Rating Matrix Grindwell Norton (GRINOR)content.icicidirect.com/mailimages/IDirect_GrindwellNorton_IC.pdf · to grow 16.4% YoY (vs. flattish sales for CUMI) in FY15, led by higher

June 12, 2015

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Grind(ing) well through tough times!!! Grindwell Norton (GNL) is a joint leader in the Indian abrasives industry with ~25% market share. Backed by the strong parentage of Saint Gobain, a strong financial track record (topline, earnings CAGR of 15.6%, 13.5%, respectively, in the last 10 years), a robust balance sheet and a huge product portfolio, GNL is poised to benefit from an industrial recovery, going ahead. Going ahead, given its strong parentage and leadership in the domestic market with an operating matrix superior to its peers, we expect strong earnings CAGR of 27% over FY15-17E. Hence, we initiate coverage on GNL with a BUY recommendation.

Joint leader in Indian abrasives; superior to peers

GNL, together with Carborundum Universal (CUMI) commands ~50% market share in the Indian abrasives industry (pegged at ~| 2500-3000 crore). The abrasives business of GNL, forming ~63% of revenues in FY15, has grown at 12.8% CAGR in CY08-FY15. It is noteworthy that despite a challenging economic environment, abrasives sales recovered to grow 16.4% YoY (vs. flattish sales for CUMI) in FY15, led by higher exports and GNL’s focus on identified market segments. Going ahead, the abrasives segment is expected to grow at 17.5% CAGR in FY15-17E to | 1017 crore led by exports and an economic recovery.

Healthy growth in ceramics division through new products, exports

The ceramics and plastics division (forming ~26% of the topline) has grown at ~16% CAGR over CY08-FY15, mainly led by the introduction of new products in the PPL division and the new facility in the HPR division. Going ahead, segment revenues are expected to be driven by increased HPR exports from the Halol facility and introduction of new products in the PPL division. Consequently, we expect ceramics and plastics segment revenues to grow at 20% CAGR over FY15-17E to | 445 crore.

Expected to exhibit growth coupled with stability; initiate with BUY

GNL’s premium valuations are driven by its ability to sustain a minimum sales level (owing to consumable nature of abrasives) and prudent pricing strategy, which has led to lower margin volatility vis-à-vis its peers. Given its strong parentage and leadership in the domestic market with an operating matrix superior to its peers, strong earnings growth (CAGR of 27% in FY15-17E) and healthy balance sheet with robust cash flow generation, we ascribe a multiple of 30x on FY17E earnings (implying a PEG of 1.1x on FY15-FY17E earnings) and arrive at a target price of | 900/share. We initiate coverage on the stock with a BUY rating.

Exhibit 1: Valuation Metrics (| Crore) FY13 FY14 FY15E FY16E FY17ENet Sales 947.0 965.5 1,135.4 1,321.9 1,598.3 EBITDA 152.1 144.0 180.6 211.2 270.6 EBITDA Margin (%) 16.1 14.9 15.9 16.0 16.9 Interest 3.0 3.1 2.9 1.0 1.0 Depreciation 24.4 31.8 41.6 45.0 48.4 Net Profit 97.3 83.9 103.2 125.3 165.9 EPS (|) 17.6 15.2 18.6 22.6 30.0 RoCE (%) 23.4 19.3 21.7 23.0 26.6 RoE (%) 18.9 15.0 16.8 17.9 20.2

Source: Company, ICICIdirect.com Research

Grindwell Norton (GRINOR)| 727

Rating Matrix Rating : BuyTarget : | 900Target Period : 12-15 monthsPotential Upside : 24%

YoY growth (%)

(YoY Growth) FY14 FY15E FY16E FY17ENet Sales 2.0 17.6 16.4 20.9 EBITDA (5.3) 25.4 17.0 28.1 Net Profit (13.8) 23.0 21.4 32.4 EPS (13.8) 23.0 21.4 32.4

Current & target multiple

z

(x) FY14 FY15E FY16E FY17EP/E 47.9 39.0 32.1 24.2 Target P/E 59.3 48.2 39.7 30.0 EV / EBITDA 27.5 21.7 18.4 14.1 P/BV 7.2 6.5 5.8 4.9 RoNW (%) 15.0 16.8 17.9 20.2 RoCE (%) 19.3 21.7 23.0 26.6

Stock Data

Bloomberg/Reuters Code GRINR IN / GWN BOSensex 26,570 Average volumes 311,468 Market Cap (| crore) 4,069.0 52 week H/L 774/ 341Equity Capital (| crore) 27.7 Promoter's Stake (%) 59.0 FII Holding (%) 4.0 DII Holding (%) 9.7

Comparative return matrix (%)

Return % 1M 3M 6M 12MGrindwell Norton 9.5 4.8 29.3 103.3 Carborundum Uni. (10.5) (12.9) (6.7) (2.1) Wendt India 9.1 5.9 (4.8) 27.0

Price movement

200

300

400

500

600

700

800

Jun-

15

Mar

-15

Dec-

14

Aug-

14

May

-14

Feb-

14

Nov

-13

Aug-

13

May

-13

Jan-

13

Oct-1

2

Jul-1

2

4,000

5,500

7,000

8,500

10,000

Price (R.H.S) Nifty (L.H.S)

Research Analyst

Chirag J Shah [email protected]

Bhupendra Tiwary [email protected]

Page 2ICICI Securities Ltd | Retail Equity Research

Company background Grindwell Norton (GNL) came into being in 1967 on the back of a technical collaboration between the India based Grindwell Company and the US-based Norton Company, which ultimately resulted in a financial collaboration in 1971. In 1996, it became the first majority owned subsidiary of Saint-Gobain. GNL is a leading company in the domestic abrasives market with ~25% revenue market share. It is well diversified across segments catering mainly to abrasives (~63% of revenues) and ceramics & plastics (26% of revenues). The company manufactures a wide range of abrasives (bonded, coated and super abrasives), ceramics & plastics (abrasive grains, refractories and performance plastics). In the abrasives segment, the company caters to industries like automobile, construction, housing, metal fabrication, etc, while in ceramics & plastics, it caters to power plants, coal washeries, cement, glass and steel industries. GNL exports (12% of revenues) to customers in the Middle East, Europe and South East Asia. Overall, the company has seven manufacturing facilities for respective products:

• Abrasives: GNL has facilities at Mora, Bengaluru, Nagpur and Bated

• Abrasive grains: The company has facilities at Tirupati and Bhutan

• High performance refractories: GNL has facilities at Bengaluru, Halol.

