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Thursday, July 16, 2009

Grindwell Norton Ltd:-Will you buy/sell or hold it?

Scripscan:Grindwell Norton Ltd

Story:Grindwell Norton Ltd. (GNL) came into being when a technical collaboration in 1967 between Grindwell and the then world leader in abrasives – Norton Company, USA, grew into a financial collaboration in 1971. GNL is a 51.3% subsidiary of Saint Gobain (SG) of France and India’s leading manufacturer of Abrasives (bonded, coated and super abrasives), Silicon Carbide and High Performance Refractories.GNL recorded a 2.9% degrowth in revenues on a Y-o-Y basis in Q1CY09 and 2.3% fall Q-o-Q at Rs.114.3 cr. This was mainly on account of sharp fall in volumes and value of each of GNL’s products. Bonded abrasives witnessed fall of 15-20% in volumes, coated abrasives saw a fall of 5% whereas thin wheels volumes improved by 5% in Q1CY09. Performance Plastics and refractories also witnessed a volume degrowth of 10% and 15% respectively. However, the others division, which accounts for revenue from the Project Engineering has done well during the quarter.The total expenditure fell by 3.3% Y-o-Y and by 3.8% Q-o-Q. Raw materials and staff cost have risen 250 bps and 150 bps respectively as a percentage of sales in Q1CY09. Staff cost increased on account of 6% hike in salary and higher wages post settlement been paid at one of GNL’s plant. Power and fuel cost has dipped by 170 bps Y-o-Y and 220 bps Q-o-Q as apercentage of sales. With the full-fledged commencement of operations at the Bhutan Plant in July 2009, the power and fuel cost could further see a dip on consolidated basis, which could ease the pressure on the margins. Other expenditure has dipped to 18.6% as a percentage of sales. Although the sales have dipped, control in costs have led to margin expansion by 40 bps Y-o-Y and 140 bps Q-o-Q to 14.3%.Despite the benefit of excise and income tax for 5 years at the HP plant, GNL continues to pay 31% tax rate as the plant hasn’t been fully utilised. GNL has managed to keep its PAT margins at the same level of 10.4% in Q1CY09. During the quarter, GNL earned an EPS of Rs.2.1, down by 5.7% Y-o-Y and down by 4% Q-o-Q.The abrasives industry has been hit very badly post October 2008 due to the severe slowdown in its user industries – automobile, auto ancillary and engineering. Also reduction in inventory further impacted the sector. Despite degrowth in the sector GNL has managed to keep its market share intact at 31%.The Bhutan plant JV came into operation in May 2009 and would have a total capacity of 10,000 tonnes p.a. GNL has entered into a contract with the Bhutan Government for next 5 years, wherein the company will benefit from the low power cost. As of Q1CY09, the power cost stands at 8% of the total expenditure. As per the contract, the power cost is expected to be not more than 6%. This will help reduce the cost of Silicon Carbide and improve margins.GNL has indicated a capex of Rs.31-33 cr CY09. Out of this capex Rs.15-16 cr would be used for the remaining work at the HP plant and the balance would be normal capex. The HP plant has not yet been fully utilised due to slowdown in demand. We believe pick-up in orders could give a push to the production at this plant and could boost its earnings. GNL has witnessed marginal growth post Q1CY09 on the back of infrastructure spending announced by the Government. As per the management, coated abrasives could continue to do well as the infrastructure spending increases. Even though the coated abrasives could do well, the management has indicated degrowth in Silicon Carbide and Refractories business, which could impact the overall business revenues and margins. Also the fall in power cost could only be a small relief.We think that under the changed circumstances recovery in demand for products of GNL could happen only after Q3CY09 and GNL could post a ~5% dip in sales and ~10% dip in PAT in CY09. The full benefit of recovery in demand and operations of HP and Bhutan plant may be available in CY10. In the meanwhile the stock price could see lower levels. Investors could exit the stock in the Rs.100-110 band.

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