Carborundum Universal Ltd. share price target

Carborundum's FY17 performance was in line Revenue grew 9%, PAT 21% (higher operating leverage). Adjusted for forex loss, PAT growth would have been 30%. EBIDTA margin expanded 130 bps, led by better margin across Abrasives (45% of rev, margin up 200 bps), and Ceramics (21% of rev; margin up 2..

Carborundum Universals (CUMIs) 4QFY17 revenues ( 11% YoY) were below our estimates led by the Electro minerals (EM) segment ( 7% YoY rev growth and -406bps YoY EBIT margins). The EM segment was impacted by (1) Increase in alumina and pet coke prices (2) High power costs and (3) RUB appreciation. Abrasive/Ceramic segments stood strong, with 11/19% YoY revenue growth and 56/122bps margin expansion to 10.6/15.8%.

CUMI Delivers on FY17 Guidance; Overall Outlook Positive: Carborundum Universals (CUMI) revenue (net) and PAT reached to Rs.20,800mn and Rs.1,749mn which are in-line with FY17 guidance. However, the same were higher than our estimates by 2.4% on revenue side and actual EBITDA and PATmargins were higher by 30bps and 50bps. In terms of segments, Abrasives sales were lower than expected; nevertheless Ceramics and Electro-minerals revenues were in-line.

Carborundum Universal's (CUMI) Q3FY17 PAT grew 44% YoY, in line with our expectation. Management reiterated its guidance for FY17 revenue/ PAT of ~Rs 22 bn/ ~Rs 1.8 bn (up 10%/ 30% YoY).

Carborundum Universals (CUMI?s) 3QFY17 revenues ( 6% YoY) were largely in line with our estimates, barring the Electro minerals (EM) segment (-390bps YoY EBIT margins), whose subdued performance impacted overall margins. The EM segment was impacted by (1) an increase in pet coke prices (2) high power costs due to lower captive power generation and (3) RUB appreciation.

Capacities Coming On-Stream to Aid Growth; Maintain BUY Guidance revised downward for FY17E: CUMI management has revised down the FY17E Revenue and PAT guidance to Rs.22,000mn and PAT in the range ofRs.1750mn Rs.1850mn which are lower by 2.2% and 5.4% respectively from the lower range of earlier guided full year numbers. Sement-wise break-up for FY17Efor Abrasives, Ceramics and Electrominerlas sales could come in the range of Rs.11,000mn, Rs.4,700mn-Rs.4,750mn and Rs.7,500mn-8,000mn respectively.

Management expects to achieve peak revenue potential of Rs 35 bn (Rs 20 bn in FY16) from existing capacities without significant capex. As macro improves, we expect CUMI to post revenue/PAT CAGR of 12%/ 35% over FY16-18E. At CMP, the stock trades at 26x FY17E EPS of Rs 10 and 19x FY18E EPS of Rs 14..

Carborundum Universal (CUMI) 2QFY17 revenues ( 7% YoY) were in line with our estimates however subdued performance in the Electro minerals (EM) segment ( 2% YoY; -840bps EBIT margins) led to a 10% lower than expected EBITDA.

Robust Guidance for FY17E and beyond: CUMI management has guided for FY17E revenue and PAT in the range of Rs.22,500mn to Rs.22,750mn and Rs.1,850mn to Rs.2,000mn respectively. In the medium term, over two to three years with all facilities running flat could help in clocking revenues in the range of Rs.3,000mn to Rs.3,500mn along with considerable operating leverage allowing for margin expansion. In terms of medium term outlook for business segments, Abrasives, Ceramics and Electrominerals could grow in the range of 12%-14%, 14%-16% and 18% plus respectively.

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)