Analysis of Carborandum Universal

Brokerage Free Team • May 27, 2024 | 18 min read • 375 views

Company Essentials

MARKET CAP ENTERPRISE VALUE  NO. OF SHARES FACE VALUE
₹ 30,782.73 Cr. ₹ 30,874.27 Cr. 19.03 Cr. ₹ 1
P/E P/B DIV. YIELD BOOK VALUE (TTM)
87.86 13.41 0.24 % ₹  120.63
CASH  DEBT  PROMOTER HOLDING EPS (TTM)
₹ 12.46 Cr. ₹ 104 Cr. 41.23 % ₹  18.41
SALES GROWTH  ROE  ROCE PROFIT GROWTH 
13.30% 17.84 % 22.28% 30.05 %

 

Fundamental Analysis of Carborundum Universal (CUMI)

 

Manufacturing is becoming a cornerstone of economic growth in many countries, driven by robust performance in key sectors like automotive, engineering, chemicals, pharmaceuticals, and consumer durables. Central to these industries is the use of abrasives, essential tools in grinding, polishing, and sanding operations. Abrasives, equipped with sharp particles, leverage friction to shape materials like wood and metal. In this blog, we'll explore Carborundum Universal (CUMI), a prominent abrasives manufacturer, and delve into its business model and financial health.

 

An Overview of Carborundum Universal (CUMI)

 

Carborundum Universal is a part of the 120-year-old Murugappa Group, a leading business conglomerate in India. Founded in 1954, CUMI began its journey as an abrasives manufacturer. Over the decades, the company has significantly expanded its value chain, encompassing mining, power generation, fusion, manufacturing, marketing, and distribution. With over 60 years in the abrasives industry, CUMI has established a global presence, operating across six continents, and is a market leader in India and Russia.

 

Business Segments

 

CUMI's business is structured into three main segments:

 

1. Abrasives: The largest segment, generating approximately 41% of the company's revenue in FY23. Abrasives are vital for grinding, polishing, sanding, and other processes that involve hardening or sharpening objects.

2. Electro Minerals: Contributing 34% to the revenue, this segment focuses on producing materials used in various high-temperature and high-wear applications.

3. Ceramics: This segment accounts for 23% of the total revenue, offering products with diverse applications across several industries.

 

Applications of CUMI’s Products

CUMI’s products find applications in a broad range of industries, including:

 

Aerospace & Defence: Electric Vehicles (EVs): Energy: Iron & Steel: Railways:
Advanced ceramic fasteners, ballistic protection ceramics, grinding solutions for fasteners, and launchpad refractories.
Advanced ceramics for EV fuses and ceramic fibers for battery fire protection, preventing thermal runaway.
Various solutions that cater to the energy sector's unique requirements. Products designed to withstand high temperatures and wear, crucial for the iron and steel industry. Ceramic electrical insulators for high-speed rail networks, grinding solutions for railway bearings, and track grindings.

 

Financial Performance

 

Analyzing CUMI's financial performance provides insight into its growth and stability. In FY23, the abrasives segment was the top revenue earner, demonstrating the company's core strength in this area. The significant contributions from electro minerals and ceramics also highlight CUMI’s diversified portfolio and resilience in the market. Carborundum Universal (CUMI) stands out as a vital player in the abrasives industry, backed by the extensive legacy of the Murugappa Group. Its diverse business segments and wide-ranging applications underscore the company's integral role in various industrial processes. With a strong global presence and a robust financial performance, CUMI is well-positioned to continue its contribution to the manufacturing sector's growth and innovation. Understanding companies like CUMI is crucial for investors and industry analysts alike, as they play a pivotal role in the economic development fueled by key manufacturing sectors.

 

Navigating the Challenges of FY23: A Global and Indian Perspective

 

FY23 was marked by significant global challenges, including economic turbulence, widespread layoffs, geopolitical conflicts, and pressing environmental issues. Just as the world was beginning to recover from the COVID-19 pandemic, the war in Ukraine erupted in February 2022, leading to sharp increases in the prices of commodities, food, energy, and fertilizers.

