Carborundum Universal's Q1FY20 results (Outperformer) - Macro slowdown impacts performance

Q1FY20 consolidated result highlights

• PAT fell 16% yoy to Rs528m: on weak performance in EMD and abrasives.
• Revenues +6% yoy to Rs6.64bn: EMD grew 11% yoy led by strong growth in international entities, particularly VAW. Abrasives saw 1% yoy revenue decline on weak demand momentum led by slowdown across industries. Ceramics sustained its demand momentum (+14% yoy) led by demand metz cylinders and uptick in refractories demand.
• Margin pressure across segments (-260bps yoy to 13.2%): EMD saw a sharp decline in margins (-540bps yoy to 9.2%) on negative operating leverage, adverse product mix, Rs40mn Foskar loss & higher power cost at both VAW & India (low Maniar hydel power generation). Abrasive margins declined 120bps yoy to 10.9% led by higher input costs & negative op. leverage. Ceramics margins declined 200bps yoy decline to 18% led by lower realisations & high base. Moreover, rupee appreciation impacted export realisations and resulted in forex losses further impacting margins. Hence, overall EBITDA fell 12% yoy to Rs874mn. Lower other income (-33% yoy to Rs127mn) and higher tax rate (+330bps yoy to 36.6%) further impacted PAT.

Conf call highlights: (1) Economy slowdown is across industries which is likely to continue over the next 4-6 quarters, resulting in consolidation in abrasives industry (smaller players will likely shut down) (2) CUMI will focus on increasing abrasives mkt share via product & pricing strategies; (3) Ramp up in hydel power plant to decrease power costs and aid EMD margins (4) Graphene plant is operational which will be scaled up gradually; (5) VAW margins were impacted on rouble appreciation (40% exports) and higher power cost, which is expected to correct going forward (6) Foskar 1QFY20 loss at Rs38mn (CUMI share); board looking to exit business by 2HFY20 (6) FY20 guidance: revenue 15%+ (Rs30bn+); stable EBIT margins (14.4%)

Impact on financials: FY20E/FY21E EPS cut by 10.1/6.8% to Rs14/Rs16.8

Valuation and view

CUMI’s performance was impacted as the macro slowdown resulted in down trading and inability to take price hikes to pass higher input costs. However, CUMIs focus on new capacities and products (20 IPs filed in FY19) would aid mkt share gains in a difficult environment and drive gradual price hikes and margin expansion going forward. Accordingly, we believe valuations of 18.7x FY21E earnings are attractive in view strong competitive edge, balance sheet and superior return ratios. Outperformer.