Grindwell Norton Driven By Value-additions

The abrasives industry in India currently has two major players offering a full range of abrasives products, one of which is Grindwell Norton which has a leadership position in several product-market segments 

The businesses of the Saint-Gobain Group in India are housed in two large entities, Grindwell Norton Limited (GNO), a publicly traded company, and Saint-Gobain India (P) Ltd. (SGIPL). Grindwell Norton is a part of the high-performance materials division, which is a part of the innovative materials sector of the group. Listed on the Bombay Stock Exchange and National Stock Exchange, the company pioneered the manufacture of grinding wheels in India in 1941. Saint-Gobain currently holds 51.66 per cent of the equity capital of GNO. Currently, GNO’s businesses include abrasives, silicon carbide, high-performance refractories, performance plastics and ADFORS. 

INDEC (the captive India IT development centre for the Saint-Gobain Group globally) is also a part of GNO. GNO’s subsidiary, Saint-Gobain Ceramic Materials Bhutan (P) Ltd., manufactures silicon carbide. GNO holds 70 per cent of the equity of this company. The certainteed business, which is a part of the construction products’ sector of Saint-Gobain, also operates under GNO. The company offers the widest range of cutting-edge abrasive products to the Indian market. While the vast majority of these products are made by GNO in India, some are sourced from other plants of Saint-Gobain or from third parties.

To augment its manufacturing capacity, GNO also has contract manufacturing facilities in India and extensive sourcing arrangements from countries outside of India. Silicon carbide (SiC) grains are used primarily as raw material in the manufacture of abrasives, refractories and for stone polishing. In the domestic market, there are three main players (including GNO) in the SiC business and GNO is the market leader. It has a captive IT services unit which provides various IT services, as for example, application development, infrastructure management, and cyber security to the Saint-Gobain Group globally. The IT services unit has around 660 people. The captive centre follows the cost-plus model.

Sector Overview
The abrasives industry in India currently has two major players offering a full range of abrasives products, one of which is GNO. GNO has a leadership position in several productmarket segments. Over the years, imports from China have significantly increased in the lower tiers of the market. Quality and performance levels of these products have also improved, thus offering a very good value proposition to the customers. Coupled with increased affordability and availability of power tools, the end-users have been shifting to more mechanised forms of work leading to a strong growth in the right-angle grinding products.

The main businesses in ceramics and plastics segment are silicon carbide, performance ceramics and refractories and performance plastics. The silicon carbide market is also catered to by imports, mainly from China, Vietnam and Russia. The key requirements for success in the industry are quality and cost-competitiveness. Entry barriers are high by way of capital investment and technology. PCR refractory products find use in applications across industry segments like primary iron and steel, primary nonferrous metals, secondary steel, secondary iron, secondary nonferrous, petrochemicals, waste to energy systems, etc. PCR ceramic products are used in applications in industry segments like sanitary ware, table ware, ballistic armour protection, wear resistance systems, etc.

Financial Overview
Considering the performance of the company recorded for the second quarter of FY22, on a consolidated basis the company recorded net sales and other operating income of Rs 512.67 crore which reported a growth of 16.77 per cent from Rs 439.04 crore reported in Q2FY21. On the other hand, the operating profit recorded at Rs 111.13 crore in Q2FY22 as compared to the operating profit of Rs 101.17 crore in Q2FY21. Q2FY22 recorded a net profit of Rs 71.9 crore in comparison with net profit of Rs 64.44 crore in the same quarter in the previous year, giving rise of 11.58 per cent. The revenue growth crossed the prepandemic levels, primarily aided by strong performance in abrasives, ceramics and plastic segment.

Revenue contribution from abrasives, ceramics and IT services stood at ~60 per cent, ~32.3 per cent and ~6.5 per cent, respectively. The abrasive segment revenue grew 18 per cent to Rs 307.9 crore on a YoY basis whereas the ceramics and plastic segment grew 15.7 per cent to Rs 165.4 crore on a YoY basis while IT services segment grew 10 per cent to Rs 33.5 crore on a YoY basis. Overall, the EBITDA margin came in at 19.7 per cent versus 21.3 per cent recorded in Q2FY21 whereas it marginally declined 10 bps on a QoQ basis. This was primarily impacted by lower gross margins, which declined 60 bps to 53.7 per cent on a YoY basis due to passthrough lag for higher commodity prices.

On the annual front, its net sales and operating income grew by 3.69 per cent from Rs 1,579.57 crore in FY20 to Rs 1,637.91 crore in FY21. The operating profit advanced by 23.02 per cent in FY21 as compared to FY20, recording at Rs 375.05 crore compared to Rs 304.88 crore. The net profit ascended by 29.33 per cent in FY21, recording Rs 237.81 crore as compared to Rs 183.88 crore in FY20. On the ratios front, the ROA, ROCE and ROE have improved in FY21 as compared to FY20. The net cash flows from operations have zoomed from Rs 318 crore in FY20 to Rs 331 crore in FY21.

Outlook
Grindwell Norton has witnessed strong and positive free cash flows consistently over more than a decade irrespective of the macro environment. Also, the company has been delivering good profit growth over the last five years. Saint-Gobain is a major player worldwide in abrasives. It has a strong product portfolio, well-established research and development set-up with projects in both basic and applied areas and a global reach with plants and marketing or sales organisations all over the world. GNO benefits from being a part of such an organisation in terms of access to all developments in products and process technology and sourcing of products and development of exports.

The stock of the company has gained around 19 per cent in the last one month whereas it has been 47.94 per cent in the last six months. As compared to its peers, the company is trading at a high PE ratio and appears to be expensive, but the growing automotive, metal fabrication, machinery, electronics, electrical, medical and construction industries are likely to contribute significantly towards the growth of the abrasives market which in turn will benefit major players like Grindwell Norton. The company works with an ambition to maintain market share in abrasives and increase market share in ceramic and plastics with gradual penetration of new value-added products. Going forward, high value-added products and solutions-oriented approach is predicted to drive the margin expansion. Hence, considering the company’s net debt-free balance-sheet, double-digit return ratios and strong cash generation, we recommend HOLD for this stock.