• Performance plastics: The company has a facility in Bengaluru Exhibit 2: Grindwell Norton – Timeline of company milestone

•Company incorporated as Grindwell Abrasives

1950

•Technical collaboration with Norton Co. of US

1967•Name changed

to Grindwell Norton

1971

•First Silicon Carbide plant in Bangalore

1972

•Silicon Carbide plant in Tirupati

1979

•Separated into abrasives & grindwheel division

1979

•Capacity expansion of super refractories

1983

•Saint-Gobain acquired Norton Co. US

1990•GNL becomes

first majorly owned subsidiary of Saint-Gobain

1996

•Acquired bonded abrasives business of Orient Abrasives

2006

•Declared 1:1 bonus

2006

•Started Himachal Pradesh plant to manufacture abrasives

2008

•Started Silicon Carbide plant at subsidiary in Bhutan

2009

•Mine grid manufacturing process completed

2012•New HPR plant

commisioned in Halol (Gujarat)

2012

•R&D centre of group started in Chennai

2013•New non-woven

plant in Bangalore fully commissioned

2013

•Bonded abrasives expansion project at Nagpur completed

2014


Shareholding pattern (Q4FY15)

Shareholder Holding (%)

Promoters 59.0

Institutional investors 13.6

General public 27.4

FII & DII holding trend (%)

2.6 2.93.7 4.0

8.4 7.99.4 9.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Q1FY15 Q2FY15 Q3FY15 Q4FY15

(%)

FII DII


Exhibit 3: GNL – segmental view

Abrasives Ceramics & plastics

Coated abrasivesBonded abrasivesSuper abrasives

Silicon carbide grainsrefractories

High performance plastics

EBIT margin 13.6% 13.8%

Growth drivers Recovery in auto and auto ancilliary, construction, housing

and aerospace industries

Recovery in steel, non-ferrous, glass, petrochemical, cement industries and

increase in product base.

Cement, petrochemical, sanitarywarepower transmission, steel, coal washery

~63% ~26%Revenue share

Application Automobiles, engineering, construction, housing,

Products


Exhibit 4: Traded goods form ~10% of sales (FY14)

Own Manufactured

90%

Traded10%


Exhibit 5: Exports form ~12% of sales (FY15)

Domestic88%

Exports12%


Exhibit 6: Plant location

PlantsProducts

Mora, Bengaluru, Nagpur, Bated

High performance refractories Bengaluru, Halol

Tirupati, BhutanAbrasive grains

Performance plastics Bengaluru

ProductsAbrasives



Investment Rationale Saint Gobain’s strong parentage with huge product portfolio

Saint Gobain – leader in glass, high performance material

Established in 1665, headquartered in Paris, Saint Gobain is a world leader in the construction and habitat markets. With an experience of about 350 years, the company is spread across 64 countries and figures among the 100 most innovative companies in the world. More than 23% of its sales are generated through products, which were developed less than five years ago. Saint Gobain is the joint world leader in all abrasive businesses. The company had a turnover of €41.1 billion in CY14. It employs 1,80,000 people and has 12 research centres worldwide.

In terms of segmental bifurcation, building distribution contributes 46%, construction products contribute 26% and innovative materials contribute 22% while packaging contributes 6% to total revenues. Geographically, Other Western Europe comprises a lion’s share of revenues at 42% while France, Asia & emerging countries and North America form 42%, 19% and 12% of the topline, respectively.

Exhibit 7: Saint Gobain total turnover at €4.1 billion

37786

40119

42116

43198

4202541054

36000

38000

40000

42000

44000

2009 2010 2011 2012 2013 2014

(Mn

Eur)


Exhibit 8: Bottomline at €953 million

241

12131360

723631

953

0

300

600

900

1200

1500

2009 2010 2011 2012 2013 2014

(Mn

Eur)


Exhibit 9: Saint Gobain - Segmental break-up of 2014 topline

Construction Products

26%

Building Distribution

46%

Packaging6%

Innovative Materials

22%



HPM business houses GNL’s product portfolio

Innovative materials cover flat glass (12% of net sales) and high performance materials (10% of net sales). With operations in 42 countries and more than 26,000 employees, high performance materials (HPM) activity comprises four businesses: ceramic materials, abrasives, performance plastics and Saint-Gobain Adfors. GNL’s business falls under the HPM activity of the parent.

Sales under the HPM activity increased 3.5% YoY to €4232 million in 2014 and grew at 5.5% CAGR in the last five years. HPM sales, which form 10% of net sales, contribute 20% to operating income with highest operating margin of 13.4% among segments. Saint Gobain allocates a high proportion of net sales to R&D (4.2% in 2013) with two dedicated research centres in US and France supported by centres in India and China.

Exhibit 10: HPM topline at €4.2 bn, forms 10% of Saint Gobain topline

3240

4088 41634376

40864232

3000

3350

3700

4050

4400

2009 2010 2011 2012 2013 2014

(Mn

Eur)


Exhibit 11: HPM EBITDA in 2014 at € 716 mn, margin of 16.9%

399

760 812 789675 716

0

150

300

450

600

750

900

2009 2010 2011 2012 2013 2014

(Mn

Eur)


Exhibit 12: Products under HPM activity which forms part of GNL portfolio Businesses & Products Main Applications Main Competitor Competitve Ranking

Ceramics

Grains & powders Raw materials for abrasives, ceramic industries No.1 worldwide in silicon carbide

Catalyst substrates for petrochemical industry Carbo ceramics (US) No.1 worldwide in zirconium-based abrasives

Proppants for oil industry Imerys (France) No.1 worldwide in ceramic balls

Ceramic balls for micro-grinding applications No.2 worldwide in proppantsRefractories Ceramic blocks for manufacture of industrial furnaces for glass,

ceramic, metallurgy & energy applications, armour plating for defense industry

Asahi (Japan)Cookson Vesuvius (UK)

RHI (Austria)

No.1 worldwide in refractories for glass andnon-ferrous metal industries

AbrasivesBonded abrasives

Roughing, grinding and sharpening of materials & tools for aerospace, automotive, metal processing, steel and bearings

industries

Winterthur Technology– 3M (Switzerland)

Noritake (Japan)Tyrolit (Austria)

Joint leader worldwidein all abrasive businesses

Thin grinding wheelsCutting, deburring, metal processing, maintenance, energy,

steel, construction and DIY applications

Tyrolit (Austria)Comet (Slovenia)Pferd (Germany)

Rhodius (Germany)Coated abrasives

Surface treatment & sanding applications in the aerospace, automotive, furniture, hand tools, steel, jewellery, watchmaking

& biomedical industries

3M (United States)Hermes (Germany)

Klingspor (Germany)SIA (Switzerland)

Super abrasivesPrecision tools for aerospace, automotive, bearings, cutting tools, electronics & composite materials industries & glass

industry

Asahi (Japan)Noritake (Japan)

Winterthur Technology– 3M (Switzerland)

Performance PlasticsBearings & seals

Friction parts for automotive, aerospaceand industrial machinery

Trelleborg (Sweden)Glacier Garlock(U.S)

Oiles (Japan)

No. 1 worldwide in automotive bearings



Strong R&D to boost new product introduction…

Saint Gobain has a strong research and development (R&D) set-up with projects in both basic and applied areas as well as a global reach. For the HPM segment (business related to GNL), Saint Gobain has two dedicated research centres in Worcester in the US and Cavaillon in France, which are supported by Saint-Gobain’s R&D centres in Shanghai, China and Chennai, India.

