Despite apparently stiff valuations, long term investors should accumulate Carborundum Universal (CUMI). After muted performance over FY12-15 (1% rev CAGR), CUMI is well set for growth as the manufacturing cycle recovers in India and international operations undergo restructuring. CUMI owns a globally dispersed set of abrasives, ceramics and electro minerals businesses. Its business model is more stable than most other capital goods makers, as it manufactures consumables (rather than equipment) for clients.
Management’s prudence is visible in CUMI’s consistent FCFs across cycles. It has a light balance sheet (0.1x net D/E) despite the capital intensive nature of the business (asset turns of ~1.4x), three acquisitions and a prolonged global slowdown. With improving capital efficiency, RoEs are on their way up to earlier levels of 17-20%. Our TP of Rs 391/sh values CUMI at 25x FY19E EPS (45% upside). This is at a premium to the 3-yr avg (~21x), which is justified given an all round improvement in business mix and earnings. Initiate with BUY target price of Rs 391/share (FY19E P/E of 25x)