Alpha | Grindwell Norton Ltd. – Equity Research Desk

Grindwell Norton Ltd. – Saint Gobain Group

Grindwell Norton pioneered the manufacture of grinding wheels in India in 1941 and became the first majority-owned subsidiary of French major Saint-Gobain in India. Company’s businesses include abrasives, ceramics & plastics (includes silicon carbide, performance ceramics and refractories, performance plastics, ADFORS) and others.

The company has its registered and corporate office in Mumbai and its manufacturing units are located in Mora (near Mumbai), Bengaluru, Tirupati, Nagpur, Bated (Himachal Pradesh) and Halol (near Vadodara). The regional/ branch offices are located at Ahmedabad, Bengaluru, Chennai, Jamshedpur, Kolkata, Ludhiana, Noida, Pune, and Navi Mumbai.

Products & Services:

The company business includes four segments namely Abrasives, Ceramics & Plastics, Digital services and others.

Abrasives – The company manufactures and markets a full range of bonded abrasives, coated abrasives (including non-woven abrasives), thin wheels and super abrasives

Ceramics & Plastics – The segment includes silicon carbide (SiC), performance ceramics and refractories (PCR), performance plastics (PPL) and ADFORS. The performance plastics business develops products with high performance properties such as fluid systems, Foams & Tapes, Bearings, etc. ADFORS manufactures polyester mesh for use in coal mining operations.

Digital services – It includes IT Development Centre (INDEC), which provides IT infrastructure monitoring and management solutions & services to parent Saint-Gobain businesses globally.

Others – Certain Teed business, which offers exterior building products. Its portfolio stretches from individual houses, resorts and educational institutions to government buildings and mega townships.

Subsidiaries: As on FY23, the company had 2 Subsidiaries, 1 Joint Venture and 1 Associate company.

Key Rationale:

• Strong Parentage – Grindwell Norton is amongst the top two players in India in abrasives with an overall market share of ~26% (30-35% share in the organised space). Company, with silicon carbide crude and grain facilities at Tirupati (Andhra Pradesh) and near Phuentsholing (Bhutan), is a lead player in silicon carbide grains in India. With such a strong presence across the value chain, the company is able to maintain strong pricing power with focus on profitability. The parent Saint-Gobain is a world leader in high-performance solutions, which, with its technological capability, a strong R&D set up and marketing/sales reach across the globe, has innovative offerings and an impressive product portfolio. Saint Gobain’s R&D support provides Grindwell an edge in product innovation and solutions.

• Recent Acquisitions – The company’s recent acquisition, PRS Permacel, has become a wholly-owned subsidiary effective May’22. It is a manufacturer of pressure-sensitive adhesive tapes (PSAT) and it caters to end industries like EVs, railways, aerospace, defence and steel. The purchase consideration is of Rs.122 crs. The target company has major share in aesthetic decals business with major 2-wheeler manufacturers. Permacel has a manufacturing facility in Ambarnath, near Mumbai. The performance plastic business is the key division in the ceramics & Plastics segment of the company and the recent acquisition will add the fuel for the growth. The company also recently commissioned its Paper Maker facility in Bengaluru campus to manufacture paper based abrasive products.

• FY23 – The company reported a revenue growth of 26% YoY in FY23 to Rs.2541 crs. The EBITDA had a growth of 25% YoY to Rs.498 crs in FY23 with an EBITDA margin of 19.6%, a decline of 30 bps from FY22. The Profit after tax reported a growth of 23% YoY to Rs.362 crs in FY23 from Rs.295 crs in FY22. Segment wise, Abrasives reported a revenue growth of 12% YoY, followed by Ceramics & Plastics with 47% YoY, Digital services with 22% YoY and others with 64% YoY in FY23.

• Financial Performance – The company’s revenue and PAT CAGR stands at 12% and 20% between FY18-23. The company has generated a cumulative operating cashflow of around Rs.1275 crs in the last 5 years. The Operating Cashflow to PAT (CFO/PAT) ratio stands at 98% in FY23 which indicates that the company is extremely good at converting accounting profit into cash. The same ratio for the average of last five years (FY19-23) stands strong at 105%.

Industry:

India’s Capital Goods manufacturing industry serves as a strong base for its engagement across sectors such as Engineering, Construction, Infrastructure and Consumer goods, amongst others. Capital Goods sector contributes to 12% of India’s manufacturing output and 1.8% to GDP. Market valuation of the capital goods industry was US$ 43.2 billion in FY22. India’s Target Production size of capital goods will be $ 112 Bn by 2025. The Indian machine tools market size reached US$ 1.4 Billion in 2022 and is expected to reach US$ 2.5 billion by 2028, exhibiting a growth rate (CAGR) of 9.4% during 2023-28.  Indian machine tool production and consumption were estimated at Rs. 6,602 crore (US$ 879.38 million) and Rs. 12,036 crore (US$ 1.6 billion), respectively, in FY21, while exports stood at Rs. 531 crore (US$ 66.48 million). Manufacturing could be the sectoral leader in this cycle with a significant push coming from the government and geo-political factors now favouring India. The policy reforms like tax concessions, PLI and duties/import bans are big drivers for investments to capitalise on China+1 sentiments.

Growth Drivers:

• In Budget 2023-24, Government has committed an outlay of Rs. 10 lakh crore (US$ 120 billion) during 2023-24 towards infrastructure capital expenditure compared to Rs. 7.5 lakh crore (US$ 90 billion) (BE) during 2022–23

• Urban areas are expected to become home to 40% of India’s population and contribute to 75% of India’s GDP by 2030 with the increase in urbanization.

• Vehicle penetration is expected to reach 72 vehicles per 1000 people by 2025.

Competitors: Carborundum Universal

Peer Analysis:

Grindwell (26%) and Carborundum (25%) enjoys the major part of market share in the highly concentrated Abrasives industry. These two players are dominant in the industry with few other small players and others who depend on Chinese imports. Grindwell is way ahead of its competition in terms of Margins, return ratios and debt profile.

Outlook:

The contribution from Abrasives to the overall revenue has been drastically decreased from 70% in FY14 to 50% in FY23. This is the result of the outperformance of Ceramics & Plastics segment of the company. The Ceramics & Plastics segment contributed 41% of the overall sales in FY23 from just 27% in FY24. This helped the company to diversify its revenue profile. The contribution to EBIT (Earnings before Interest and Tax) is high from the Ceramics & Plastics segment at 50% in FY23 from just 28% in FY14. The performance ceramics & plastics are high margin business and the robust growth in the segment will eventually lead to an increase in the ROCE going forward. We expect the company to benefit from its latest acquisitions, high margin product business, parent support and the industrial recovery in India post covid along with the high capital investment outlay in the Budget 2023-24.

Valuation:

Grindwell Norton with its market leader status backed by a large parent group is a strong play in the near duopolistic abrasives market.  We recommend a BUY rating in the stock with the target price (TP) of Rs.2230, 40x FY26E EPS.

Risks:

• Demand related Risk – Though the company has a diversified end user portfolio, any slowdown in the demand from the major contributor like Auto & Auto ancillary sector will impact the revenue of the company.
• Technological Risk – Technological changes in the abrasives industry is very common and any lack of investment in upgrading the facility, technology, etc, will make the company obsolete.
• Forex Risk – Company imports a major part of its grain requirements. Any depreciation in the Indian rupee vs. its peers will leave a significant challenge for the company.