Carborundum Universal's Q4FY18 results (Outperformer) - Strong performance led by margin expansion

Q4FY18 consolidated result highlights

• PAT at Rs668mn (+51% yoy): on strong operational performance across segments as also higher other income and lower interest cost.
• Revenues grew 16.7% yoy to Rs6.4bn: EMD grew 22.8% yoy led by new plants commissioned in India and higher volumes in Russia. Abrasives grew +12% yoy on low base and steady demand. Ceramics grew by 18% yoy led by higher volumes in Australia & Industrial Ceramics. 
• Margins +190bps yoy at 16.5%: led by abrasives (+146bps to 13.9%) and EMD (+105bpsto 11.8%). EMD margins improved led by higher margins in domestic & VAW (positive operating leverage) partly offset by loss in Foskor Zirconia (Rs120mn inventory write down). Abrasives margin improved on low base & positive operating leverage, while ceramics margins fell 88bps yoy to 15.6%. EBITDA +32% yoy to Rs668m.
• FY18 PAT +23% yoy to Rs2.2b: led by steady performance in abrasives (mkt share gains), ceramics (niche products) and EMD (low base, scale up of shifted plants). FY18 Rev/EBITDA +12%/20% to Rs23.3b /Rs3.6b.

Conf call highlights: (1) Retail demand yet to pick up meaningfully in abrasives post GST (2) Metz cylinder to see faster ramp up Q1FY19 onwards, to reach peak capacity by FY19 end (3) Input costs (particularly graphite, alumina, power) continue to rise, particularly in Zirconia, wherein graphite prices have risen sharply; Z450 yet to pick up (4) Margins likely to improve as higher input costs are passed on via price hikes and benefits of operating leverage (5) Price hikes yet to be undertaken in a meaningful way (6) Rs1.5bn consol capex for FY19E (7) VAW capacity increased to >90kt thru de-bottlenecking (8) Consolidated revenues for FY20E likely to be ~Rs2.7bn (+15% yoy)

Key positives: Margin expansion

Key negatives: Higher input costs            

Impact on financials: No change - FY19E/FY20E EPS at Rs14.4/Rs17

Valuation and view

CUMI’s performance has bounced back on higher volumes, improved revenue mix towards specialities and ramp up of new capacities. Further, margin improvement is likely on positive operating leverage and price hikes led by cost push and improving supply-demand dynamics across segments. Accordingly, we believe valuations of 22x FY20E earnings are attractive in view of an earnings uptick (22% earnings CAGR over FY18-20E) and improvement in return ratios. Outperformer.