Saint Gobain Research India (SGRIL) incorporated in FY13, is a transversal R&D centre for the Saint Gobain Group in Chennai, the benefits of which accrue to GNL also. The company has invested | 6.7 crore by way of equity capital in SGRIL. The parent holds a 51% stake in SGRIL whereas 19% is held by GNL and two other group companies holds the remaining 30% stake in the R&D centre. GNL benefits from the parent in terms of access to all developments in products and process technology, sourcing of products and development of exports.

In 2014, R&D spends of Saint Gobain stood at ~€400 million (~1% of the topline). In the HPM segment (business in which GNL operates), R&D at €172 million formed ~40% of the total R&D spend, clearly signifying the role of innovation and product development in the segment. Apart from that, at the company level, GNL spent ~| 3.5 crore for recurring R&D expenditure in FY15. It is noteworthy that given the excellent R&D, new products introduced in the last five years, form 35% of GNL’s topline. Going ahead, new product introduction from the parent portfolio would also boost GNL revenues as its abrasives offering of 15000 products is merely 6% of Saint Gobain’s product portfolio of 250000 grinding wheels.

Exhibit 13: Saint Gobain spends ~€ 400 million every year on R&D

386 402431 451 430

400

0

100

200

300

400

500

2009 2010 2011 2012 2013 2014

(Mn

Eur)

0.9

0.9

1.0

1.0

1.0

1.0

1.0

1.1


Exhibit 14: and~40% of this pertains to HPM segment

130 123

150166 172

0

40

80

120

160

200

2009 2010 2011 2012 2013

(Mn

Eur)


Exhibit 15: GNL also spent ~| 3.5 crore on R&D in FY14 at company level

1.21.5

2.1

1.6

3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FY10 FY11 FY12 FY13 FY14

| cr

ore

0.0

0.2

0.4

0.6

(%)

R&D cost at GWN level As a %age of Sales (RHS)



Replacement led demand acts as cushion in tough period

Abrasive is by nature a consumable and has a replacement cycle of up to three month. Therefore, demand for abrasives is mainly replacement led. This provides a cushion in terms of demand volatility. Furthermore, ceramics, refractories and plastics are also in the nature of consumables, thereby providing lower demand volatility.

Abrasives comprise ~63% of the topline, which ensures that even during tough times, revenues do not decline. This has led to a superior standing of GNL vis-à-vis other industrials/capital goods players who have been impacted severely due to the economic slowdown. Even in FY15, revenues grew at 17.6% YoY through a mix of increased exports, incremental sales from refractories segment and a recovery in abrasives sales.

Exhibit 16: Consumables nature of abrasives acts as cushion during tough times

Upto 3 months

36-38 months 36-38 months

0

5

10

15

20

25

30

35

40

Bonded & Coated Abrasive Wear resistant products Fused refractory

(Mon

ths)

Source: Company, ICICIdirect.com Research Exhibit 17: Topline has not declined even in toughest of times

318373

441502

702797

906 947 966

1135

0

200

400

600

800

1000

1200

CY05 CY06 CY07 CY08 FY10 FY11 FY12 FY13 FY14 FY15

(| c

rore

)

051015202530354045

(%)

Net sales YoY (RHS)



Capex in place, growth to follow

GNL spent | 300 crore in FY10-15 on capex. The capex was a mix of maintenance and expansion. In FY12, a high performance refractories division in ceramics and plastics was set up as a greenfield project near Vadodara, Gujarat. A plant was also set up in Bengaluru for the manufacture of mine grids (part of ADFORS’ technical fabrics business of Saint Gobain). During FY13 and FY14, the new non-woven abrasives plant in Bengaluru was commissioned while the bonded abrasives expansion project in Nagpur was completed and commissioned.

However, given the overall economic slowdown, revenues took a hit (muted growth of 5.2% and 1.6% in FY13 and FY14, respectively). Consequently, the asset turn came down to 1.7x in FY14 vs. 2.3x in FY12.

We have built in maintenance capex of ~| 50 crore in FY16E and FY17E as the major capacity expansion has been done and utilisation levels (currently at ~55-70% across segments) have enough headroom to move to peak levels as demand recovers.

Going ahead, with the anticipated recovery in industrial demand and capacity in place, we expect robust topline growth at 17% CAGR over FY15-17E and expect asset turnover to recover to 2.2x.

Exhibit 18: GNL spends ~| 300 crore on capex over FY10-15

30.1 26.2

97.8 93.2

21.128.1

50.0 50.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

FY10 FY11 FY12 FY13 FY14 FY15P FY16E FY17E

(| c

rore

)

Source: Company, ICICIdirect.com Research Exhibit 19: Asset turnover to go back to historical highs of 2.2x

258.5343.3 364.6 390.4

506.4583.7 611.8

661.8711.8

0

100

200

300

400

500

600

700

800

CY08 FY10 FY11 FY12 FY13 FY14 FY15P FY16E FY17E

(| c

rore

)

0.0

0.5

1.0

1.5

2.0

2.5

(x)

Gross Block Asset Turnover



Abrasives – growth to be fuelled by domestic industrial recovery

The abrasives business, which formed ~63% of revenues in FY15, consists of bonded abrasives (including thin wheels), coated abrasives (including non-woven) and super abrasives (a miniscule portion).

GNL caters to a number of industries such as steel, automobiles, auto components, general metal fabrication, woodworking, etc. However, the dependence on any single industry segment is less than 15%. The company has a well diversified clientele in the abrasive segments with the largest customer accounting for less than 2% of total sales while the largest dealer accounts for less than 3% of total sales.

GNL along with Carborundum Universal (CUMI) commands around 50% of the market share (70% of organised market share) in the domestic abrasives industry. While the competitive landscape in the abrasive industry has evolved with major threat in the form of Chinese imports, GNL has been able to maintain its market share given the high degree of customisation of these products, critical nature of input (like ceramics in furnaces) and its brand recognition.

The abrasives business has four manufacturing sites: Mora, (near Mumbai), Bengaluru, Nagpur and Bated (Himachal Pradesh). During FY14, HNL completed and commissioned the major expansion project of the bonded abrasives plant at Nagpur. Furthermore, the thin wheels capacity and capability was also enlarged at Nagpur and in Bated (Himachal Pradesh) while the new non-woven plant was commissioned.

