Abrasives
Printed From: The Equity Desk
Category: Investment Ideas - Creating winning portfolios!
Forum Name: Sector talk
Forum Discription: Discussion on sectors with regard to specific matters. We will be discussing the various sectors of the economy and how they would perform. Basically a top down approach.
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=2895
Printed Date: 26/Jun/2024 at 2:22am
Topic: Abrasives
Posted By: brijwanth
Subject: Abrasives
Date Posted: 23/Jul/2010 at 12:27pm
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As per Wikipedia "An abrasive is a material, often a http://en.wikipedia.org/wiki/Mineral - mineral , that is used to shape or finish a workpiece through rubbing which leads to part of the workpiece being worn away". Fundamentally speaking as long as you are in business you have to use your work tools- abrasives are not like steel hammers and are worn out, so you have to change them frequently which means constant business the entry barriers are not high and the un organised sector is big but if you are a regular user you know how frequently abrasives get worn out so you develop a relationship with products that are less wornout i.e. their USP Abrasive industry in India caters more to the industrial sector. There are 4 major companies in Abrasive listed space Carborundum Universal (CUMI) Grindwell Norton Orient Abrasive Wendt All the 4 in Listed space cater to different industries because of variation in products though CUMI and Grindwell have some products in common. Carborundum Universal is part of Murugappa Group. As far as I understand Carborundum people are making tons of cash but the problem is they can not scale up their business so they are making acquisitions when we acquire something we pay more than its actual value and there is added risk of lack of integration. So growth rates can't be positive. Grindwell Norton is an partnership of Saint Gobain and some Indian partners. It is also well diversified in abrasives. Orient Abrasive's name is deceptive they are a leader in manufacture of refractories which are used in lining of different industries to protect from heat. their margins are low hence lowest pe in this abrasive space.I am not particularly bullish about orient abrasives though it is the cheapest of the 4 because they are increasing assets @ 19% where as their sales are growing @ 13%. So the PE is justified Wendt is the best of all of them they are mainly concentrated in diamond cutting blades. Their business is predictable unless either women stop buying diamonds(no chance in near term) or diamond cutting business goes out of india(more probable). Wendt is a partnership between wendt(mnc) and CUMI (the first one) The above 3 except CUMI are fairly valued may be the reason for high price of CUMI is cheery consensus of MF managers. At present prices all of them are on the overvalued side. But in case of falls/slides abrasive business can be useful if you are a very long term player Written by a pessimist  and sometimes humorist P.S. I couldn't find much about grindwell. I am an ECE grad so couldn't find much on technical details Please share your views Regards Brijwanth ------------- Past will not be repeated in future but peaks and troughs do revert to mean, period and order of those peaks, troughs and mean days is the one i.e. not predictable- riser3 valuations |
Replies:
Posted By: jigneshk
Date Posted: 24/Jul/2010 at 6:56pm
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rider3,
Thanks for starting this thread. Wanted to add something to what you have written.
A.Carborundum Universal - CUMI has 3 business segments:
1. Electrominerals (38%) which are actually grains mined from mines and has different uses like making machine tools, SPV cells, abrasive etc. So primarily its raw material for next stage of products.
2. Abrasives and grinding wheels (41%) - There are above 15,000 types of abrasives. They are used as consumable for finishing an auto product like automobile engine or say sand paper used before painting your house. They are also used as raw material for next stage of product like grinding wheel which is similar to big running wheel you see when sharpening knives.
3. Ceramics and refractories (18%)- These are capex items used mainly by steel and auto foundries.
CUMI gets about 44% sales outside india from total consolidated sales of 1258 Cr.
B. Grindwell Norton gets about 70% sales from Abrasives (No.2 above) and rest from ceramics (No.3 above) and largely (90%) India focussed from total sales of 702 Cr.
C. Orient Abrasives gets 35% sales from Electrominerals and 55% from Refractories.
D. Wendt makes super Abrasive tools made from diamond and CBN. This doesn't mean diamond industry uses it. These tools are used by Auto, Engineering, Defence etc sectors.
E. ITL Industries also makes similar products like Wendt but largely focussed on cutting tools.
So these companies are proxy play on Auto (60% exposure) and general engineering and Industrial production of India which is surging after 2009.
