Carborundum Universal's Q4FY19 results (Outperformer) - Weak quarter

Q4FY19 consolidated result highlights

• PAT fell 6%yoy to Rs619mn: on lower than estimated revenues.
• Revenues +9% yoy to Rs6.96bn: EMD grew 14% yoy led by sustained demand and ramp up in India capacities. Abrasives saw muted 3% yoy growth on weak demand led by pre-election cautiousness, channel challenges arising from GST etc. Ceramics +11.5% yoy led by ramp up of metz cylinders capacity, robust demand for industrial ceramics. 
• Input costs exert pressure on margins (-20bp yoy to 16.2%): Abrasives saw a sharp decline in margins (249bp yoy to 11.5%) on higher input costs, adverse product mix and negative operating leverage, while ceramics margins saw 111bps decline led by higher input costs. This was offset by 173bps margin improvement in EMD segment led by stable RM costs, re-commissioning of Maniyar hydel power plant and qoq decline in Foskar loss. Hence, overall EBITDA flat at Rs1.13bn.
• FY19 PAT +15% yoy to Rs2.48bn: Revenues +14% yoy to Rs26.6bn led by 14.6%/19.3% yoy growth in EMD/Ceramics (ramp up of new capacities), while abrasives saw 8.5% yoy growth. OPM fell 25bps to 15.3% due to lower margins in abrasives (-30bps to 12.5%; higher RM cost and negative operating leverage) and EMD (higher power cost, adverse product mix). Hence, FY19 EBITDA +12% yoy to Rs4.05bn

Conf call highlights: (1) Sustained weakness in abrasives to be seen in 1Q20; normalise by 2Q20 (2) Input cost pressures in ceramics to be passed on in a phased manner and margins to normalise by 2Q20, (3) EMD growth driven by new products & capacities, while margin expansion led by price hikes, normalisation of hydel plant, etc; (4) VAW - despite seeing 11% revenue growth to Rs6.3bn, PAT stable at Rs900mn on adverse product mix & rouble appreciation; continue to add 3-4k tons/year (de-bottlenecking) (5) Foskar FY19 loss at Rs126mn (CUMI share); board evaluating options to reduce losses; (6) FY20 guidance: revenue 15%+ (Rs30bn+); stable EBIT margins (14.4%)

Impact on financials: FY20E/FY21E EPS cut by 4/2% to Rs15.4/Rs18

Valuation and view

CUMI’s FY19 performance was led by ramp up of new capacities and new products (20 IPs filed in FY19). However, positive operating leverage benefits and focus on specialities were largely offset on higher input costs. We believe the improving supply-demand dynamics and value added products across segments would result in gradual price hikes and margin expansion going forward. Accordingly, we believe valuations of 23.4x/20x FY20E/21E earnings are attractive in view of earnings growth (17% earnings CAGR over FY19-21E) and superior return ratios. Outperformer.