Carborundum Universal's Q2FY19 results (Outperformer) - Demand strong; price hikes to drive expansion

Q2FY19 consolidated result highlights

• PAT +17%yoy to Rs648mn: on revenue growth & lower interest.
• Revenues grew 12% yoy to Rs6.5bn: EMD grew 13% yoy led by new plants commissioned in India. Abrasives grew +9% yoy on steady demand led by automotive segment. Ceramics grew by 19% yoy led by ramp up of metz cylinders capacity, robust demand for industrial ceramics as well as steady demand for engg ceramics and refractories. 
• Input costs exert pressure on margins (-160bps yoy to 15.3%): due to sharp decline in EMD (-560bps yoy to 11.6%) on lower hydel generation (floods, Rs50mn impact) and Rs110mn loss at Foskar, Africa (higher costs). Abrasives margin declined 70bps to 13.4% on higher input costs and rupee depreciation. However, this was partially offset by sharp margin expansion in ceramics (+500bps to 18.9%) on positive operating leverage, improved product mix towards Metz cylinders. Hence, overall EBITDA +2% yoy to Rs996m.

Conf call highlights: (1) Volume growth remains strong led by consumption base demand, with steady working capital (2) Input cost pressures high across segments, EMD will take ~20% hike in 2HFY19, which will be passed on by abrasives as well (critical to watch demand on higher prices) (3) Foskar – shift to value added products like Z450 (cost competitive) has been slow, once it scales up over the next 2-3 quarters, losses would reduce (4) Hydel power plant (shut in mid-Aug) to be operational by mid-Dec with operations to normalise; (5) Capacity utilization at 70%+ across most products, VAW at full capacity, Bubble Zirconia at ~30% (6) Rs1.2bn consol capex for FY19E with capacity addition of 10,000tons at VAW to come up in ~18 months; (7) Guidance: Rev growth of 15% in FY19E (Rs2.7bn); to reach ~Rs32bn by FY20E with ~10% PAT margins.

Impact on financials: FY19E/FY20E EPS cut by 2.6%/2.2% to Rs14/Rs16.7

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 22x FY20E earnings are attractive in view of an earnings uptick (21% earnings CAGR over FY18-20E) and improvement in return ratios. Outperformer.