 

Global Economic Impact

The sudden spike in inflation rates prompted central banks to implement tighter monetary policies in an effort to control the rising prices. This had a cascading effect on many developing nations, which faced severe economic hardships due to higher import costs, weakened currencies, increased living expenses, and a stronger dollar. As a result, the global economy, which grew by 3.4% in CY22, is projected to grow at a slower pace of 2.8% in CY23 before gradually stabilizing at 3%.

 

India's Economic Resilience

In contrast to the global scenario, the Indian economy demonstrated remarkable resilience. The recovery was driven by strong domestic demand, substantial government investment in infrastructure, and a surge in exports. Additionally, the ‘China Plus One’ strategy significantly boosted India’s role as a global supplier, attracting numerous international players.

 

Inflation in India has been kept in check, with the annual rate staying below 6%. The World Bank predicts that inflation will average around 5.2% for FY24. Export growth has been robust, with goods and services exports rising by 16% in the first nine months of the financial year (April-December) compared to the same period in 2021-22.

 

Growth Prospects

India's current growth trajectory remains strong, despite some signs of moderation. The overall growth rate is projected to be between 6.5% and 7% for the full year. This growth is underpinned by vigorous investment activity, bolstered by the government’s commitment to capital expenditures, and robust private consumption.

 

The Index of Industrial Production (IIP) reflected this growth, increasing by 5.5% over the previous year. This growth was broad-based, encompassing various sectors. However, global geopolitical disturbances have led to rising commodity prices and higher input costs, contributing to inflationary pressures and the depreciation of the Rupee against the USD.

 

FY23 highlighted the interconnectedness of global economies and the significant impact of geopolitical and economic factors. While many nations grappled with economic hardships, India showcased resilience and adaptability. The country's robust growth, driven by strategic investments and strong domestic demand, positions it well for continued economic strength in the face of global challenges. As we move forward, maintaining this growth will require navigating the complex global landscape and addressing both domestic and international economic pressures.

 

Carborundum Universal's Financial Performance: A Detailed Analysis

 

In Rs. Cr. MAR'15 MAR'16 MAR'17 MAR'18 MAR'19 MAR'20 MAR'21 MAR'22 MAR'23 TTM
Sales 2050 1944 2112 2368 2689 2599 2632 3325 4654 4702
Operating Expenses 1787 1643 1784 1969 2252 2202 2168 2789 4004 3963
Operating Profit 263 301 329 399 437 397 464 536 651 739
Other Income 26.82 29.7 28.64 22.92 28.52 46.28 32.89 40.82 77.88 76.65
OPM (%) 14.13 17.02 16.92 17.8 17.32 17.07 18.88 17.34 15.65 15.71
Depreciation and Amortisation 100 86.82 96.48 106 108 105 99.45 115 187 191
Interest 25.34 22.91 18.12 8.61 8.48 6.33 3.58 5.64 23.53 18.34
Profit Before Tax 220 237 262 322 369 351 395 477 580 606
Tax 82.16 81.41 78.08 102 121 75.55 102 127 138 174
Net Profit 133 144 175 216 248 272 284 333 414 432
Number of shares(Crs) 18.82 18.84 18.87 18.9 18.92 18.94 18.96 18.99 18.99
Dividend Payout Ratio(%) 17.74 19.61 18.88 19.72 21 19.12 20.01 19.93 16.06
TTM Values as of Mar 2024

 

Revenue Growth

Carborundum Universal (CUMI) reported impressive revenue figures for FY23, reaching ₹4,654 crore. This represents a substantial 40% increase from ₹3,325 crore in FY22. Since FY21, CUMI has experienced unprecedented growth, with revenues increasing by 33%. However, considering the dip in growth during FY20-21, the long-term growth rate has normalized to a compound annual growth rate (CAGR) of 14.7% since FY19.

 

Net Profit Growth

Net profit also showed a healthy increase, rising from ₹350 crore in FY22 to ₹442 crore in FY23, marking a 26% growth. Despite the fluctuation in revenue growth in a particular year, the net profit has consistently shown a positive trend. Since FY21, CUMI's net profit has grown at a CAGR of 16%, indicating strong profitability alongside revenue expansion.

