Buy Carborundum Universal, target price Rs 303: Anand Rathi

Anand Rathi has given a buy rating to Carborundum Universal Ltd. with a target price of Rs 303 based on 22 times FY22e. The share price moved up by 0.68 per cent from its previous close of Rs 244.35. The last traded stock price is Rs 246.

According to the brokerage, the 24 per cent year on year drop in revenue from abrasives and 16 per cent from ceramics reflects weak industrial activity, aggravated by the Covid-19 lockdown. Consolidated sales fell 15 per cent year on year due to the much more than-expected weak home market. The margin, however, at 17.3 per cent was a surprise, the higher gross margin driven by a better product-mix and lower commodity prices. The management is confident of a steady margin ahead, focusing on operating efficiency, cost control, launches of products in ceramics moving out of the loss-suffering Foskor Zirconia this year.

Investment Rationale

According to the brokerage, stiff competition in abrasives and a fall in sales of margin accretive diesel-particulate filters (electro-mineral) led to pressure on margins. With its focus on operating efficiency, cost-control, launches of products in ceramics and exiting the loss-making Foskor Zirconia this year, the management is confident of steady margins ahead. The brokerage expects the consolidated EBITDA margin to step up from 15.3 per cent in FY20 to ~16 per cent in FY22.

Despite the near-term dimmer abrasives and electro-minerals outlook, the growth momentum in engineered ceramics and metallised cylinders is good. The brokerage expects margins to improve over FY20-22, and drive earnings growth. Hence, the brokerage has upgraded its rating to a buy.

Risks: Drag in industrial production for long and delay in the sale of Fosker Zirconia.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 586.02 crore, down -8.75 per cent from last quarter sales of Rs 642.21 crore and down -15.75 per cent from last year's same quarter sales of Rs 695.58 crore. The company has reported net profit after tax of Rs 93.29 crore in the latest quarter.


Promoter/FII Holdings

Promoters held 42.05 per cent stake in the company as of March 31, 2020, while FIIs held 6.54 per cent, DIIs 28.19 and public and others 23.21 per cent.