Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the non-convertible debentures, short term debt and bank facilities of Carborundum Universal Limited (CUMI).

 

CUMI’s operations despite being impacted by the second and third covid waves are expected to stage a strong recovery, supported by demand from end user industries like automotive sector, real estate and engineering and exports. Revenues are expected to register a healthy 15% growth in fiscal 2022, supported by steady demand from end-user industries, and over 25% in fiscal 2023 driven by steady demand and full benefit of revenues from moderate sized acquisitions made in fiscal 2022.

 

Operating profitability continued to improve due to pass on of increase in raw material prices and past operational efficiencies. Cost cutting measures during pandemic period helped in operating margins improving by ~200 bps to ~17.5% in fiscal 2021 despite revenues remaining stagnant. The benefits have continued in current fiscal also with operating margin being maintained over 17% despite increase in raw material prices. Over the medium term also, CRISIL Ratings expects company to maintain its healthy margins profile aided by strong market position in key products, the diversity in its revenue base, and its fairly integrated operations.

 

CUMI’s financial risk profile is strong driven by net worth of over Rs.2131crore as on March 31, 2021 and a net debt free balance sheet. Leveraging on the strong balance sheet, CUMI has announced 3 acquisitions during fiscal 2022. CUMI acquired a ~72% stake in PLUSS Advanced Technologies Limited (PLUSS) for Rs 115 crore. PLUSS is engaged in research and manufacturing of phase change materials for thermal energy storage. The second acquisition is being done in Germany for the assets of an entity under insolvency (AWUKO) for an estimated consideration of Euro 8 mn. AWUKO is engaged in manufacturing of coated abrasives and has an established plant and marketing set up in Europe. Further on February 2, 2022, CUMI announced acquisition of 100% stake in RHODIUS Abrasives, at a valuation of Euro 55 million. Total outflow on account of these acquisitions is estimated at ~Rs 650 crore. All these acquisitions are in existing lines of business and are expected to further strengthen product offerings as well as geographical diversity in revenue.

 

CRISIL Ratings expects that these acquisitions will be prudently funded with CUMI relying largely on existing cash surpluses. Even post these acquisitions, CUMI is expected to maintain a net debt free balance sheet over the medium term. Moreover, accruals of over Rs 350-400 crore in fiscals 2022 and 2023 will be sufficient to meet annual capex spends of ~Rs 120 crore and incremental working capital requirements.

 

CRISIL Ratings’ ratings on the debt facilities of CUMI continue to reflect the company’s healthy business risk profile, marked by its strong market position in key products, the diversity in its revenue base, and its fairly integrated operations. The ratings also factor in the company’s healthy financial risk profile, marked by a very comfortable capital structure and robust debt protection metrics, and the company’s financial flexibility emanating from being part of the Murugappa Group. These rating strengths are partially offset by the volatility in CUMI’s operating profitability across business segments.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of CUMI and its majority owned subsidiaries (prominent among them are Volzhsky Abrasive Works (VAW), Foskor Zirconia Pty Limited (FZL) and Sterling Abrasives Limited (rated ‘CRISIL A+/Stable’). CRISIL Ratings has also amortised goodwill on account of acquisition of VAW over 10 years.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy business risk profile marked by strong market position, diversified revenue base and fairly integrated operations: CUMI's healthy business risk profile is supported by its well-diversified revenue streams.  The electro-minerals (38% of consolidated revenue in first six months of fiscal 2022) overtook the abrasives business (37% of consolidated revenues in first six months of fiscal 2022) as the largest contributor to its revenue in fiscal 2021. The industrial ceramics and ceramics business accounted for the balance revenues.

 

The company has a leadership position in the domestic abrasives market, and strengthening market position in the global electro-minerals market. It also has a highly diversified customer base in terms of end-user industries, with revenue contribution from international markets (~50% of consolidated turnover) such as Russia, Australia, China, North America, and Europe. CUMI caters to a diverse set of end user industries including auto original equipment manufacturers (OEMs), auto ancillaries, general engineering, fabrication, foundry, industrial projects, construction and metal working.

 

With a market share of over 30% in the bonded abrasives segment, CUMI is a strong player in the Indian abrasives industry. The acquisition of VAW in 2007 and the 51% stake in South Africa-based FZL in 2008 established CUMI among a handful of global players with product offerings across the electro-minerals value chain; besides, with these acquisitions, the company emerged as the second-largest producer of silicon carbide, and the third-largest producer of zirconia globally. The company has also achieved healthy cost advantages through its strategy of securing the back-end. It integrated backward into silicon carbide, zirconia, and brown/white fused alumina, which are key inputs for its businesses. CRISIL Ratings believes that the diversified revenue profile will benefit CUMI's business position over the medium term, and benefit of recent acquisitions will enable it to register healthy double digit revenue growth over the near to medium term. Operating profitability is also expected to sustain at healthy levels of 17-18%, supported by better utilisation of capacities and continued focus on cost reduction.