Abrasives revenues have grown at 12.8% CAGR in CY08-15. During FY13 and FY14, abrasives sales were muted owing to a decline in auto volumes and a slowdown in the manufacturing sector. However, in FY15, abrasives sales recovered to grow 16.4% YoY led by increased exports and GNL’s focus on identified market segments.

While the exports focus bodes well for GNL’s abrasives sales, we believe the major kicker for growth would be the domestic industrial recovery along with a pick-up in automotive volumes. Going ahead, the abrasives segment is expected to grow at 17.5% CAGR over FY15-17E on the back of exports and a domestic economic recovery. We expect growth in abrasives to be back ended with ~15% topline growth in FY16E and ~20% in FY17E when we may see industrial recovery led demand.

Exhibit 20: Abrasives segment revenues expected to grow at 17.5% CAGR over FY15-17E

358483

545611 602 633

737847

1017

0

200

400

600

800

1000

1200

CY08 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

| cr

ore

-50510152025303540

(%)

Abrasives YoY (RHS)


Going ahead, the abrasives segment is expected to grow at

17.5% CAGR over FY15-17E on the back of exports and

domestic economic recovery


Ceramics and plastics segment – growth led by new product introduction

The ceramic and plastics division of GNL formed ~26% of topline in FY15. The main business in this segment is silicon carbide, high performance refractories and performance plastics.

Silicon carbide grains (SiC) are used primarily as raw materials in the manufacture of abrasives, refractories and stone polishing. GNL manufactures SiC at a plant in Tirupati, Andhra Pradesh and another in Bhutan. SiC, which forms two-third of the ceramics segment, has of late been affected by sharp electricity cost in AP. The company is contemplating shifting the complete facility to Bhutan.

High performance refractories (HPR) are used for processing ferrous and non-ferrous metals and as kiln furniture to fire ceramic wares. The main customers are the ceramic industry, metallurgy non-ferrous (copper and aluminium), foundry, iron & steel, energy and heat treatment. HPR has one plant in Bengaluru and another in Halol (recently commissioned). In FY14, there was low demand for wear resistant technology due to the slowdown in mining and power. In FY15, GNL is now focused on the export market through the Halol plant, which has the capacity and capability to address a number of growth opportunities in export markets.

The Performance plastics (PPL) business produces standard and custom polymer products through three business segments: engineered components (ENC), fluid systems (FLS) and composites. The major product lines in PPL are bearings, seals, tubings & hoses, films, fabrics and foams. The major markets addressed are automotive, pharma & bio-pharma, construction, energy and general industrial. While the muted passenger vehicle market has impacted demand in the segment, GNL strives to grow into new applications in the industrial, healthcare and construction segments.

The ceramics and plastics division has grown at ~16% CAGR in CY08-15, mainly led by the introduction of new products in the PPL division and the new facility in the HPR division. Going ahead, the company aims to grow the segment through increased HPR exports from the Halol facility and introduction of new products in the PPL division. Consequently, we expect revenues of the ceramics and plastics segment to grow at 20% CAGR over FY15-17E.

Exhibit 21: Ceramics, plastics division has grown at 20% CAGR in FY15-17E

126

189218

252 251 252

309

371

445

050

100150200250300350400450500

CY08 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

| cr

ore

-10

0

10

20

30

40

50

60

(%)

Ceramics & Plastics YoY (RHS)


We expect revenues of the ceramics and plastics segment

to grow at 20% CAGR over FY15-17E


Strong exports offset domestic demand slowdown

GNL currently exports to countries ranging from Asia Pacific to Africa mainly through its group companies. Exports, which form ~12% of the topline, have grown at ~25% CAGR over FY12-15. They have cushioned weak domestic sales over the same period.

GNL is poised to capitalise on the export opportunity owing to its worldwide presence with the Saint Gobain group facilitating marketing and providing service support to its customers. Furthermore, the parent plans to triple its India group business (including glass) by 2019. GNL has indicated that exports would be the key focus area, going ahead. As per the company, apart from abrasives exports, the new HPR plant at Halol has the capacity and capability to address a number of growth opportunities in export markets. Consequently, we expect exports to grow at 20% CAGR over FY15-17E to | 199 crore.

Exhibit 22: We expect exports to grow at 20% CAGR over FY14-17E

78.2 71.1 70.6

123.7102.8

138166

199

0

50

100

150

200

250

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

| cr

ore

4567891011121314

(%)

Exports As a %age of Sales (RHS)


Robust balance sheet with no debt situation, strong FCF

GNL has had a robust balance sheet that is net debt free across cycles. The FCF generation has also been strong while the company has funded most of its maintenance and expansion capex (~| 300 crore over FY10-15) through internal accruals. GNL’s net cash of | 97 crore in FY15 (~32% of its networth) and strong FCF generation provide it a lever to go for any major expansion as and when needed.

Exhibit 23: Strong FCF generation

95.6

59.6

25.7 22.9

79.8 77.5 78.5

113.6

0

20

40

60

80

100

120

FY10 FY11 FY12 FY13 FY14 FY15P FY16E FY17E

(| c

rore

)


Exhibit 24: Net cash as percentage of networth at~32% in FY15

0.7

65.678.3

56.839.2

68.297.0

130.9

184.7

0

50

100

150

200

CY08

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

(| c

rore

)

010203040506070

(%)

Net Cash As a %age of Networth (RHS)


We expect exports to grow at 20% CAGR over FY15-17E to

| 199 crore


GNL stands tall vis-à-vis CUMI GNL and Carborundum Universal (CUMI) are the two major players in the Indian abrasives market with ~50% market share. In terms of the organised space, which forms three-fourth of the total Indian abrasive market, GNL and CUMI command a staggering 65-70% market share.

On a consolidated basis, CUMI’s turnover is 2.2x of GNL given its manufacturing facilities across the globe. However, we would compare CUMI’s standalone business to GNL for a like to like comparison based on domestic business units.

