Fundamental Analysis Of Carborundum Universal: Manufacturing is emerging as an integral pillar in the country’s economic growth, thanks to the performance of key sectors like automotive, engineering, chemicals, pharmaceuticals, and consumer durables. One key piece of machinery that almost every manufacturing & engineering Company uses is Abrasives.
Abrasives are used in grinding, polishing, and sanding materials. The abrasives are fitted with sharp particles that use friction to shape wood, metal, and other materials. Let us learn about one such manufacturer of Abrasives, learn more about what is its business and understand the Company financially.
Table of Contents
Fundamental Analysis Of Carborundum Universal – Company Overview
Carborundum Universal (CUMI) is part of the 120-year-old Murugappa Group, which is one of India’s leading business conglomerates. CUMI started as an Abrasives company in 1954. Abrasives are materials used for grinding, polishing, sanding & other similar processes that are used to harden or sharpen objects.
As an abrasives manufacturer, CUMI has expanded its value chain from mining, and power generation, to fusion, manufacturing, marketing, and distribution. With over six decades in the abrasives business, CUMI is a global leader having a presence in over 6 continents and a market leader in the abrasives business in India as well as Russia.
Carborundum Universal’s business can be divided into four segments. Abrasives is the largest segment of CUMI which earned about 41% of the revenue in FY23. The second largest segment is the electro minerals which contributed to 34% of the revenue and the ceramic segment brings in 23% of the total revenue earned from operations.
The Company’s products have a wide range of applications, especially in industries such as Aerospace & Defence, Electric Vehicles, Energy, Iron & Steel, and Railway. For example, the aerospace industry uses advanced ceramic fasteners, ceramics for ballistic protection of people, grinding solutions for fasteners, and refractories for its launchpads.
Advanced ceramics are also used for making EV Fuses and ceramic fibres are used for fire protection in batteries to prevent thermal runaway. Ceramic electrical insulators are used for high-speed rail networks, grinding for railway bearings, and track grindings.
Industry Overview
FY23 presented challenges worldwide including, the economy, layoffs, war, and environmental issues. Just when the world recovered from the Pandemic, the war in Ukraine broke out in February 2022. The prices of commodities, food, energy, and fertilizer rose sharply.
As inflation rates accelerated, central banks responded with monetary policy tightening to contain inflation. Due to the negative effects of rising import costs, declining currencies, increased living expenses, and a stronger dollar, many developing nations experienced extreme economic hardship.
The global economy grew by 3.4% in CY22 and is expected to grow at 2.8% in CY23, before rising slowly and settling at 3%. The Indian economy has strongly rebounded on the back of a sustained recovery in domestic demand, government spending on infrastructure, and export growth. Further, the ‘China Plus One’ strategy spurred India as a global supplier to many International players.
The annual rate of inflation is below 6% and as per the World Bank it is expected to average out at 5.2% for the FY24. The export of goods and services in the first nine months of the financial year (April-December) was up by 16% compared to the same period in 2021-22.
India’s current growth continues to be resilient despite some signs of moderation. The overall growth remains robust and is estimated to be between 6.5% to 7% for the full year. Strong investment activity, supported by the government’s push for capital expenditures, and robust private consumption provided the foundation for growth.
The Index for Industrial Production (“IIP”) grew by 5.5% over 2021-22 and the growth was widespread. The global geo-political disturbances resulted in rising commodity prices and input costs which resulted in a rise in inflation and depreciation in the Rupee against the USD.
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Fundamental Analysis Of Carborundum Universal – Financials
Revenue & Net Profit
Carborundum Universal reported revenue of Rs. 4654 Cr in FY23, which increased by 40% from Rs. 3325 Cr in FY22. Since FY21 CUMI has seen unprecedented growth with revenues scaling by 33% since FY21. However, due to a declined growth in FY20-21, the long-term growth rate has normalized at 14.7% CAGR since FY19.
Net Profits during the year increased from Rs. 350 Cr in FY22 to Rs. 442 Cr in FY23, growing by 26%. Although the revenue growth rate declined in one exceptional year, its Net Profit remained rather positive. Since FY21, net profits of the Company have increased by 16% CAGR.
| Fiscal Year | Gross Revenue | Net Profit |
|---|---|---|
| 2023 | ₹ 4,654.28 | ₹ 441.70 |
| 2022 | ₹ 3,324.76 | ₹ 350.02 |
| 2021 | ₹ 2,631.71 | ₹ 293.07 |
| 2020 | ₹ 3,598.97 | ₹ 274.98 |
| 2019 | ₹ 2,688.90 | ₹ 247.60 |
| 4-Year CAGR | 14.70% | 15.57% |
Profit Margins
Operating Margins of the Company has been a little over 10% since the last 5 years. Carborundum Universal’s Operating margins have dropped by 200 bps from 15% in FY22 to 13% in FY23. The 5-year average remains at 14.4%.
