Carborundum Universal's Q3FY20 results (Outperformer) - Sustained pain of weak macro

Q3FY20 consolidated result highlights

• PAT +8.1% yoy at Rs628m: on lower tax (24.8% vs 33.3% in 3Q19). Weak operational performance with 6/5% decline in revenues/ EBITDA.
• Revenues fell 6% yoy to Rs6.4bn: EMD revenues declined 7.7% yoy led by down trading and lower demand in domestic as also lower revenues from Foskar. Abrasives saw 12% yoy revenue decline on weak demand led by slowdown across industries (particularly auto and related industries; 18-20% of revenues). Ceramics delivered muted growth of +2.2% yoy led by slower growth in wear ceramics. 
• Margin improved by +20bps yoy: to 13.9% led by 85bps yoy increase in ceramics margins (higher realisations & improved product mix towards Metz). However, this was partially offset by EMD, which saw 227bps yoy decline to 8.3% largely led by adverse mix of lower speciality revenues and Rs95mn loss in FZL (Rs20mn in 2Q20). Abrasive margins declined 94bps yoy to 11.9% led by down trading (lower bonded sales, which are more customised) and negative operating leverage.

Conf call highlights: (1) Economic slowdown has impacted demand across industries (particularly auto and related industries); hopeful that uptick in infra spend will drive demand (2) CUMI is focussed on product innovation and pricing strategies to increase share (currently 25-28%) in abrasives market; Operational efficiencies and RM prices have aided qoq improvement in abrasive margins (3) Foskar loss increased on lack of availability of material (-36% revenues) and mgmt. is aiming to exit by year end. (4) EMD – Lack of specialities continues to hurt revenues and margins. Mgmt working on new areas in EV, while graphene is taking time to scale up (5) VAW is seeing stable performance with de-bottlenecking and expansion to drive growth; also expanding refractories at VAW for exports (6) Capex: ~Rs1.2bn in FY20E towards coated & VAW de-bottlenecking;

Impact on financials: FY20E/FY21E EPS cut by 4/9% to Rs12.7/Rs14.9

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 22x FY21E earnings are attractive in view strong competitive edge and balance sheet. Outperformer.