Exhibit 25: GNL vs. CUMI

658 73

8 911 1,

105

1,12

8

502 70

2 797 90

6

947

966 1,

135

1,08

0

1,16

9

0200400600800

1,0001,2001,400

CY08

/FY0

9

FY10

FY11

FY12

FY13

FY14

FY15

(| c

rore

)

CUMI Standalone Sales GWN

386 428 50

6 609 640

358 48

3 545 61

1

602

633 73

7

607 66

9

0100200300400500600700800

CY08

/FY0

9

FY10

FY11

FY12

FY13

FY14

FY15

(| c

rore

)

CUMI Standalone - Abrasives GWN Abrasives

173 19

8 245

317

304

126

189 21

8 252

251

252 30

9322

315

050

100150200250300350

CY08

/FY0

9

FY10

FY11

FY12

FY13

FY14

FY15

(| c

rore

)

CUMI Standalone Ceramics GWN Ceramics


GNL and CUMI (standalone) had abrasive sales at ~| 737 crore and | 640 crore, respectively. These two companies together command ~65-70% market share in the organised abrasive industry in India, indicating a virtual duopoly in the segment. In CAGR terms, over CY08-FY15, GNL at 12.7% has grown at a higher pace than CUMI, which grew at 9.6% CAGR during the same period

In terms of the ceramics division, CUMI’s standalone sales at | 315 crore are slightly higher that GNL’s ceramics division sales of | 309 crore. However, GNL’s ceramics division has grown at a much higher CAGR of 16% in CY08-FY15 vs. CUMI’s growth of ~10.5% in the same period

CUMI’s (standalone) sales have been higher than GNL as the company also has an electro-mineral segment apart from similar segments like abrasives and ceramics. In CAGR terms, GNL’s growth at 14.5% CAGR in CY08-FY15 has been superior to 10% CAGR for CUMI in the same period



21.719.4

24.322.2

14.312.9

14.417.3 17.2 17.7

15.915.5

16.1 14.9

0.0

5.0

10.0

15.0

20.0

25.0

CY08

/FY0

9

FY10

FY11

FY12

FY13

FY14

FY15

(%)

CUMI Standalone EBITDA Margin GWN EBITDA Margin

EBIT Margin

13.110.9

9.3 10.1

14.416.1

14.712.3

13.615.3

17.0

13.1

15.7 15.9

5.0

10.0

15.0

20.0CY

08/F

Y09

FY10

FY11

FY12

FY13

FY14

FY15

(%)

CUMI - Abrasives GWN - Abrasives

EBIT Margin

14.3

22.6

15.6 15.0

11.4 11.514.214.5

14.319.5

15.9

13.2

17.315.9

5.0

10.0

15.0

20.0

25.0

CY08

/FY0

9

FY10

FY11

FY12

FY13

FY14

FY15

(%)

GWN - Ceramics CUMI - Ceramics


GNL has been superior in terms of EBIT margins both for the abrasives as well as the ceramics segment, clearly reflecting the pricing power and prudent cost optimisation ability of GNL over the CUMI. The same advantage also flows through to the overall profitability level

GNL’s margins have shown lower volatility than CUMI’s. In FY15, GNL with 15.9% margins was much ahead of CUMI’s margin of 12.9%. CUMI has been hit hard by the margin decline due to the higher price based competition vis-à-vis GNL, which has been prudent in price hikes. Furthermore, the commoditised nature of electro-minerals has also contributed to CUMI’s margin’s volatility



Net Working Capital

3424

3846

110

62

96 100 104

333130

62

98

10

32

54

76

98

120

CY08

/FY0

9

FY10

FY11

FY12

FY13

FY14

FY15

(day

s)

GWN CUMI

Return on Equity

17.6

24.320.8

22.8 22.2

17.7 19.3

10.714.3

25.3

11.3 10.37.1

22.3

0

5

10

15

20

25

30

CY08/FY09 FY10 FY11 FY12 FY13 FY14 FY15

(%)

GWN RoE CUMI RoE

Return on Capital Employed

24.0 25.8 27.2 28.7

23.419.3

21.7

12.214.9

22.9

16.113.8 12.9

29.1

0

5

10

1520

25

30

35

CY08/FY09 FY10 FY11 FY12 FY13 FY14 FY15

(%)

GWN RoCE CUMI RoCE


Even on a consolidated basis, CUMI scores much lower than GNL on operational as well as financial parameters with lower margins, higher working capital days accentuated further by the international business, which has continued to face challenges.

The return ratio of GNL has been higher than CUMI’s return ratio given superior topline growth and margins. While GNL’s RoE, RoCE averaged ~19%, ~24% in the last seven years, CUMI’s RoEs, RoCE averaged ~14% ~17%, respectively, in the same period

GNL has been prudent in terms of working capital management. While the company sells abrasives both directly to the client as well as through dealers, CUMI has increased its retail sales exposure in the domestic market in the last couple of years resulting in an elongated working capital cycle. GNL’s net working capital days stood at ~46 days in FY15 vs. CUMI’s (standalone) WC days at ~104


Financials Revenues to grow at 18.7% CAGR during FY15-17E

In CY08-FY15, revenues of Grindwell Norton grew at 14.6% CAGR. While given the challenging macroeconomic scenario, revenues grew at 3.2% CAGR in FY12-14, they recovered in FY15 to grow 17.6% YoY mainly led by exports in HPR segment and recovery in abrasives segment sales. With expectations of a recovery in the industrial and manufacturing sector, we expect revenues to grow at 18.7% CAGR in FY15-17E. The ceramics and plastics segment, which has shown a strong CAGR of 17% over CY08-FY15, is expected to grow at 20% CAGR in FY15-17E led by introduction of new products and exports of HPR from the Halol facility. The abrasives segment is expected to grow at 17.5% CAGR in FY15-17E. We expect growth in abrasives to be back ended with ~15% topline growth in FY16E and ~20% in FY17E when we may see industrial recovery led demand.

Exhibit 28: Revenue growth trend

947 966

1,322

1,598

1,135

-160320480640800960

1,1201,2801,4401,6001,760

FY13 FY14 FY15E FY16E FY17E

(| c

rore

)

18.7% CAGR


Exhibit 29: Break-up of revenues into various segment

602 633251 252

309371

445

62 38

38

42

46

25 35

44

53

64

737 8471017

600

800

1000

1200

1400

1600

1800

FY13 FY14 FY15 FY16E FY17E

(| c

rore

)

Abrasives Ceramics & Plastics Others Service Income Other Operating Revenue


With expectations of a recovery in industrial and

manufacturing sector, we expect revenues to grow at

18.7% CAGR during FY15-17E


EBITDA to grow at 22.4% CAGR in FY15-17E

The EBITDA grew at 16.5% CAGR during CY08-FY15. However, the margin has come down from 17.7% in FY12 to 14.9% in FY14 due to subdued demand across its segments and increased input costs. However, margins expanded in FY15 by 100 bps led by operating leverage due to healthy topline growth of 17.6% YoY.

Going ahead, we expect EBITDA to grow at 22.4% CAGR in FY15-17E with capex in place and capacity utilisation levels set to increase as demand picks up across segments. Consequently, the EBITDA margin is expected to expand 100 bps over FY15-17E to 16.9%.

Exhibit 30: EBITDA growth trend

152.1 144.0

180.6211.2

270.6

-

50

100

150

200

250

300


(| c

rore

)

10

13

16

19

(%)

EBITDA Margin (RHS)


PAT growth of ~27% CAGR over FY15-17E

During CY08-FY15, PAT grew at 11.3% CAGR.

With healthy topline growth and margin expansion by ~100 bps in the next two years, we expect the bottomline to grow at ~27% CAGR in FY15-17E.