Net Profits also slipped by 10 bps during the year from 10% in FY22 to 9% in FY23. The company was able to achieve double-digit margins in just 3 years out of the last 5. The 5-year average stood at 9.8%.
| Fiscal Year | Operating Profit Margin (%) | Net Profit Margin (%) |
|---|---|---|
| 2023 | 13.00% | 9.00% |
| 2022 | 15.00% | 10.00% |
| 2021 | 16.00% | 11.00% |
| 2020 | 14.00% | 10.00% |
| 2019 | 14.00% | 9.00% |
| 5 Year Average | 14.40% | 9.80% |
Return Ratios
Carborundum Universal had a return on Equity of 16% in FY23, which increased by 100 bps from 15% in FY22. The 5 Year average return on equity was calculated to be 15%. The Company does maintain a rather lower ROE as CUMI retains a higher amount of earnings as compared to what its disburses back to its business or giving payout as cash.
Return on Capital Employed has been maintained consistently at 20% for the past three years. Due to rather slower earnings in FY20 the Company’s ROCE dropped to its 5 Year low of 19% in FY20.
| Fiscal Year | ROE (%) | ROCE (%) |
|---|---|---|
| 2023 | 16.00% | 20.00% |
| 2022 | 15.00% | 20.00% |
| 2021 | 14.00% | 20.00% |
| 2020 | 15.00% | 19.00% |
| 2019 | 15.00% | 21.00% |
| 5 Year Average | 15.00% | 20.00% |
Debt Analysis
The Company is virtually debt free with a debt-to-equity ratio of just 0.1x. It has maintained such a status in the past 5 years, even slipping to a ratio of nil debt to equity in FY21. As the Company is a debt-to-free enterprise, the interest coverage ratio is not a concern.
| Fiscal Year | Debt / Equity | Interest Coverage Ratio |
|---|---|---|
| 2023 | 0.10 | 32.50 |
| 2022 | 0.10 | 105.70 |
| 2021 | 0.00 | 143.00 |
| 2020 | 0.00 | 72.90 |
| 2019 | 0.10 | 57.20 |
| 5 Year Average | 0.06 | 82.26 |
Fundamental Analysis Of Carborundum Universal – Future Plans
- The Company continues to explore and identify alternative opportunities for expanding into various product segments including clean energy, semiconductors, defense, digital, etc..
- During the year, CUMI acquired RHODIUS, AWUKO, and PLUSS, all funded by internal accruals. The Company expected to realize the benefits of these investments in the next three to five years.
- In the upcoming FY24, the company aims for a revenue growth of 12-14%. At the standalone level, it targets revenue growth of 15-18%.
- The company expects moderation in growth for the Ceramics business after the very strong growth in FY2023. However, it still expects the Ceramics business to grow at around 20% CAGR over the next 3 years.
- In the Electrominerals business, the domestic business is expected to face competition from imports as commodity prices soften globally. However, the Russian subsidiary VAW is expected to continue performing well.
Fundamental Analysis Of Carborundum Universal – Key Metrics
The Key Metrics of Carborundum Universal are given below.
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| CMP | ₹ 1,431.15 | Market Cap (Cr.) | ₹ 27,442.00 |
| EPS | ₹ 21.80 | Stock P/E | 74.43 |
| ROE (%) | 16.00% | ROCE (%) | 20.00% |
| Promoter Holding (%) | 41.23% | FII Holding (%) | 12% |
| Debt to Equity | 0.10 | Price to Book Value | 9.58 |
| Operating Profit Margin | 13.00% | Net Profit Margin | 9.00% |
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Conclusion
Carborundum Universal (CUMI) has demonstrated impressive financial performance, with a 40% revenue growth and a 26% increase in net profit in FY23, backed by its diversified product portfolio catering to various industries.
The company maintains a robust balance sheet, with virtually no debt and healthy return ratios. CUMI has pursued growth opportunities through acquisitions and expects to realize their benefits over the next few years.
For FY24, the company has provided a cautiously optimistic outlook, targeting a 12-14% consolidated revenue growth and 15-18% standalone growth, with moderation expected in the Ceramics business.
While the Electrominerals segment may face competition, the Russian subsidiary VAW is anticipated to continue performing well. With its strong financials, growth initiatives, and diversified business model, CUMI appears well-positioned for the future, although it will need to navigate potential challenges effectively.
Written by Nasir Hussain
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