Carborundum Universal's Q2FY20 results (Outperformer) - Sustained pain of weak macro

Q2FY20 consolidated result highlights

• PAT was flat at Rs645m (-0.5% yoy): on weak performance in abrasives, which was partially offset by lower tax rate (-1218bps yoy to 23.3%; 1H20 at 29.5%; -490bps yoy).
• Revenues +4% yoy to Rs6.8bn: EMD grew 8.6% yoy led by intl entities. Abrasives saw 8.3% yoy revenue decline on weak demand led by slowdown across industries (particularly auto and related industries; 18-20% of revenues). Ceramics sustained its demand momentum (+19% yoy) led by demand metz cylinders and uptick in refractories demand.
• Margin pressure in EMD and abrasives (-90bps yoy to 14.4%): EMD saw 136bps yoy decline to 10.3% largely led by adverse revenue mix (lower speciality sales) and negative operating leverage. Improved utilisation of the hydel power plant and lower losses in Foskar helped restrict the decline in segment margins. Abrasive margins declined 170bps yoy to 11.7% led by down trading (lower bonded sales, which are more customised), higher input costs & negative operating leverage. Ceramics margins expanded 240bps yoy to 21.3% led by higher realisations & improved product mix towards Metz. Hence, overall EBITDA fell 2% yoy to Rs977mn.

Conf call highlights: (1) Economic slowdown has impacted demand across industries (particularly auto and related industries); while some green shoots seen in festive season, need to see sustainability of the uptrend (2) CUMI is focussed on product innovation and pricing strategies to increase share (currently 25-28%) in abrasives market; (3) VAW margins were impacted on rouble appreciation (40% exports) higher RM costs and adverse product mix; (4) Foskar performance has improved but still loss making on EBIT level (Rs20mn vs Rs50mn in 1QFY20); board looking to exit business by 2HFY20; (5) Capex: Rs340mn in 2QFY20, ~Rs1bn in FY20E; Rs1.3-1.5bn in FY21E towards coated & VAW de-bottlenecking; (6) Focus on cost reduction  

Impact on financials: FY20E/FY21E EPS cut by 9/6% to Rs13.2/Rs16.3

Valuation and view

CUMI’s performance was impacted as the macro slowdown resulted in down trading across abrasives and EMD driving adverse mix & inability to take price hikes. However, CUMIs focus on new capacities with a wide product portfolio (20 IPs filed in FY19) would aid mkt share gains in a difficult environment and drive gradual price hikes and margin expansion. Further, it is eyeing higher exports across segments which would aid performance. Accordingly, we believe valuations of 18x FY21E earnings are attractive in view strong competitive edge & balance sheet. Outperformer.