Carborundum Universal's Q3FY18 results (Outperformer) - Demand uptick; margins expand

Q3FY18 consolidated result highlights

• PAT at Rs543mn (+24% yoy): on strong operational performance across segments as also higher other income.
• Revenue growth of 15% yoy to Rs6bn: EMD revenues grew 17% yoy on back of new plants commissioned in India and higher volumes in Russia (last year shutdown). Abrasives (+15.4% yoy) on led by pick up in demand, particularly in institutional segment. Growth in ceramics was robust (+18.1% yoy) led by improved domestic demand on growth notably engineered & specialised ceramics and refractories. 
• Margins flat yoy at 15.6%: as higher margins across segments were offset by higher unallocable expenses. Margins expanded in EMD (+385bps yoy to 14.8%; low base & improved utilisations), while abrasives (+122bps yoy to 13.5%) and ceramics (+76bps yoy to 16.6%) margins expanded on positive operating leverage. Hence, EBITDA increased 15% yoy to Rs934m.

Conf call highlights: (1) Retail demand pick up abrasives post GST has been weaker than expected (2) New facilities starting to see traction with Metz cylinder to see faster ramp up (3) Micro grit facility seeing improved utilisation with traction with customers (4) Utilisation at 70-85% across most facilities, new plants at lower utilisation (5) VAW to debottleneck capacity by 10k to 90k over 2 years (6) Input costs rising, particularly in P&F costs (7) Margins likely to remain stable or improve as higher input costs are passed on via price hikes (8) Focus on R&D, with 26IPs filed; developed new product (Z450) which reduces power and graphite electrode consumption (9) Consolidated revenues for FY18E likely to be Rs2.3-2.35bn (+11-12% yoy); FY20 revenues likely at Rs32bn.

Key positives: Demand pick up, margin expansion, strong balance sheet

Key negatives: Higher input costs            

Impact on financials: No change - FY18E/19E/20E EPS at 11.4/14.4/17.2

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 24.5/20.7x FY19E/20E earnings are attractive in view of an earnings uptick (22% earnings CAGR in FY17-20E) and improvement in return ratios. Outperformer.