Carborundum Universal's Q3FY19 results (Outperformer) - Higher input costs drag

Q3FY19 consolidated result highlights

• PAT +7%yoy to Rs581mn: on lower than estimated margins.
• Revenues grew +13.8% yoy to Rs6.83bn: EMD grew 15.8% yoy led by sustained demand across markets and ramp up in India capacities. Abrasives grew +10.8% yoy on sustained demand and traction in Russia with focus on coated abrasives. Ceramics grew by 22% 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 (-184bps yoy to 13.7%): due to sharp decline in EMD (-430bps yoy to 10.6%) on higher power costs in both India (hydel plant yet to start) and VAW (higher purchased power cost) and Rs50mn loss at Foskar. Abrasives margin declined 60bps to 12.9% on adverse mix and rupee depreciation. However, this was partially offset by margin expansion in ceramics (+200bps to 18.6%) on positive operating leverage & improved product mix towards Metz cylinders. Hence, overall EBITDA flat (+0.4% yoy) at Rs996m.

Conf call highlights: (1) Volume growth across segments remains strong led by consumption base demand (2) Input cost pressures across segments, price hikes taken in EMD segment, however global markets have been disrupted on M&A activity (3) Foskar’s shift to value added products like Z450 (cost competitive) has been slow, once it scales up over the next 1-2 quarters, losses would reduce or else management will take a call on the subsidiary (4) Maniyar hydel power plant is now partially operational (shut in mid-Aug; entirely opnl in 4Q19) (5) Price hikes in abrasives leads to down trading, impacting revenue mix (6) Rs1.2/1.4bn consol capex for FY19E/FY20E (7) Guidance: Revenue growth of 15% yoy in FY19E (Rs27bn) and 18% yoy in FY20E (Rs32bn); with ~16-17% operating margins.

Impact on financials: FY19E/FY20E EPS cut by 6/3% to Rs13.5/Rs16.1

Valuation and view

CUMI’s performance has improved on higher volumes, improved revenue mix towards specialities and ramp up of new capacities. Further, near term margins are under pressure on higher input costs, particularly for  power costs, we believe the improving supply-demand dynamics across segments would result in gradual price hikes and thereby drive earnings. Accordingly, we believe valuations of 21.6x FY20E earnings are attractive in view of strong earnings growth (19% earnings CAGR over FY18-20E) and improvement in return ratios. Outperformer.