Carborundum Universal: Buy
Investors with a two-three year perspective can consider taking exposure to the stock of Carborundum Universal (CUMI), a leading player in the abrasives and industrial ceramics space.
Ongoing expansion in capacity, growing focus on export markets, and a foray into the power tools business make CUMI an attractive investment. Besides, CUMI's recent acquisition of VAW, a Russian abrasives manufacturer, also holds potential given the global shortage of alumina grains.
At current market price of Rs 161, the stock trades at about 14 times its likely earnings for 2008-09. Investors can, however, accumulate the stock in lots given the volatility in the broad markets.
With strong demand drivers in place, CUMI has embarked on a timely expansion in capacities. Apart from leveraging on the buoyant domestic demand, CUMI may also benefit from an increased exposure to exports.
The management expects to increase its export contribution to about 40 per cent from the current levels of about 22 per cent in two-three years.
CUMI plans to set up marketing presence in Europe, US and South-East Asia through subsidiaries or strategic partners. These apart, CUMI's planned foray into power tools business (market size of about Rs 400 crore) also holds significant potential.
This foray, apart from helping CUMI capture a share of this relatively high-growth and less tapped market, will also help it make the transition to an integrated player. This may be beneficial to profit margins.
The company already supplies consumables to the power tool industry (they account for 30 per cent of the power tool price).
For the quarter ended September 2007, CUMI recorded a lower net profit of Rs 12.3 crore, despite a 23 per cent growth in revenues.
Higher depreciation and interest cost in addition to an exceptional expenditure because of VRS payment explains the 21-per cent dip in earnings.
Given CUMI's high reliance on debt for funding capex, the pressure on earnings may remain over the next year.
Nonetheless, this is no cause for concern given the healthy growth in revenues across all business segments and expected payoffs from the capex.