Conference Call      
          Carborundum Universal
Q2FY12's high PBIT margin of Electro Minerals not sustainable


Carborundum Universal hosted a conference call on Nov 8, 2011. In the conference call the company was represented by K Srinivasan, Managing Director, Sridharan Rangarajan, CFO and Raja Mukherjee, DGM Internal Audit & Strategy.

Key takeaways of the conference call

Consolidated net sales for the quarter ended Sep 2011, grew by 24% to Rs 505 crore. However the EBITDA recorded an increase of 42% to Rs 120 crore with the EBITDA margin increasing to 24% from 21% in the corresponding previous period. And finally the net profit (after minority interest) was higher by 60% to Rs 66 crore.

Growth was driven by the performance of both the Indian and Overseas operations. The Electrominerals and Ceramics business segments recorded a growth rates in excess of 25%. Abrasives business grew by 15%.

Abrasives: Off-take of abrasives from user industries in India and Russia continued to be encouraging. But, the operations in America, Middle East and Canada continued to be subdued. However, the Chinese subsidiary registered good growth from a low base. Sterling Abrasives, VAW's Abrasive division and Wendt (India) in Indian abrasive segment, registered higher growth. Have strong orders for Q3 in abrasives.

Electro Minerals: Growth in revenues and also improvement in operating margins led to increase in profit before interest and tax of the electro minerals business on a consolidated basis. Growth in sales was made possible by the robust performance of the Indian, Russian and South African operations.

Ceramics : The engineered ceramics business performed well. Sales of metallized cylinders and wear resistant tiles registered strong growth. The growth in sales was driven by exports as a result of higher offtake from Canada, Europe, USA and South American markets. Australia grew by 32% for the quarter. In Refractories, good order inflow was witnessed for both fired and Monolithic products. Off-take from glass and steel industry was extremely encouraging. The joint ventures in the refractories business registered significant growth on a combined basis.

Profitability of all business segments witnessed good increase. Overseas subsidiaries recorded strong growth in sales, particularly the entities in Russia and South Africa.

Sales of the abrasives business (on consolidated basis) registered an increase of 15% to Rs 208 crore and PBIT of the same was up by 23% to Rs 30 crore gained by higher sales as well as 100 bps expansion in PBIT margin to 14.6%.

Electro Minerals recorded an increase of 25% in sales to Rs 190 crore and the PBIT was higher by 52% to Rs 55 crore. Spurt in PBIT of Electro minerals apart from higher sales is due to its PBIT margin zoom to 28.9% for the quarter compared to 23.7% in the corresponding previous quarter. Jump in PBIT margin is largely on account of Change in Mix in India as well as better realisation in VoW. The volume of EM for the quarter is flat and slightly less in some cases. Hence the entire growth came on product mix and price rise.

The ceramics segment recorded a robust 36% increase in sales on a consolidated basis to Rs 117 crore. PBIT of the same increased by 80% to Rs 27 crore. On the back of favorable product mix (increased volume in metallized cylinders with commissioning of additional line in Q3FY11) and optimum production levels, the segment margin of the same expanded to 22.9% up from 17.3% in the corresponding previous period.

Growth on QoQ basis for Q2FY12 is unusual given the fact that Q1FY12 is always strong for the company.

Translation impact in topline for the quarter is a gain of Rs 2 crore and on YTD basis it is a gain of Rs 14 crore. On sequential basis it is a loss of Rs 3 crore.

Reduction in profit on account of withdrawal of DEPB amounts to Rs 1.5 crore in H1FY12.

Standalone PBT margin for the quarter ended Sep 2011 expanded by 100 bps to 16.6% on year on year basis and it contracted on sequential basis by 110 bps from 17.7% in Q1FY12.

Expansion in PBT margin on year on year basis is on account better price realisation to the extent of 20 bps, semi fixed costs to the extent of 150 bps and lower interest to the extent of 40 bps. Which was offset by 110 bps on account of forex loss (agains gain), lower dividend and management fee.

Similarly contraction on QoQ basis is largely on account of lower management fee to the extent of 120 bps, higher salary 50 bps and others 90 bps. Which was offset by lower interest 20 bps, better price realisation of 110 bps.

The Q2FY12 Electro Minerals PBIT margin of 28.9% is not sustainable and the more sustainable EBIT margin is around 24-25%.

Disproportionate margin came in Q2FY12 and EM will shed its margin going forward. However other business is expected to sustain/maintain their Q2FY12 performance for rest of the fiscal. In terms of revenue Q3FY12 will be as such as that of Q2FY12, but Q3FY12 bottomline will be lower than that of Q2FY12 as the latter (i.e.Q2FY12)has the advantage of better performance of VoW and translation gain which is not sustainable.

Of the total revenue of the company about 55% is from India and about 45% from outside of India (24% is from Europe and balance 21% from rest of world including 10% from Australia, 5% from Americas).

The JV with Salerez of Israel is for special grade (fibre) refractories and in JV CUMI will hold 51% and Israel company will hold 49% stake. JV's Phase I project will be more of a technology demonstrator and once that is stabilized and taken commercial under Phase II only there will be meaning full ramp up in revenue. The project is coming up in Cohin SEZ.

Sold its entire stake in Laserwoods, a prepublishing company for a consideration for Rs 50 crore that is not included in the financials of Q2FY12 but will be accounted in Q3FY12.

Standalone debt stand reduced to Rs 220 crore as end of Sep 2011 (down from Rs 251 crore ) on account of repayment of ECB with its maturity. Of the 220 crore of debt shorterm debt is Rs 95 crore and rupee loan is Rs 90 crore.

Debt equity level improved from 0.62 as on Sep 2010 to 0.51 as on sep 2011 on consolidated level.

Chinese antidumping duty of 52% in Europe has gone. The impact of the same on company's European operation ie. Russia is to be seen. There is not much of impact in Q2FY12 but may get reflected in Q3FY12 if there is any dumping by China.

Lot of value added and higher margin products are going to be on offer in next fiscal. For Russia the company is going to have backup strategy with Chinese becoming a real threat in Europe market. For Ceramics it is going to be Value creation and volume for Ceramics. Higher utilisation of abrasives in China and Russia. Value added products.

Expect 15% growth for current fiscal with general slowdown in Europe along with increased Chinese competition.

Unallocable expenses on consolidated segment - Extraordinary repair which is not allocated segment wise as well as some other legal expenses related to Wendt India litigation.

The company manufacturers Black Silicon Carbide but China produces predominantly Green Silicon carbide. The price offered by China is USD 2400/ tonne and the company could offer its Black Silicon Carbide at USD 2100/ tonne and even at this price point the company will make a margin over 20%. However Chinese domestic demand is more right now whether they will aggressively fight in Europe has to be seen even if they do the company has advantage as of now.

China is the major capacity adding country as far as Silicon Carbide is concerned.

Almost all the plants are running on full capacity barring EM where there is some headroom and coated ceramics where utilisation stand at 60%.

The realisation in refractory grew by 2-3% flat on yoy basis. EM by about 15% yoy. The metallized cylinders was up by 10-15% and engineered ceramics was up about 12-15%.

Employee cost will be maintained around 10-11.5% of net sales.

Metallized cylinders whose user industries i.e. power equipment mfrs are planning to grow their production by 15% and this is expected to drive demand for this products.

Bonded abrasives – the company is still behind in deliveries. It is debottlenecking the plant to augment capacity as well as trying to bring in some products from China which has a capacity of 3000 tonnes.
Previous Stories