 

• Healthy financial risk profile and the financial flexibility as part of the Murugappa Group: CUMI's financial risk profile remains healthy as reflected by its gearing of under 0.1 times at March 31, 2021; the gearing levels were  at the lowest levels over the past five years. CUMI's strong balance sheet strength has provided it with the flexibility to weather material volatility on its cash accruals, as was witnessed during fiscal 2013 to fiscal 2015.

 

The improvement in profitability from fiscal 2015 onwards, and reducing debt levels, has strengthened CUMI’s debt protection metrics over time; its interest coverage and net cash accruals to debt ratios for fiscal 2022 are estimated to be over 100 times and over 1 time, respectively, from 11.1 times and 0.61 times in fiscal 2015. CRISIL Ratings believes that CUMI's debt protection metrics will remain strong on the back of healthy cash accruals and only moderate capital spending. Modest debt raising, to part fund recent acquisitions will not impact debt metrics materially. Liquidity also continues to remain healthy, as reflected in its own largely unutilised bank lines ~Rs 400 crores (standalone) as of December 2021 and cash surpluses of over Rs. 600 crores (on a consolidated basis as on September 30, 2021), which though will be used largely to fund recent acquisitions. Besides, it is a leading company of the Murugappa group, which adds to its financial flexibility.   

 

Weakness:

• Volatility in operating profitability across business segments: CUMI's profitability margins across its key business segments - abrasives, electro-minerals, and industrial ceramics and refractories have been volatile from fiscal 2013 onwards. The abrasives division had been impacted by competitive pressures and rise in input costs due to rupee depreciation in the past. However, with an increase in volumes, the margins have improved since fiscal 2015. Ceramics business had witnessed moderation in profitability, owing to project deferments in domestic business. However, strong ramp up in industrial ceramics business is expected to bode well for profitability in the near term. The electro-minerals business was earlier impacted due to weak capacity utilization in South-Africa. The division’s profitability is expected to improve driven by relocation of facilities of South African entities, uptick in pricing due to strict environmental regime in China and improvement in demand environment.

 

Furthermore, expected improvement in industrial activity is expected to bode well for CUMI's profitability across business divisions over the medium term. CRISIL, however, believes that CUMI’s profitability will remain susceptible to economic cycles over the medium term. Besides, trade regulations and volatile foreign exchange movements also render moderate susceptibility to business performance of its key subsidiary, VAW.

Liquidity: Strong

CUMI has strong liquidity. The company’s accruals are expected to remain at healthy levels of over Rs.350-400 crores (annually), and will be sufficient to fund the ongoing and proposed annual capex of ~Rs 120 crore. Additionally, the company has access to bank lines, which have been largely unutilized in the last 12 months ended December, 2021. Cash surpluses of over Rs.600 crores (on a consolidated basis as on September 30, 2021) will be largely deployed to fund recent acquisitions, but should gradually build up over the medium term.

 

Given the company’s strong fund raising abilities, expected adequate accruals, CRISIL believes that CUMI will maintain its financial flexibility over the medium term.

Outlook: Stable

CRISIL Ratings believes that CUMI will maintain its business risk profile over the medium term, driven by its diversified revenue streams and strong market position in the abrasives segment. CUMI is also likely to maintain its healthy financial risk profile driven by its good cash generating ability and its strong balance sheet.

Rating Sensitivity Factors

Upward factors:

• Better than anticipated improvement in CUMI’s scale of operations, including through inorganic route, and sustenance of operating margins at over 18-19%, leading to higher cash generation
• Prudent expansion plans and working capital management, resulting in continued strong debt metrics and material increase in liquid surplus.

 

Downward factors: 

• Sharp decline in CUMI’s scale of operations leading to pressure on its operating profitability, and cash generation
• Significant increase in gearing beyond 1.2 times due to large acquisitions or larger-than-expected debt-funded capex or working capital requirements

About the Company

CUMI, a part of the ~Rs. 42000 crore Chennai-based Murugappa group, manufactures abrasives, ceramics, refractories, and electro-minerals. The company has manufacturing plants in several locations across India, besides having plants in Russia, South Africa and Australia, and marketing operations in China, Middle East and North America.

 

For the first nine months of fiscal 2022, CUMI, on a consolidated basis, reported a net profit of Rs 291 crore (Rs 197 crore for the corresponding period in the previous year) on revenue of Rs 2455 crore (Rs 1875 crore for the corresponding period in the previous year). 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Crore)	Complexity levels	Rating Assigned with Outlook
NA	Bank Guarantee	NA	NA	NA	150	NA	CRISIL A1+
NA	Cash Credit*	NA	NA	NA	400	NA	CRISIL AA+/Stable
NA	Short-Term Debt	NA	NA	7-365 days	60	Simple	CRISIL A1+
NA	Non-Convertible Debentures#	NA	NA	NA	200	Simple	CRISIL AA+/Stable

*Interchangeable with short term loan, working capital demand loan, packing credit in foreign currency, buyer’s credit, bill discounting, bill guarantees and letter of credit.

#Yet to be placed