Coming to valuations I feel all above companies are cheap and may give good return to an investor over next 1-2 years. Remember even during depression of 2009 these companies' market cap never went below their 1 times sales. Even on PE basis historically these companies got more than 15-20 times PE simply due to higher entry barriers and capital/technology intensive nature of business.
My pick is CUMI as they have invested close to 750 Cr in last 5 years and are set to encash it when world is recovering and India's Auto sales and capex in full bloom. I expect EPS of 16 for 10-11 which is just 13 PE. Its still available at 1.5 times consolidated sales which is also low I feel.
Disc: I hold CUMI and ITL Ind.
I Welcome comments.
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Posted By: brijwanth
Date Posted: 24/Jul/2010 at 7:40pm
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Thanks jignesh with my little enginering knowledge I figured out wendt wrongly. Automotives use this abrasives in which process, i mean is it some thing like before painting. I haven't seen any process during the production of cars using abrasives (in National Geographic channel). I heard that Daiamond dust is used to cut for diamonds and polishing so if wendt makes them can the be also used for diamond cutting and polishing ------------- Past will not be repeated in future but peaks and troughs do revert to mean, period and order of those peaks, troughs and mean days is the one i.e. not predictable- riser3 valuations |
Posted By: biks
Date Posted: 24/Jul/2010 at 11:07pm
Well written... The entire sector is supposed to be doing well currently. In my view Grindwell Norton & Orient Abrasives should offer better returns among the lot... - biks ------------- i am tired of being bored... i think i'll make a lateral move to self-pity |
Posted By: sarulatha
Date Posted: 27/Jul/2010 at 5:13pm
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Posted By: karn
Date Posted: 27/Jul/2010 at 5:58pm
  ------------- “Invert, always invert.” |
Posted By: brijwanth
Date Posted: 27/Jul/2010 at 10:53pm
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------------- Past will not be repeated in future but peaks and troughs do revert to mean, period and order of those peaks, troughs and mean days is the one i.e. not predictable- riser3 valuations |
Posted By: bihisello
Date Posted: 27/Jul/2010 at 11:18pm
| Back on topic, picked up a little CUMI. I like the Murugappa group. |
Posted By: mohitrathi8
Date Posted: 28/Jul/2010 at 12:40pm
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I am quite bullish on Wendt. The AR is there on the website. CUMI has a promoter stake.
Below 700 I think it is a good buy. ------------- Good stocks can go down for no reason. Bad stocks can go up for no reason. |
Posted By: karn
Date Posted: 28/Jul/2010 at 1:37am
I have observed that almost entire basket ( Wendt, Grindwell, CUMI & Orient) doing very well in last 3 years or so. I can understand the numbers and they do look fantastic, but unfortunately I'm not able to understand the biz.  ------------- “Invert, always invert.” |
Posted By: jigneshk
Date Posted: 28/Jul/2010 at 7:24am
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mohitrathi8,
Wendt is indeed a bluechip company. Only issue I find is Auto Capex (They make super abrasive/machines tools) is yet to pick up in big way which is why we do not see QoQ growth which should start coming for market to give it better discounting. YOY June 10-11 (Q1 2011) results looks good only because June 09-100 (Q1 2010) was exceptionally weak quarter. As against this CUMI, Grindwell and Orient are more in to Consumables and Electrominerals where demand pickes up directly with Auto sales.
Disc: Hold CUMI and Grindwell.