 

Revenue Growth: Over the last four years, the revenue growth has averaged a CAGR of 14.7%. This reflects a strong recovery and expansion phase post-FY20, with particularly notable jumps in FY22 and FY23.

 

Net Profit Growth: The net profit has grown at a CAGR of 15.57% over the same period. This steady increase in profitability, even during fluctuating revenue growth phases, underscores CUMI’s operational efficiency and cost management.

 

Carborundum Universal's financial performance in recent years highlights a robust growth trajectory in both revenue and net profit. The company's ability to sustain growth and profitability despite economic challenges and a temporary slowdown in FY20-21 reflects its strong market position and strategic management. With a normalized long-term growth rate and consistent profitability, CUMI is well-positioned for future expansion and value creation for its stakeholders.

 

Operating Profit Margin Analysis

 

Over the past five years, Carborundum Universal (CUMI) has maintained operating profit margins that slightly exceed 10%, averaging at 14.4%. However, there has been some volatility, especially noted in the recent fiscal year:

 

FY23: Operating margins dropped to 13%, down from 15% in FY22, representing a decline of 200 basis points (bps). This drop indicates potential cost pressures or reduced pricing power in the market.

 

Historical Performance: While the operating margins peaked at 16% in FY21, they have generally hovered around the 14-16% range, suggesting that the company has had strong control over its operating costs in most years.

 

The decrease in operating margin in FY23 could be attributed to increased input costs, higher operational expenses, or competitive pricing pressures. Despite the recent dip, the five-year average remains robust, reflecting overall operational efficiency.

 

Net Profit Margin Analysis

CUMI's net profit margins have also exhibited fluctuations, with a five-year average of 9.8%:

 

FY23: Net profit margin slipped to 9%, down from 10% in FY22, a decline of 10 bps. This decline, although minor, suggests that the impact on net profit is less severe compared to operating profit.

 

Historical Performance: The highest net profit margin was 11% in FY21, mirroring the peak in operating margins. The net profit margin has consistently been around the 9-11% range.

 

The relatively stable net profit margin, even with the dip in operating margins, suggests effective cost management and possibly favorable tax treatments or other financial strategies that help maintain profitability.

 

Key Observations

1. Volatility in Margins: Both operating and net profit margins have seen declines in FY23, indicating potential challenges such as increased costs or pricing pressures. This volatility needs to be monitored to assess whether it's a short-term fluctuation or indicative of a longer-term trend.

 

2. Long-term Performance: The five-year averages for both operating (14.4%) and net profit (9.8%) margins remain strong. This reflects the company’s overall ability to generate consistent profits over the long term despite short-term variations.

 

3. Strategic Management: The ability to maintain double-digit margins in most of the past five years underscores CUMI's strategic efficiency in managing its operations and finances, even in fluctuating market conditions.

 

Carborundum Universal’s profit margins, while experiencing some recent pressures, exhibit strong long-term averages, showcasing the company’s operational and financial resilience. The drop in margins in FY23 warrants close attention to identify underlying causes and implement corrective measures. However, the overall trend indicates a well-managed company capable of sustaining profitability over time. Future analyses should focus on how CUMI navigates cost pressures, market competition, and other external factors to maintain or improve its margins.

