past 12 years irrespective of the macro environment. This has resulted in a strong balance sheet at a net cash of Rs6.4bn and consistent overall RoCE of 16% and core RoCE of 29% for FY21. Given the varying growth profile and return profiles of various segments, we value them separately. Taking into account the domestic leadership, technology edge and stable growth profile, we value the abrasive business at 40x FY23E earnings, ceramic & plastic at 50x (increased from 45x earlier) and 'others' at 30x. Given the revival in domestic industrial activity and benefit to C&P from newer applications, we maintain our BUY rating with a revised SoTP-based target price of Rs1,220 vs Rs990 earlier.

Shares of GRINDWELL NORTON LTD. was last trading in BSE at Rs.1055 as compared to the previous close of Rs. 1048.25. The total number of shares traded during the day was 11665 in over 1322 trades.

The stock hit an intraday high of Rs. 1065.6 and intraday low of 1036. The net turnover during the day was Rs. 12223630.

Source : Equity Bulls

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