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Posted By: EMANI
Date Posted: 28/Jul/2010 at 9:04am
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Dear Ted, ORIENT ABRASIVES , I think would do better in the medium term.I hold a small qty.This is purely my personal opinion. ------------- esn |
Posted By: mohitrathi8
Date Posted: 28/Jul/2010 at 10:22am
abrasive: (noun) any material or substance used for grinding, polishing, etc., as emery, pumice, or sandpaper. In Wendt's case, they make abrasives mainly for auto companies but they are diversifying into non-cyclicals such as defense and aerospace. They also have a subsidary in UAE which did poor due to the Dubai issue but they expect it to provide services to the Oil and Gas space and break even this year. ------------- Good stocks can go down for no reason. Bad stocks can go up for no reason. |
Posted By: brijwanth
Date Posted: 05/Aug/2010 at 1:01pm
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If some one an elaborate on refractory business it would be helpful. I have seen in Tata Steel AR that Depreciation for lining in furnace is for 7 or 8 years
------------- Past will not be repeated in future but peaks and troughs do revert to mean, period and order of those peaks, troughs and mean days is the one i.e. not predictable- riser3 valuations |
Posted By: brijwanth
Date Posted: 25/Aug/2010 at 10:21am
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orient abrasive gujarat plant ordered to shutdown http://www.cafestocks.com/marketupdate/orient-abrasives/orient-abrasives-suspends-operations-at-porbander-plant ------------- Past will not be repeated in future but peaks and troughs do revert to mean, period and order of those peaks, troughs and mean days is the one i.e. not predictable- riser3 valuations |
Posted By: biks
Date Posted: 26/Aug/2010 at 12:59pm
I would take this as an opportunity to load up on this stock -biks ------------- i am tired of being bored... i think i'll make a lateral move to self-pity |
Posted By: brijwanth
Date Posted: 26/Aug/2010 at 9:44am
biks we have already seen you piling up the stock. You seem to be bull on this stock can you help us see the opportunities within next few years for the company ------------- Past will not be repeated in future but peaks and troughs do revert to mean, period and order of those peaks, troughs and mean days is the one i.e. not predictable- riser3 valuations |
Posted By: jigneshk
Date Posted: 08/Apr/2011 at 10:31pm
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Wendt back to near all time high. It hardly corrected when small cap index was down 30%. With FY12 EPS of 115-120, BV of 300+ and Auto Capex boom led Sales growth of min 40% YoY for next 2-3 years looks like this Murugappa company could become one of the top performer stock in C 2011.
Disc: I am biased because I hold.
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Posted By: TCSer
Date Posted: 08/Apr/2011 at 12:20pm
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Hi Jigs Nice to see you on this forum Please post more frequently ------------- Share market is nothing but a game of temperament. Success mantra Right Price,Right Business,Patience, Conviction .Do not do panic buying or selling.It may be the only profession where inactivity pays |
Posted By: jigneshk
Date Posted: 30/May/2011 at 6:59am
Wendt hit 20% upper circuit @ 1440. Grindwell (235) and Carborundum (262) both just 6% away from their respective all time highs.
Disc: I hold Wendt India and Grindwell as of writting so I am biased.
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Posted By: TCSer
Date Posted: 31/May/2011 at 8:54pm
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Is Grindwell a better buy at this price or wendt?
------------- Share market is nothing but a game of temperament. Success mantra Right Price,Right Business,Patience, Conviction .Do not do panic buying or selling.It may be the only profession where inactivity pays |
Posted By: jigneshk
Date Posted: 27/Jul/2011 at 6:57pm
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Wendt - 1945 - up 20% - completely shocked looking at its speed. June Q1Fy12 EPS at 25.5. Time to sell above 2000?
Disc: I hold.
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Posted By: anishc
Date Posted: 01/Sep/2011 at 7:01pm
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My two cents worth:
Abrasives are used in any kind of manufacturing facility where a smooth finish is a desired result for the product or the component. It is also used for deburring, denibbing and defuzzing. Allied industries are Refractories and Ceramics. CUMI, GN, Orient and Wendt either have their own divisions for refractories and ceramics or supply abrasive products to these industries. There are 4 prominent players in India alongwith the cheaper Chinese imports and other firms having in-house grinding facilities. Operating margins tend to be in the 18%-25% range for all of these except Wendt which has a more limited product range catering to a more high end segment. CUMI at 2690crs Mcap is the largest player with GN being 2nd. CUMI has a significant international presence with factories and subsidaries in Asia, Australia, Africa, Europe and USA. I GN is debt free, its largest stake holder is Saint Gobain which is a world leader in abrasives from France. Wendt is JV between CUMI and a German firm. Orient's prospects post demerger of its profitable high margin refractory operations are unknown to me. Overall I like the prospects of an industry that has a fairly high entry barrier (capital, expertise), has widespread application across industries and the largest company is valued less than a billion dollars. My number one pick is GN for its valuation and it being debt free. ------------- anish |
