Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on th bank facilities and debt instruments of Carborundum Universal Limited (CUMI).

 

CUMI’s operations were impacted in the first quarter of current fiscal due to lockdown related disruptions. However, post gradual lifting of restrictions, restoration of demand from end user industries helped in quick ramp up of operations. CUMI also utilized the lockdown period to improve its cost structure and production efficiencies which helped in improving operating margins. Thus, despite a weak Q1 performance, company is expected to maintain revenues and operating profits in fiscal 2021.

 

CRISIL Rating’s ratings 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 the goodwill related to the acquisition of VAW of Rs.68.72 crores over a 10-year period. This has resulted in goodwill amortisation (for six months) of Rs.3.4 crores for fiscals 2008 and 2018, and Rs.6.9 crores (for 12 months) from fiscal 2009 to 2017.

 

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 (39% of consolidated revenue in first 9 months of fiscal 2021) overtook the abrasives business (36% of consolidated revenues in first nine months of fiscal 2021) as the largest contributor to its revenue. 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 (45-50% 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 Foskor Zirconia (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. While fiscal 2021 is expected to be flattish, CRISIL Ratings believes that the diversified revenue profile will benefit CUMI's business position over the medium term, and enable it to register revenue growth of 10-12%. Operating profitability is also expected to sustain at healthy levels of 15-17%, 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 estimated gearing of under 0.1 times at March 31, 2021; the gearing levels are estimated to be almost 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 2021 are estimated to be over 100 times and over 5 times, 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, which will not necessitate material debt raising. CUMI's financial flexibility also continues to remain healthy, as reflected in its own largely unutilised bank lines, and cash surplus of ~Rs 400 crores (standalone) as of December 2020. 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 Ratings, 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.250-300 crores (annually), and will be sufficient to fund the ongoing and proposed capex. Additionally, the company has access to bank lines, which have been sporadically utilized in the recent past and cash surplus of ~Rs 400  crore (standalone) as on December 31, 2020.

 

Capex spends is also likely to be Rs 80-100 crore annually in medium term towards new product development, augmenting and debottlenecking its plant capacities. Given the company’s strong fund raising abilities, expected adequate accruals and liquid surplus, CRISIL Ratings believes that CUMI will maintain its strong liquidity 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. CRISIL Ratings also believes that CUMI will maintain its healthy financial risk profile driven by its healthy cash generating ability and its strong balance sheet.

Rating Sensitivity Factors

Upward Factors:

• Significant improvement in CUMI’s scale of operations and sustenance of operating margins at over 18-20%, leading to better than anticipated cash generation
• Prudent expansion plans and working capital management, resulting in continued strong debt metrics; for instance, gearing of 0.5 times on a sustainable basis
• Sustenance of strong liquid surplus

 

Downward factors: 

• Sharp decline in CUMI’s scale of operations leading to pressure on its operating profitability (below 10-12%), 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. 38,105 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 2021, CUMI, on a consolidated basis, reported a net profit of Rs 197 crore (Rs 181 crore for the corresponding period in the previous year) on revenue of Rs 1,875 crore (Rs 2005 crore for the corresponding period in the previous year).

Key Financial Indicators (Consolidated)

As on/for the period ended March 31	Unit	2020	2019
Revenue	Rs crore	2599	2689
Profit After Tax (PAT)	Rs crore	275	248
PAT Margin	%	10.6	9.2
Adjusted debt/adjusted networth	Times	0.03	0.06
Interest coverage	Times	77	57

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

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

#Nil outstanding against the NCDs

Annexure – List of entities consolidated

Name of Entity	Extent of Consolidation	Rationale for Consolidation
Volzhsky Abrasive Works (VAW), Russia	Full	Subsidiary, business synergies
Foskor Zirconia Pty Limited (FZL), South Africa	Full	Subsidiary, business synergies
Sterling Abrasives Limited	Full	Subsidiary, business synergies
Net Access India Limited	Full	Subsidiary, business synergies
Southern Energy Development Corporation Limited	Full	Subsidiary, business synergies
CUMI International Limited	Full	Subsidiary, business synergies
CUMI (Australia) Pty Limited	Full	Subsidiary, business synergies
CUMI America Inc	Full	Subsidiary, business synergies
CUMI Middle East FZE	Full	Subsidiary, business synergies
CUMI Abrasives & Ceramics Co., Limited	Full	Subsidiary, business synergies
CUMI Europe s.r.o	Full	Subsidiary, business synergies