  MAR'14 MAR'15 MAR'16 MAR'17 MAR'18 MAR'19 MAR'20 MAR'21 MAR'22 MAR'23
 Operational Ratios                    
 Quick Ratio 1.03 0.98 1.03 1.41 1.71 1.89 2.36 2.68 1.24 1.53
 Current Ratio 1.79 1.67 1.74 2.35 2.76 3.21 3.79 3.67 2.13 2.74
 Interest Coverage Ratio 6.48 9.7 11.34 15.45 38.34 44.47 56.42 111 85.43 25.64
 Fixed Asset Turnover 1.42 1.39 2.61 2.37 2.32 2.49 2.12 1.95 1.99 1.95
 Cash Conversion Cycle 41.47 43.36 52.34 48.85 45.13 54.01 54.2 25.73 8.82 29.49
 Debt to Equity Ratio 0.41 0.31 0.27 0.11 0.08 0.06 0.03 0.02 0.09 0.08
 Free Cash Flow/Sales (%) 2.87 16.2 4.81 8.95 5.11 3.98 10.94 13.23 -9.49 2.78
 Profitability Ratios                    
Gross Margin (%) 64.92 64.92 64.98 65.18 66.29 64.49 65.87 65.88 65.18 63.17
 Op Profit Margin (%) 12.87 14.13 17.02 16.92 17.8 17.32 17.07 18.88 17.34 15.65
 Net Profit Margin (%) 4.31 6.47 7.41 8.28 9.11 9.21 10.48 10.8 10.03 8.89
 ROCE (%) 12.86 15.16 18.24 17.39 18.91 19.67 17.58 17.99 18.31 17.4
 Return on Assets (%) 4.61 7.3 7.75 9.14 10.33 11.15 11.94 10.63 10.11 10.76
 ROIC (%) 7.54 9.13 13.64 13.33 14.4 14.23 15.52 19.92 15.52 14.09
 ROE (%) 8.27 12.18 12.09 12.65 13.78 14.37 14.66 13.34 14.1 14.68
Adjusted EPS 4.87 7.05 7.65 9.27 11.41 13.09 14.38 15 17.56 21.8
 Valuation Ratios                    
P/E 30 26.73 22.94 31.4 30.46 31.02 15.27 33.95 45.44 45.42
Price to Book 2.49 3.26 2.78 3.98 4.21 4.47 2.25 4.55 6.45 6.72
EV/EBITDA 11.43 13.07 10.62 15.45 15.58 16.5 8.85 18.12 26.04 25.57
Dividend Yield (%) 0.85 0.66 0.85 0.6 0.65 0.68 1.25 0.59 0.44 0.35

 

Return on Equity (ROE)

Carborundum Universal (CUMI) has demonstrated a steady Return on Equity (ROE) over the past five years, with the following key points:

 

FY23: ROE increased to 16%, up by 100 basis points (bps) from 15% in FY22.

 

5-Year Average: The average ROE over the past five years stands at 15%.

 

The relatively lower ROE can be attributed to CUMI's strategy of retaining a significant portion of its earnings, which is reinvested back into the business rather than being distributed as dividends. This reinvestment strategy supports long-term growth and operational expansion, although it may moderate the immediate ROE.

 

Return on Capital Employed (ROCE)

CUMI has consistently maintained a robust Return on Capital Employed (ROCE), reflecting efficient use of capital in generating profits:

 

Consistency: The ROCE has remained stable at 20% for the past three years, highlighting strong operational efficiency.

 

FY20 Dip: In FY20, the ROCE dipped to a five-year low of 19% due to slower earnings growth, but quickly rebounded in subsequent years.

The stable ROCE indicates that CUMI has been able to effectively manage its capital to generate consistent returns, even during periods of slower earnings growth.

 

Key Observations

1. ROE Trends: The incremental rise in ROE to 16% in FY23 is a positive sign, showing that the company is improving its efficiency in generating returns from shareholders' equity. However, the five-year average of 15% suggests a balanced approach between reinvestment and profit generation.

 

2. ROCE Stability: The consistent ROCE of 20% over the past three years (with a minor dip to 19% in FY20) underscores CUMI's ability to maintain high capital efficiency. This stability is indicative of sound management practices and effective utilization of capital resources.

 

3. Strategic Earnings Retention: CUMI’s strategy of retaining a higher portion of earnings for reinvestment rather than payout supports long-term growth prospects. While this may result in a relatively lower ROE, it positions the company for sustainable growth and expansion.

 

Carborundum Universal’s return ratios reflect a company with solid capital management and a strategic focus on reinvestment. The increase in ROE to 16% in FY23, along with a stable ROCE of 20%, highlights the company's operational efficiency and effective use of capital. Despite a conservative approach to earnings distribution, CUMI's financial performance indicates robust management and a strong foundation for future growth. Investors should consider both the immediate return ratios and the long-term growth potential driven by the company’s reinvestment strategies.

