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Carborundum Universal (CU) - Qtr. Update - Dated - May 01, 2013




Axis Capital Limited


02 May 2013





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Carborundum Universal’s (CUMI) steep drop in Q4 PAT was mainly due to higher tax rate of 66%. This was a result of it not availing tax credit on its loss-making South African operations. Normalizing the tax rate would imply PAT of over Rs 200 mn (vs. Rs 120 mn reported and Rs 300 mn expected; Rs 80 mn in Q3FY13). While macro headwinds continue, we believe margin has troughed; QoQ improvement in segment margins is visible. Significant operating leverage due to high fixed costs shall aid margin growth when business momentum revives. EMD performance a disaster in FY13; to turnaround in FY14 The steep fall in operating profit of CUMI in FY13 has been due to lower profits (swing of Rs 1.2 bn) in EMD division (~ 10% of FY13 EBIT vs. ~ 40% in FY12). This fall was due to lower profits from VAW, Russia of Rs 350 mn, loss of Rs 250 mn in FZL, South Africa (vs. profit of Rs 150 mn last year; hence profit swing of Rs 400 mn in EMD) and loss of Rs 150 mn from Microgrits facility in India (vs. profit of Rs 200 mn last year; hence profit swing of Rs 370 mn in EMD). Management is confident of turning around FZL and Microgrits in FY14 and is also upbeat on VAW operations on the back of volume pick up. This should result in EMD profit swing of at least Rs 500 mn in FY14. While economic environment continues to pose a challenge, management reiterated that there would be a slow but steady improvement in margin. Estimates and valuation: We maintain our EPS estimates of Rs 8 and Rs 11 in FY14 and FY15 and our TP of Rs 140 (13x FY15E EPS). Upgrade to BUY on price correction; implies 16% upside from CMP of Rs 121. At CMP, the stock trades at 16x FY14E EPS of Rs 7.6 and 11x FY15E EPS of Rs 10.8. Regards, Kashyap Pujara (ED – Midcaps) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1146 Farzan Madon (Asst VP – Midcaps) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1131

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