‘Hold’ on Grindwell Norton with revised TP of `500

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New Delhi | Published: February 8, 2019 4:11:03 AM

With higher exposure to auto segment, we believe the current slowdown in auto primary market will impact GWN’s earnings. Hence, we revise down FY19/FY20E EPS 3 percent/6 percent. Consequently, we revise down multiple to 27x from 30x, at a three-years’ average and estimate FY19-21E PAT CAGR of 18 percent. Hence, we downgrade to hold with revised TP of Rs 500 (27x as we roll over to Q1FY21E; Rs 567 earlier).

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Grindwell Norton’s (GWN) Q3 FY19 revenue grew 8 percent y-o-y (5 percent below estimate) led by moderating growth in abrasives to 5 percent y-o-y (11 percent in H1FY19; CUMI’s 11 percent in Q3FY19). However, ceramics & plastics (CP) segment sustained momentum at 24 percent y-o-y. Due to pricing pressure, Ebitda margin dipped 140bps y-o-y, leading to flat Ebitda growth (10 percent below estimate).

With higher exposure to auto segment, we believe the current slowdown in auto primary market will impact GWN’s earnings. Hence, we revise down FY19/FY20E EPS 3 percent/6 percent. Consequently, we revise down multiple to 27x from 30x, at a three-years’ average and estimate FY19-21E PAT CAGR of 18 percent. Hence, we downgrade to hold with revised TP of Rs 500 (27x as we roll over to Q1FY21E; Rs 567 earlier).

Abrasives’ growth was moderate at 5 percent y-o-y despite a weak base (up 2% y-o-y). Further, with higher exposure to auto (our estimate ~30%), we believe the current slowdown in auto primary market will impact GWN’s earnings. Growth in the segment is driven by volumes as pricing is under pressure despite rising input cost. As per competition, price hikes are expected subsequently. Consequently, Ebit margin dipped 160bps y-o-y, leading to 6 percent Ebit decline. For 9mFY19, revenue grew 9 percent y-o-y and Ebit was up 13 percent with margin expanding 48bps.

The segment continued to grow strongly at 24 percent y-o-y following similar growth in Q2FY19. Ebit margin dipped slightly 50bps y-o-y to 14.5 percent leading to Ebit growth of 20 percent. Management expects performance plastics (PP) within CP (30 percent of segment sales) to post 20% CAGR over the next five years led by automobile, life science and other sectors. Further, PP is a strong focus area for the parent as well. Pent up demand in the industrial segment and new application launches across sectors are growth catalysts. However, in light of the slowdown in auto, we revise down FY19/FY20E EPS 3%/6%, leading to 18% PAT CAGR over FY19-21.

Grindwell Norton (part of the Saint-Gobain Group) was established in 1967 as a technical collaboration between Grindwell and Norton Company, USA. The company manufactures wide range of abrasives (bonded, coated and super abrasives) and ceramics (silicon carbide grain and refractories).

It has seven manufacturing facilities with six located in India and one in Bhutan. GNW manufactures abrasives — bonded (including thin wheels), coated (including nonwoven), super abrasives — and ceramics meeting predominantly industrial requirements, which includes Silicon Carbide, high performance refractories and performance plastics.

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