Exhibit 31: PAT & PAT margin trend

97.383.9

103.2

125.3

165.9

-20406080

100120140160180


(| c

rore

)

-

3

6

9

12(%

)

PAT Margin (RHS)


We expect EBITDA margins to recover to 16.9% in FY17E

vs. 15.9% in FY15

PAT is expected to grow at 27% CAGR over FY15-17E


Return ratios to improve led by earnings growth

The RoE and RoCE came down to 16.8% and 21.7% in FY15 vs. the highs of 24.3% and 25.8%, respectively, in FY10, owing to capex and resultant lower capacity utilisation due to a tepid economic environment.

With expectations of an economic recovery and demand growth, utilisation levels are expected to improve led by demand. Thus, earnings are expected to pick up resulting in improved return ratios. Consequently, RoEs and RoCEs are expected to improve to 20.2% and 26.6% in FY17 vs. 16.8% and 21.7% in FY15, respectively. The RoIC is expected to grow to 35.1% in FY17 vs. 25.5% in FY15.

Exhibit 32: Return ratios to improve

35.1

18.915.0 16.8 17.9

20.2

23.4 19.3 21.723.0

26.625.3

21.725.5

28.6

-

5

10

15

20

25

30

35

40


(%)

RoE RoCE RoIC


RoEs and RoCEs are expected to improve to 20.2% and

26.6% in FY17E vs. 16.8% and 21.7%, respectively, in FY15


Risks & concerns Demand pick-up delay may impact earnings assumptions GNL sells ~90% of its products in the domestic market. We highlight that the overall slowdown in the economy affecting the industrial as well as automotive segment had led to muted growth in FY12-14. In FY15, the topline grew 17.6% YoY indicating the initial signs of a demand recovery. We believe that any delay in a sustained pick-up in industrial demand could pose a risk to our earnings estimate.

Raw material cost rise may impact our earnings estimates A sharp rise in key raw material like steel may also pose a risk to our earnings estimates impacting margins.

Hence, we have run a sensitivity analysis to find out the impact of a change in RM to sales on our FY16E and FY17E earnings assumptions. We highlight that every 100 bps change in RM to sales would impact our earnings by ~3%. Exhibit 33: Sensitivity of RM to sales on FY16E & FY17E earnings

33.9% 34.9% 35.9% 36.9% 37.9%

FY16E EPS 25.9 24.3 22.7 21.1 19.4

FY17E EPS 33.9 32.0 30.0 28.0 26.1

Raw Material as a %age of Sales


Increase in royalty

Currently, royalty, as a percentage of manufactured sales, is at 0.5%. We highlight that any increase in the same by the parent could pose a risk.

Hence, we have run a sensitivity analysis to find out the impact of higher royalty on our earnings assumptions wherein every 50 bps rise in royalty rates would impact our earnings by ~4%.

Exhibit 34: Impact of hike in royalty rates

0.5% 1.0% 1.5% 2.0% 2.5%

FY16E EPS 22.7 21.9 21.1 20.2 19.4

FY17E EPS 30.0 29.0 28.0 27.0 26.1

Royalty Rates


Increasing competition may create pricing pressure, going ahead

The abrasives market is evolving from two major players to many players. With economies in Europe growing very slowly, a lot of global players are considering increasing their share in the Indian and Chinese markets, which are still growing. On the other hand, cheap imports from China and increased participation in the markets by power tool players continue to pose a threat to GNL.

While GNL has so far weathered the competition, we believe that any major capex by global majors could lead to increased competition in the Indian market.

Every 50 bps rise in royalty rates would impact our

earnings by ~4%


Valuation GNL has grown at rate superior to its peer CUMI (given its exports and new product introduction) over the last five years. The company is also prudent enough to pass on the price hike in the competitive scenario leading to lower volatility in margins vis-à-vis its peers.

While the historical average P/E of GNL has been ~13x in the last 10 years, it is noteworthy that given the consumables nature of abrasive and its ability to safeguard topline even during tough times, the average one year forward P/E over the last two years has inched up to 20x.

Given GNL’s strong parentage and leadership in the domestic market with superior operating matrix than its peers, strong earnings growth (CAGR of 27% in FY15-17E) and healthy balance sheet with robust cash flow generation, we use PE multiples for the fair valuation of the stock price.

We ascribe a multiple of 30x on FY17E earnings (implying a PEG of 1.1x on FY15-FY17E earnings) and arrive at a target price of | 900/share. We initiate coverage on the stock with a BUY rating.

Exhibit 35: Price/earnings

0100200300400500600700800

Jan-

08

Jun-

08

Nov

-08

Apr-0

9

Sep-

09

Feb-

10

Jul-1

0

Dec-

10

May

-11

Oct-1

1

Mar

-12

Aug-

12

Jan-

13

Jun-

13

Nov

-13

Apr-1

4

Sep-

14

Feb-

15

Pric

e (|

)

Price 5x 10x 15x 20x 25x

Source: Company, Bloomberg, ICICIdirect.com Research

Exhibit 36: Price/BV trend

0100200300400500600700800

Jan-

08

Jun-

08

Nov

-08

Apr-0

9

Sep-

09

Feb-

10

Jul-1

0

Dec-

10

May

-11

Oct-1

1

Mar

-12

Aug-

12

Jan-

13

Jun-

13

Nov

-13

Apr-1

4

Sep-

14

Feb-

15

Pric

e (|

)

Price 2x 3x 4x 5x 6x


We ascribe a PE of 30x (implying 1.1x PEG on FY15-17E

earnings) and arrive at a target price of | 900/share with a

BUY rating on the stock


Relative valuations GNL business model much more stable than other MNC capital goods peers

We have compared GNL to a set of MNC companies that are present in the industrial products space and are leaders in their respective categories. The set of companies include Cummins India (leading engine manufacturer), Bosch Ltd (largest auto ancillary player in the domestic automotive industry) and SKF (the leader in the Indian bearings space). Like GNL, all the above-mentioned companies also boast a strong margin and cash flow profile with minimum leverage on their balance sheets.

However, GNL’s product portfolio with the consumable nature of use and lower replacement cycle is likely to be prone to much lower volatility than other peers in the industrial product space.

We highlight that given the global presence and leadership of the above-mentioned companies, they command premium valuations. For instance, Bosch, Cummins, SKF are trading at two year forward valuations of 34.1x, 24.7x, 23.5x, respectively.

