Carborundum Universal's Q2FY18 results (Outperformer) - Robust performance; momentum to continue

Q2FY18 consolidated result highlights

• PAT at Rs554mn (+18.6% yoy): on strong operational performance in both domestic and international entities.
• Electrominerals (EMD), abrasives drives 13% yoy revenue growth: to Rs5.8bn. EMD revenues were strong (+20% yoy) on back of new plants commissioned in India and higher volumes in Russia (VAW +7000tons in 1HFY18; low base). Abrasives (+11.7% yoy) on re-stocking demand post GST.  Growth in ceramics was muted (+4.6% yoy) due to weak domestic demand (drop in refractories offset strong growth in industrial ceramics)
• Positive operating leverage drives margin improvement (16.9%, +200bp yoy): led by electrominerals (+380bps yoy to 17.2%; low base on power supply issues at VAW in Q2FY17) and abrasives (+120bp yoy to 14.1%; positive operating leverage). Ceramics margin declined 91bps yoy to 13.9% due to margin decline in international (low margin orders). Hence, EBITDA +28% yoy to Rs981m.

Conf call highlights: (1) Channel inventory has still not reached normal levels and hence re-stocking demand is likely to continue (2) Volumes in VAW likely to reach 80,000 tons in FY18 (3) Domestic EMD margins were impacted by higher RM prices as also hike in power tariffs in Kerala. (4) SIC prices have largely been stable despite rise in input costs, likely to rise going forward (5) Consolidated revenues to grow >10% in FY18E, PAT likely at Rs2.15-2.2bn (6) Aim to reach consolidated revenues of Rs32bn by FY20 (Rs21bn in FY17) (7) Consol capex of Rs520mn in H1FY18, likely to be Rs1bn in FY18E

Key positives: Margin improvement in abrasives and electrominerals

Key negatives: Weak ceramics performance, drop in profit of associates

Impact on financials: FY18/19 EPS raised by 2% each to 11.4/14.4. Introduced FY20 EPS of Rs17.1

Valuation and view

CUMI’s performance has bounced back on higher volumes, improved revenue mix towards specialities and ramp up of new capacities with sustained profitability improvement of international entities. Further,  margin improvement is likely on positive operating leverage and price hikes (cost push) across segments. Accordingly, we believe valuations of 25.5x FY19E earnings are attractive in view of an earnings uptick (25% earnings CAGR in FY17-19E) and improvement in return ratios. Outperformer.