Carborundum Universal's Q1FY19 results (Outperformer) - Robust operational performance

Q1FY19 consolidated result highlights

• PAT at Rs629mn (+56.5% yoy): on strong operational performance across segments as also lower interest cost.
• Revenues grew 22.1% yoy to Rs6.3bn: EMD grew 18.2% yoy led by new plants commissioned in India and higher volumes in Russia. Abrasives grew +20.5% yoy on low base and steady demand led by automotive segment (demand growing 15-25% yoy). Ceramics grew by 31.5% yoy led by ramp up of metz cylinders capacity, robust demand for wear ceramics as well as steady demand for engg ceramics and refractories. 
• Margins +309bps yoy at 15.8%: due to improvement in abrasives (+210bps to 12.1%), ceramics (+594bps to 20%) and EMD (+84bps to 14.6%). The improvement across segments was led by positive operating leverage on scale up of new facilities, improved product mix (such as Metz cylinders in ceramics and value added products in EMD). Hence, EBITDA +51.8% yoy to Rs989m.

Conf call highlights: (1) Abrasives has yet to see significant shift towards organized post GST and e-way bill (2) Price hikes of 5-10% needed across product categories to offset impact of input cost increase; to happen over next 2-3 quarters (3) Introducing new and value added products like Z450 (cost competitive) in EMD to improve margins as volumes scale up over the next 3-6 quarters. (4) Capacity utilization >70% across most products, VAW at full capacity, Bubble Zirconia at ~40% (5) Rs1.2bn consol capex for FY19E with capacity addition of 10,000tons at VAW to come up in ~18 months; (6) Guidance: Rev growth of 15% in FY19E (Rs2.7bn); to reach ~Rs32bn by FY20E; FY19 EBIT margin guidance at 14% with abrasives 13-14%, ceramics 15-16%, EMD ~16%.

Key positives: Robust revenue growth, Margin expansion

Key negatives: Continued weakness in abrasives particularly retail

Impact on financials: No change - FY19E/FY20E EPS at Rs14.4/Rs17

Valuation and view

CUMI’s performance has bounced back on higher volumes, improved revenue mix towards specialities and ramp up of new capacities. Further, margin improvement is likely on positive operating leverage and price hikes led by cost push and improving supply-demand dynamics across segments. Accordingly, we believe valuations of 21x FY20E earnings are attractive in view of an earnings uptick (22% earnings CAGR over FY18-20E) and improvement in return ratios. Outperformer.