Exhibit 37: Growth trend comparison

FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17ESKF India 6.2 14.6 16.5 8.4 24.0 25.7 21.6 24.3 25.4Cummins India 10.8 18.6 18.2 5.5 22.6 22.7 31.0 4.5 20.1Bosch Ltd 38.9 -7.8 23.5 53.3 0.6 29.8 68.1 -4.2 28.3

Average 18.6 8.5 19.4 22.4 15.7 26.1 40.2 8.2 24.6Grindwell Norton 17.6 16.4 20.9 25.4 17.0 28.1 23.0 21.4 32.4

Revenue Growth (%) EBITDA Growth (%) PAT Growth (%)

Source: Company, Reuters, ICICIdirect.com Research The estimates for SKF India are for CY14, CY15 and CY16 respectively Bosch FY15 numbers are for 15 months

Exhibit 38: Profitability trend comparison

FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17ESKF India 11.7 12.7 13.7 14.3 16.0 17.6 8.5 9.3 10.0Cummins India 17.0 17.6 18.2 28.8 26.6 28.5 16.2 16.0 16.2Bosch Ltd 16.2 17.6 18.5 20.2 16.6 18.3 12.1 12.6 13.1


EBITDA Margin(%) ROE (%) PAT Margin (%)

Source: Company, Reuters, ICICIdirect.com Research The estimates for Bosch and SKF India are for CY14, CY15 and CY16 respectively Bosch FY15 numbers are for 15 months

Exhibit 39: Valuations comparison

FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17ESKF India 36.7 29.5 23.5 5.3 4.7 4.1 24.4 19.3 14.9Cummins India 31.3 29.7 24.7 8.5 7.7 6.8 33.0 26.8 21.8Bosch Ltd 59.9 44.1 34.1 8.7 7.5 6.4 40.7 29.8 23.2


P/E (1 yr forward) P/B (1 yr forward) EV/EBITDA (1 yr forward)

Source: Company, Reuters, ICICIdirect.com Research The estimates for Bosch and SKF India are for CY14, CY15 and CY16 respectively Bosch FY15 numbers are for 15 months

We highlight that given the global presence & leadership of

the above-mentioned companies, they command premium

valuations


Peer matrix

With an expected recovery in economic growth, the multiples have been re-rated over the last year. Given the lower base and expected earnings growth in the next two or three years, premium multiples seem justified.

GNL has been superior in the operating matrix. Thus, it has always commanded premium valuations vis-à-vis CUMI. We also highlight that even in terms of expected earnings growth over the next two years, GNL is in a more superior position.

Exhibit 40: Peer matrix M Cap

(| Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E

Grindwell Norton 4023 18.6 22.6 30.0 32.1 32.1 24.2 21.7 18.4 14.1 16.8 17.9 20.2 21.7 23.0 26.6

Carborundum Universal 3083 7.1 7.8 11.3 23.2 20.9 14.5 12.2 9.5 7.4 12.1 12.2 15.8 12.6 16.4 21.3

RoE (%) RoCE (%)

Company

EPS (|) P/E (x) EV/EBITDA (x)


Exhibit 41: I-direct vis-à-vis consensus estimates | crore Consensus I-Direct Deviation over consensus (%)

Revenues

FY16E 1357.0 1321.9 -2.6

FY17E 1714.7 1598.3 -6.8

EBITDA

FY16E 225.7 211.2 -6.4

FY17E 307.5 270.6 -12.0

PAT

FY16E 135.4 125.3 -7.5

FY17E 192.1 165.9 -13.6



Tables and ratios

Exhibit 42: Profit & loss account (| Crore) FY13 FY14 FY15E FY16E FY17ETotal Operating Income 947.0 965.5 1,135.4 1,321.9 1,598.3 Other Income 10.8 12.8 17.7 21.2 25.5 Total Revenue 957.8 978.3 1,153.1 1,343.2 1,623.8

Cost of materials consumed 362.9 351.3 408.1 475.2 574.5 Purchase of stock-in-trade 65.4 76.6 83.9 101.8 123.1 Change in inventories (12.9) (14.8) (10.3) (10.3) (10.3) Employee Expenses 105.8 114.2 132.9 152.8 178.7 Other Expenses 273.6 294.3 340.2 391.2 461.6 Total Operating Expenditure 794.9 821.5 954.8 1,110.7 1,327.7

EBITDA 152.1 144.0 180.6 211.2 270.6 Interest 3.0 3.1 2.9 1.0 1.0 PBDT 159.9 153.7 195.4 231.4 295.0 Depreciation 24.4 31.8 41.6 45.0 48.4 PBT 135.5 121.9 153.8 186.4 246.6 Total Tax 38.4 37.5 49.6 59.7 78.9 PAT before MI 97.2 84.4 104.2 126.8 167.7 Minority Interest (0.2) 0.5 1.0 1.5 1.8 PAT 97.3 83.9 103.2 125.3 165.9

EPS 17.6 15.2 18.6 22.6 30.0


Exhibit 43: Balance sheet (| Crore) FY13 FY14 FY15E FY16E FY17EEquity Capital 27.7 27.7 27.7 27.7 27.7 Reserve and Surplus 488.6 530.2 588.2 671.3 795.2 Total Shareholders funds 516.2 557.9 615.8 699.0 822.9

Minority Interest 7.1 7.6 8.6 10.1 11.8

Total Debt 22.4 16.4 14.9 14.9 -

Deferred Tax Liability 15.0 18.9 18.7 18.7 18.7 Total Liabilities 560.7 600.8 658.1 742.7 853.4 Gross Block 506.4 583.7 611.8 661.8 711.8 Acc: Depreciation 179.3 208.7 250.4 295.4 343.8 Net Block 327.1 375.0 361.4 366.4 368.0 Capital WIP 61.7 5.5 5.5 5.5 5.5 Total Fixed Assets 388.8 380.5 367.0 371.9 373.5 Goodwill on Consolidation - - - - -

Investments 30.8 35.1 35.1 35.1 35.1

Inventory 159.3 184.5 225.0 262.0 316.8 Debtors 96.1 90.0 123.0 143.2 173.2 Loans and Advances 43.5 48.8 60.9 70.9 85.7 Other Current Assets 9.4 9.8 12.9 13.1 15.8 Cash 55.7 84.7 113.5 161.5 221.2 Total Current Assets 364.0 417.8 535.4 650.7 812.7 Current Liabilities 161.5 170.8 217.1 252.8 305.7 Provisions 61.4 61.8 62.3 62.3 62.3 Net Current Assets 141.1 185.2 256.0 335.7 444.8

Total Assets 560.7 600.8 658.1 742.8 853.5



Exhibit 44: Cash flow statement (| Crore) FY13 FY14 FY15E FY16E FY17EProfit after Tax 97.3 83.9 103.2 125.3 165.9 Depreciation 24.4 31.8 41.6 45.0 48.4 Interest 3.0 3.1 2.9 1.0 1.0 Other income (10.8) (12.8) (17.7) (21.2) (25.5) Prov for Taxation 38.4 37.5 49.6 59.7 78.9 Cash Flow before WC changes 152.2 143.5 179.6 209.8 268.8 Net Increase in Current Assets 16.2 (24.8) (88.8) (67.4) (102.3) Net Increase in Current Liabilities (23.6) 9.7 46.8 35.7 52.9 Taxes Paid (34.2) (33.6) (49.8) (59.7) (78.9) Net CF from Operating activities 110.7 94.8 87.9 118.4 140.5