 

Debt-to-Equity Ratio

Carborundum Universal (CUMI) has consistently maintained a strong balance sheet, characterized by minimal debt. Here are the key points:

 

Current Status: As of FY23, the debt-to-equity ratio stands at 0.1x, indicating that the company is virtually debt-free.

 

Historical Performance: Over the past five years, CUMI has managed to keep this ratio extremely low, even achieving a zero debt-to-equity ratio in FY21 and FY20. This highlights the company's prudent financial management and conservative approach to leveraging.

The five-year average debt-to-equity ratio is 0.06, reinforcing the company's status as virtually debt-free.

 

Interest Coverage Ratio

Given its minimal debt levels, CUMI’s interest coverage ratio is exceptionally high, which underscores its ability to comfortably meet interest obligations. The interest coverage ratio is calculated as EBIT (Earnings Before Interest and Taxes) divided by interest expenses.

 

FY23: The interest coverage ratio is 32.5, indicating that the company's EBIT is 32.5 times its interest expenses.

 

Historical Performance: The interest coverage ratio has seen fluctuations, with an exceptional high of 143.0 in FY21. This was largely due to the absence of debt, resulting in minimal interest expenses.

The five-year average interest coverage ratio is 82.26, reflecting the company's strong earnings relative to its negligible interest expenses.

 

Key Observations

1. Debt Management: CUMI's low debt-to-equity ratio over the past five years showcases its conservative approach to debt management. The company's ability to operate with virtually no debt enhances its financial stability and reduces risk.

 

2. Interest Coverage: The exceptionally high interest coverage ratio further emphasizes CUMI’s strong financial health. Even in years with minimal debt, the company’s earnings far exceed its interest obligations, indicating robust profitability and sound fiscal management.

 

3. Financial Flexibility: Maintaining such low debt levels provides CUMI with significant financial flexibility. The company can leverage this strength to invest in growth opportunities without the burden of substantial interest payments, ensuring long-term sustainability.

 

Carborundum Universal's debt analysis reveals a company with outstanding financial health, characterized by minimal debt and high interest coverage ratios. The low debt-to-equity ratio and consistent ability to cover interest expenses multiple times over highlight the company’s prudent financial strategies and robust earnings capacity. This financial strength positions CUMI well to navigate economic uncertainties and capitalize on growth opportunities, ensuring continued stability and potential for long-term value creation for its stakeholders.

 

Future Plans

 

Expansion into New Product Segments

 

Carborundum Universal (CUMI) is actively exploring opportunities to diversify its product offerings, with a focus on high-growth and emerging sectors such as:

 

Clean Energy: As global emphasis on sustainability intensifies, CUMI is looking to tap into the clean energy market, potentially developing materials and components critical for renewable energy technologies.

 

Semiconductors: Recognizing the critical importance of semiconductors in the modern economy, CUMI is exploring avenues to enter this sector, which could involve supplying advanced materials used in semiconductor manufacturing.

 

Defense: Given the increasing defense budgets globally, CUMI is identifying opportunities to supply materials and components for defense applications, leveraging its expertise in advanced ceramics and other high-performance materials.

 

Digital: With the rapid digital transformation across industries, CUMI aims to develop products that cater to digital applications, possibly focusing on materials used in electronic devices and digital infrastructure.

 

Strategic Acquisitions

 

During the year, CUMI strategically acquired three companies to bolster its market presence and diversify its product portfolio:

RHODIUS: Known for its high-quality industrial abrasives, this acquisition enhances CUMI's product range and market reach in Europe.

 

AWUKO: Specializing in coated abrasives, AWUKO’s acquisition strengthens CUMI's position in the abrasives market, adding new capabilities and expanding its customer base.

 

PLUSS: This acquisition brings advanced polymer technology into CUMI’s fold, potentially opening new avenues in high-performance material applications.