Posted By: manish_okhade
Date Posted: 01/Sep/2011 at 8:17pm
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One question:
Abrasive business is inevitable and demand is less or more regular. But isn't growth depends on the growth of their end customers? If economy as a whole does very well then Abrasives will also do good and vice-verca. This makes abrasives bit cyclical in nature. Players can increase the prices but capacity expansion is controlled by end user segments so it may not make one very rich. Anyway it is reflected in their valuation too. |
Posted By: anishc
Date Posted: 01/Sep/2011 at 8:54pm
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I have a couple of thoughts around this Manish:
The cyclicality of the abrasives industry is smoothened out to a large extent by the fact that the cater to a whole host of industries across the economy. GN does not have an exposure greater than 15% to any one industry. CUMI and GN both manufacture silicon carbide which is the RM for abrasives. Another point is that the quality of manufactured products in India is improving in terms of functionality and aesthetics. The grinding and abrasion processes contribute to this. Yes I do agree with you that if the economy tanks then abrasives will hurt, but then again if the economy tanks everyone will hurt  ------------- anish |
Posted By: shontou
Date Posted: 09/Nov/2011 at 10:38am
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Conference Call
Carborundum Universal Q2FY12's high PBIT margin of Electro Minerals not sustainable Carborundum Universal hosted a conference call on Nov 8, 2011. In the conference call the company was represented by K Srinivasan, Managing Director, Sridharan Rangarajan, CFO and Raja Mukherjee, DGM Internal Audit & Strategy. Key takeaways of the conference call Consolidated net sales for the quarter ended Sep 2011, grew by 24% to Rs 505 crore. However the EBITDA recorded an increase of 42% to Rs 120 crore with the EBITDA margin increasing to 24% from 21% in the corresponding previous period. And finally the net profit (after minority interest) was higher by 60% to Rs 66 crore. Growth was driven by the performance of both the Indian and Overseas operations. The Electrominerals and Ceramics business segments recorded a growth rates in excess of 25%. Abrasives business grew by 15%. Abrasives: Off-take of abrasives from user industries in India and Russia continued to be encouraging. But, the operations in America, Middle East and Canada continued to be subdued. However, the Chinese subsidiary registered good growth from a low base. Sterling Abrasives, VAW's Abrasive division and Wendt (India) in Indian abrasive segment, registered higher growth. Have strong orders for Q3 in abrasives. Electro Minerals: Growth in revenues and also improvement in operating margins led to increase in profit before interest and tax of the electro minerals business on a consolidated basis. Growth in sales was made possible by the robust performance of the Indian, Russian and South African operations. Ceramics : The engineered ceramics business performed well. Sales of metallized cylinders and wear resistant tiles registered strong growth. The growth in sales was driven by exports as a result of higher offtake from Canada, Europe, USA and South American markets. Australia grew by 32% for the quarter. In Refractories, good order inflow was witnessed for both fired and Monolithic products. Off-take from glass and steel industry was extremely encouraging. The joint ventures in the refractories business registered significant growth on a combined basis. Profitability of all business segments witnessed good increase. Overseas subsidiaries recorded strong growth in sales, particularly the entities in Russia and South Africa. Sales of the abrasives business (on consolidated basis) registered an increase of 15% to Rs 208 crore and PBIT of the same was up by 23% to Rs 30 crore gained by higher sales as well as 100 bps expansion in PBIT margin to 14.6%. Electro Minerals recorded an increase of 25% in sales to Rs 190 crore and the PBIT was higher by 52% to Rs 55 crore. Spurt in PBIT of Electro minerals apart from higher sales is due to its PBIT margin zoom to 28.9% for the quarter compared to 23.7% in the corresponding previous quarter. Jump in PBIT margin is largely on account of Change in Mix in India as well as better realisation in VoW. The volume of EM for the quarter is flat and slightly less in some cases. Hence the entire growth came on product mix and price rise. The ceramics segment recorded a robust 36% increase in sales on a consolidated basis to Rs 117 crore. PBIT of the same increased by 80% to Rs 27 crore. On the back