Grindwell Norton has diversification edge

Grindwell Norton Ltd, a leading manufacturer of abrasives in India, benefits from its dominant market position and a strong product portfolio amid challenging macro environment.

Business: Grindwell Norton, a subsidiary of Saint Gobain of France, manufactures and sells abrasives, ceramics and performance plastic products in India and internationally. It derives close to 70% of its revenues from abrasives, comprising bonded abrasives (including thin wheels), coated abrasives (including non-woven) and super abrasives.

The company, with an installed capacity to manufacture 18,427 tonne of bonded abrasives, has over 15,000 products used in applications such as lapping, polishing, finishing and removing high quantities of materials. It also has a capacity to produce 5.98 million square metre of conventional coated abrasives, used for material removal. Further, it sells super abrasives made of diamond or cubic boron nitride, used in precision applications.

The ceramics segment, which contributes close to 28% of Grindwell’s revenues, comprises high performance refractories (HPR) division and silicon carbide (SiC) division. While refractories are used in processing ferrous and nonferrous metals and as kiln furniture to fire ceramic wares, SiC grains are primarily used as raw material in the manufacture of abrasives, refractories and for stone polishing. The installed capacities for abrasive grains and refractories stand at 18,000 tonne and 1,600 tonne, respectively.

Grindwell has five manufacturing locations and 12 sales offices across the country.

The company derives 85-90% of revenues from the domestic market. Export revenues constitute the rest as the company sells its products to over 32 countries. 

Investment rationale: The company holds No.2 position in abrasives and the top slot in SiC. Along with key competitor Carborundum Universal, it has close to 70% of the abrasives market, with each having almost equal share. Being a subsidiary of Saint Gobain, however, Grindwell enjoys a strong technological advantage over competitors. Its products find use across industries and sectors, thereby limiting its exposure to any particular sector or customer. The company’s dependence on any particular sector is limited to 15% and no single client contributes more than 3% to revenues.

The company, which has its own SiC grains manufacturing, is less dependent on external sources for raw materials and this helps to improve margins as well. It has a capacity to produce 13,000 tonne of SiC at its subsidiary in Bhutan, which it plans to augment further.

Grindwell is looking to make a capital expenditure of Rs100 crore per annum over the next 2-3 years. It plans to set up Phase II of its HPR  plant in Gujarat this fiscal. Also, it would be investing in capacity expansion at bonded abrasives plant in Nagpur and thin wheels and coated abrasives plant in Baddi. It is setting up a new non-woven abrasives line along with new plant for performance plastics at Bangalore, too.

The company has strong balance sheet with zero debt and substantial cash on hand. Further, Grindwell’s high dividend payout of close to 38%, resulting in dividend yield of close to 3%, provides comfort to investors.

Concerns: Extended slowdown in the industrial production and capex activities in India and overseas may pose threat to company’s revenue growth. Also, a rise in input costs of petroleum coke and electricity may impact the company’s margins if it is not able to pass on the hikes.

Valuations: Led by introduction of new products, higher capacities and diversified presence across industries, Grindwell’s revenues are expected to grow at a compounded annual growth rate of 16% from fiscals 2011 to 2013, while the net profit is also likely to grow at a similar pace. At its current market price of Rs235, the stock of Grindwell is trading at 13.60 times and 11.31 times its expected earnings per share for fiscal 2012 and 2013, respectively.

Investors with a long-term perspective may consider the stock on declines for decent and stable returns.

Disclaimer: The writer does not hold any share in the company