 

All acquisitions were funded through internal accruals, reflecting CUMI’s strong financial position. The benefits from these investments are anticipated to materialize over the next three to five years, enhancing revenue and market share.

 

Revenue Growth Targets

For FY24, CUMI has set ambitious revenue growth targets:

 

Consolidated Revenue Growth: The company aims to achieve a 12-14% increase in consolidated revenue. This growth will likely be driven by its diverse business segments and recent acquisitions.

 

Standalone Revenue Growth: On a standalone basis, CUMI is targeting an even higher growth rate of 15-18%. This indicates confidence in its core business operations and market strategies.

 

Segment-Specific Outlook

 

Ceramics Business: After experiencing exceptional growth in FY23, CUMI expects some moderation in this segment. Despite this, the company projects a robust 20% CAGR for the Ceramics business over the next three years, supported by ongoing demand in industries such as aerospace, defense, and energy.

 

Electrominerals Business: This segment faces challenges from increased competition due to softening global commodity prices. However, the performance of CUMI’s Russian subsidiary, VAW, remains strong, providing a stable revenue stream. The company will need to navigate competitive pressures domestically while leveraging VAW’s strengths.

 

Strategic Implications

 

1. Diversification and Innovation: CUMI’s focus on new sectors like clean energy and semiconductors reflects a strategic pivot towards innovation and diversification, positioning the company for long-term growth in high-potential markets.

 

2. Integration of Acquisitions: The successful integration of RHODIUS, AWUKO, and PLUSS will be crucial. These acquisitions not only expand CUMI’s product portfolio but also enhance its technological capabilities, enabling it to better serve existing markets and enter new ones.

 

3. Revenue Targets and Growth Management: Achieving the set revenue growth targets will require effective execution of strategic initiatives and efficient operations. Monitoring and adapting to market conditions, particularly in the competitive electrominerals segment, will be key to sustaining growth.

 

4. Sustaining Ceramics Growth: Even with expected moderation, maintaining a 20% CAGR in the Ceramics segment indicates CUMI’s strong market position and ability to capitalize on industry demand. Continuous innovation and customer focus will be critical.

Carborundum Universal's future plans highlight a comprehensive strategy aimed at diversification, innovation, and sustained growth. The company's proactive approach in acquiring strategic assets and exploring new market segments, combined with ambitious revenue targets, positions it well for continued success. Effective execution and integration of these initiatives will be vital to realizing the anticipated benefits and driving long-term value creation for stakeholders.

 

Conclusion

Carborundum Universal (CUMI) has showcased robust financial health and growth, evidenced by a remarkable 40% increase in revenue and a 26% rise in net profit for FY23. This impressive performance is supported by CUMI’s diverse product portfolio that serves a wide range of industries, from aerospace to consumer durables. The company’s financial prudence is reflected in its virtually debt-free status and strong return ratios. Maintaining a debt-to-equity ratio of just 0.1x and achieving high interest coverage ratios highlight CUMI’s solid financial management and minimal reliance on external financing. This financial stability provides a strong foundation for future growth initiatives. CUMI’s strategic acquisitions of RHODIUS, AWUKO, and PLUSS, all funded through internal accruals, indicate a proactive approach to expanding its market reach and enhancing its technological capabilities. The benefits from these acquisitions are expected to unfold over the next three to five years, potentially boosting revenue and profitability.

 

Looking ahead to FY24, CUMI has set ambitious yet attainable revenue growth targets of 12-14% on a consolidated basis and 15-18% on a standalone basis. The company anticipates continued growth in its Ceramics business, although at a moderated pace, while the Electrominerals segment may face increased competition due to global commodity price fluctuations. However, the Russian subsidiary VAW is expected to sustain strong performance, contributing positively to the overall business. With its robust financials, strategic growth initiatives, and diversified business model, CUMI is well-positioned to navigate future challenges and capitalize on emerging opportunities. The company’s cautious optimism and strategic planning indicate a balanced approach to growth, ensuring long-term value creation for its stakeholders. As CUMI continues to innovate and expand, it remains a strong contender in its industry, poised for sustained success.

Discussion