of favorable product mix (increased volume in metallized cylinders with commissioning of additional line in Q3FY11) and optimum production levels, the segment margin of the same expanded to 22.9% up from 17.3% in the corresponding previous period. Growth on QoQ basis for Q2FY12 is unusual given the fact that Q1FY12 is always strong for the company. Translation impact in topline for the quarter is a gain of Rs 2 crore and on YTD basis it is a gain of Rs 14 crore. On sequential basis it is a loss of Rs 3 crore. Reduction in profit on account of withdrawal of DEPB amounts to Rs 1.5 crore in H1FY12. Standalone PBT margin for the quarter ended Sep 2011 expanded by 100 bps to 16.6% on year on year basis and it contracted on sequential basis by 110 bps from 17.7% in Q1FY12. Expansion in PBT margin on year on year basis is on account better price realisation to the extent of 20 bps, semi fixed costs to the extent of 150 bps and lower interest to the extent of 40 bps. Which was offset by 110 bps on account of forex loss (agains gain), lower dividend and management fee. Similarly contraction on QoQ basis is largely on account of lower management fee to the extent of 120 bps, higher salary 50 bps and others 90 bps. Which was offset by lower interest 20 bps, better price realisation of 110 bps. The Q2FY12 Electro Minerals PBIT margin of 28.9% is not sustainable and the more sustainable EBIT margin is around 24-25%. Disproportionate margin came in Q2FY12 and EM will shed its margin going forward. However other business is expected to sustain/maintain their Q2FY12 performance for rest of the fiscal. In terms of revenue Q3FY12 will be as such as that of Q2FY12, but Q3FY12 bottomline will be lower than that of Q2FY12 as the latter (i.e.Q2FY12)has the advantage of better performance of VoW and translation gain which is not sustainable. Of the total revenue of the company about 55% is from India and about 45% from outside of India (24% is from Europe and balance 21% from rest of world including 10% from Australia, 5% from Americas). The JV with Salerez of Israel is for special grade (fibre) refractories and in JV CUMI will hold 51% and Israel company will hold 49% stake. JV's Phase I project will be more of a technology demonstrator and once that is stabilized and taken commercial under Phase II only there will be meaning full ramp up in revenue. The project is coming up in Cohin SEZ. Sold its entire stake in Laserwoods, a prepublishing company for a consideration for Rs 50 crore that is not included in the financials of Q2FY12 but will be accounted in Q3FY12. Standalone debt stand reduced to Rs 220 crore as end of Sep 2011 (down from Rs 251 crore ) on account of repayment of ECB with its maturity. Of the 220 crore of debt shorterm debt is Rs 95 crore and rupee loan is Rs 90 crore. Debt equity level improved from 0.62 as on Sep 2010 to 0.51 as on sep 2011 on consolidated level. Chinese antidumping duty of 52% in Europe has gone. The impact of the same on company's European operation ie. Russia is to be seen. There is not much of impact in Q2FY12 but may get reflected in Q3FY12 if there is any dumping by China. Lot of value added and higher margin products are going to be on offer in next fiscal. For Russia the company is going to have backup strategy with Chinese becoming a real threat in Europe market. For Ceramics it is going to be Value creation and volume for Ceramics. Higher utilisation of abrasives in China and Russia. Value added products. Expect 15% growth for current fiscal with general slowdown in Europe along with increased Chinese competition. Unallocable expenses on consolidated segment - Extraordinary repair which is not allocated segment wise as well as some other legal expenses related to Wendt India litigation. The company manufacturers Black Silicon Carbide but China produces predominantly Green Silicon carbide. The price offered by China is USD 2400/ tonne and the company could offer its Black Silicon Carbide at USD 2100/ tonne and even at this price point the company will make a margin over 20%. However Chinese domestic demand is more right now whether they will aggressively fight in Europe has to be seen even if they do the company has advantage as of now. China is the major capacity adding country as far as Silicon Carbide is concerned. Almost all the plants are running on full capacity barring EM where there is some headroom and coated ceramics where utilisation stand at 60%. The realisation in refractory grew by 2-3% flat on yoy basis. EM by about 15% yoy. The metallized cylinders was up by 10-15% and engineered ceramics was up about 12-15%. Employee cost will be maintained around 10-11.5% of net sales. Metallized cylinders whose user industries i.e. power equipment mfrs are planning to grow their production by 15% and this is expected to drive demand for this products. Bonded abrasives – the company is still behind in deliveries. It is debottlenecking the plant to augment capacity as well as trying to bring in some products from China which has a capacity of 3000 tonnes. Previous Stories ------------- Every day, self-proclaimed stock market "experts" tell us why the market just went up or down, as if they really knew. So where were they yesterday? |