(Purchase)/Sale of Fixed Assets (96.3) (23.5) (28.1) (50.0) (50.0) (Purchase)/Sale of Investments (2.3) (4.3) - - - Other Income 10.8 12.8 17.7 21.2 25.5 Net CF from Investing activities (87.7) (15.0) (10.4) (28.8) (24.5)

Inc / (Dec) in Secured Loan 3.5 (6.0) (1.5) - (14.9) Inc / (Dec) in Unsecured Loan - - - - - Interest (3.0) (3.1) (2.9) (1.0) (1.0) Minority Interest 1.3 0.5 1.0 1.5 1.8 Others (42.3) (42.3) (45.2) (42.1) (42.1) Net CF from Financing Activities (40.5) (50.8) (48.7) (41.7) (56.3)

Net Cash flow (17.5) 29.0 28.8 48.0 59.7 Opening Cash/Cash Equivalent 73.2 55.7 84.7 113.5 161.5 Closing Cash/ Cash Equivalent 55.7 84.7 113.5 161.5 221.2


Exhibit 45: Ratio analysis (Year-end March) FY13 FY14 FY15E FY16E FY17EPer Share Data (|)EPS 17.6 15.2 18.6 22.6 30.0 Cash EPS 22.0 20.9 26.2 30.8 38.7 BV 93.3 100.8 111.2 126.3 148.6 Operating profit per share 27.5 26.0 32.6 38.2 48.9

Operating Ratios (%)EBITDA Margin 16.1 14.9 15.9 16.0 16.9 PAT Margin 10.3 8.7 9.1 9.5 10.4

Return Ratios (%)RoE 18.9 15.0 16.8 17.9 20.2 RoCE 23.4 19.3 21.7 23.0 26.6 RoIC 25.3 21.7 25.5 28.6 35.1

Valuation Ratios (x)EV / EBITDA 26.2 27.5 21.7 18.4 14.1 P/E 41.3 47.9 39.0 32.1 24.2 EV / Net Sales 4.2 4.1 3.5 2.9 2.4 Market Cap / Sales 4.2 4.2 3.5 3.0 2.5 Price to Book Value 7.8 7.2 6.5 5.8 4.9

- - - - Turnover Ratios (x)Asset turnover 1.8 1.7 1.8 1.9 2.0 Debtors Turnover Ratio 9.9 10.7 9.2 9.2 9.2 Creditors Turnover Ratio 5.9 5.7 5.2 5.2 5.2

Solvency Ratios (x)Net Debt / Equity - - - - - Current Ratio 1.6 1.8 1.9 2.1 2.2 Quick Ratio 0.9 1.0 1.1 1.2 1.3



Sector Overview Abrasive market

Types of abrasives

Abrasives are hard, tough and wear resistant substances for grinding and polishing operations. Manufactured through a complex and high technology process, these abrasives are used in metal removal, cutting, lapping and finishing operations in almost all industries. They can broadly be classified as bonded abrasives, coated abrasives and super abrasives. Bonded abrasives are largely used in precision applications like lapping, honing, super finishing, race grinding, thread grinding and in rough applications like snagging, tool sharpening, burr removal, abrasive parting off, weld preparation, etc. Coated abrasives products are engineering composites comprising a backing, bond system and abrasive grains and are designed for material removal and surface generation. Coated abrasives are used in auto and auto ancillaries, steel, foundry, bearings, cutting tools, construction and fabrication. Super abrasives are made up of diamond (synthetic or natural) or cubic boron nitride and are used in precision applications.

Exhibit 46: Types of abrasives

Abrasives

Bonded Coated Super

They are natural or synthetic abrasive grains bonded into a solid form, usually in the shape of a wheel.

They are abrasivegrains bonded to a flexible substrate (paper, cloth or rubber etc.) using adhesives.

They are very brittle, hard compounds (made up of diamond or cubic boron nitride) that are used in grinding and cutting.

What are they?

ApplicationRoughing, grinding and sharpening of materials and tools.

Light polishing application,Surface treatment and sanding applications.

Precision tools

IndustryAerospace, Bearings, Automotive, Steel, Construction etc.

Automobiles, Auto Ancillaries, Sanitary ware, Furniture, Fabrication and Construction industry

Aerospace, Automotive, Electronics, Medical, Composites & Oil Industry



Global abrasives market

The global abrasives market is pegged at ~$12.9 billion as on CY13. It consists of coated abrasives (36% global demand), bonded abrasives (36% global demand) and super abrasives (28% global demand).

Region wise, the abrasives market is spread across five main regions viz. - Europe (33% market share), US (20% market share), China (18% market share), India (4% market share) and Rest of the world (25% market share).

Major players in the global abrasives market include: Saint-Gobain (under Norton & Carborundum), 3M (under SIA abrasives), Tyrolit (under Radiac, Burka Kosmos), Hermes (Germany), Asahi (Japan) and Noritake (Japan).

Exhibit 47: Geographical break-up of abrasives market

US$ 4.3 bn, 33%

US$ 3.2 bn, 25%

US$ 2.6 bn, 20%

US$ 2.3 bn, 18%

US$ 0.5 bn, 4%

Europe Rest of the world USA China India


Exhibit 48: Product-wise break-up of abrasives market

US$ 4.7 bn, 36%

US$ 4.6 bn, 36%

US$ 3.6 bn, 28%

Coated Abrasives Bonded Abrasives Super Abrasives


Indian abrasives market

The abrasives market in India is pegged at | 2500-3000 crore (less than 4% of the global market), out of which 70% is organised.

There are two major players in Indian abrasives market viz. Grindwell Norton and Carborundum Universal (CUMI) have 35% market share each in the organised segment making it a duopolistic market along with some small sized and local players.

The unorganised sector consists of imports from China particularly at the lower end and some players from Europe and Japan having their agents and distributors in India.

Together, coated abrasives and bonded abrasives account for 90% while super abrasives, which are specialised products account for 10% of the market.


RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]


ANALYST CERTIFICATION We /I, Chirag Shah, PGDM Bhupendra Tiwary, MBA (FIN) Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com. ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that Chirag Shah, PGDM Bhupendra Tiwary, MBA (FIN), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that Chirag Shah, PGDM Bhupendra Tiwary, MBA (FIN), Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

Documents

Rating Matrix Grindwell Norton (GRINOR)content.icicidirect.com/mailimages/IDirect_GrindwellNorton_IC.pdf · to grow 16.4% YoY (vs. flattish sales for CUMI) in FY15, led by higher