Detailed Rationale

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

 

The company enjoys healthy market share in its product categories and remains one of the largest producers of abrasives in the domestic market with over 30% market share. The business risk profile remained strong with overall revenue growing by 40% on-year in fiscal 2023 driven by healthy demand for abrasives and ceramics and ramp up in operations at the recently acquired subsidiaries in Germany (RHODIUS Abrasive GmBH and CUMI AWUKO Abrasives GmBH) and India (PLUSS Advanced Technologies). The new entities contributed around Rs 700 crore to consolidated revenue in fiscal 2023.

 

Revenue growth is expected at 1-3% in fiscal 2024 owing to depreciation of the ruble, impacting realisations, in the electrominerals segment. The abrasives and ceramics segments witnessed modest growth in fiscal 2024 and will perform slightly better in the near-to-medium term, supported by scaling up of operations at new subsidiaries. Demand for abrasives and ceramics will remain steady in the near-to-medium term.

 

Operating margin moderated to 14.1% in fiscal 2023 from 16.4% in fiscal 2022 on account of higher raw material cost and expenses in the newly acquired subsidiaries in Europe and India. However, consolidated operating margin improved to 15.1% in the first nine months of fiscal 2024. The operating margin is expected to improve to 15.5-16.0%, with the European subsidiaries likely to break even in the near-to-medium term.

 

CUMI continues to have a strong balance sheet with moderate debt of Rs 119 crore as on December 31, 2023. Interest coverage ratio, gearing and total outside liabilities to tangible net worth (TOL/TNW) ratio were healthy at 31.73 times, 0.09 time and 0.36 time, respectively, as on March 31, 2023. The company is not expected to add major long-term debt over the medium term for its capital expenditure (capex) plans. The interest coverage ratio, gearing and TOL/TNW ratio are expected above 30 times, less than 0.1 time and 0.3 time, respectively, over the medium term.

 

The ratings continue to reflect the healthy business risk profile of the company, supported by strong market position in key products, diversity in revenue profile and integrated operations. The ratings also factor in the healthy financial risk profile with comfortable capital structure and robust debt protection metrics, and the financial flexibility emanating from being part of the Murugappa group. These strengths are partially offset by volatility in operating profitability across business segments.

Analytical Approach

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 Ltd (FZL) and Sterling Abrasives Ltd (‘CRISIL A+/Stable’), as well as newly acquired entities.

 

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:

Strong market position, diversified revenue profile and integrated operations: The business risk profile is supported by its well-diversified revenue streams. The abrasives division accounted for 44% of the revenue of CUMI in fiscal 2023 supported by robust demand in domestic and overseas markets. The acquired subsidiaries, viz RHODIUS Abrasive GmbH, CUMI AWUKO and Pluss Advanced Technologies, have started contributing to the revenue, with over Rs 700 crore coming in fiscal 2023 and around Rs 600 crore in the nine months of fiscal 2024. The acquisitions in Germany have strengthened the market position of the company in Europe. Electrominerals accounted for 30-32% of the revenue in the first nine months of fiscal 2024. Ceramics and refractory segments accounted for the remaining 25%. Contribution from the abrasives segment will remain large over the medium term owing to higher contribution from the newly acquired companies.

 

The company has leading position in the domestic abrasives market and strengthening market position in the global electrominerals market. It also has a diversified customer base in terms of end-user industries, with revenue contribution from international markets (50-55% of consolidated turnover) such as Russia, Australia, China, North America and Europe. Also, it 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 work.

 

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 51% stake in South Africa-based FZL in 2008 established CUMI among a handful of global players with product offerings across the electrominerals 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 achieved healthy cost advantage through its strategy of backward integration. It has integrated backwards into silicon carbide, zirconia and brown/white fused alumina, which are key inputs for its businesses. CRISIL Ratings believes the diversified revenue profile will continue to benefit the business over the medium term and recent acquisitions will enable it to register healthy revenue growth over the medium term. Operating margin is expected to sustain at 15-16% supported by better utilisation of capacities in the newly acquired companies and continued focus on cost reduction through debottlenecking.

 

Healthy financial risk profile and financial flexibility as part of the Murugappa group

Gearing was below 0.10 time as on March 31, 2023, and will be low over the medium term with moderate increase in working capital borrowing. A strong balance sheet has provided the flexibility to weather material volatility in cash accrual, as witnessed during fiscal 2013 to fiscal 2015.

 

Improvement in profitability from fiscal 2015 and reducing debt levels have strengthened the debt protection metrics; interest coverage and net cash accrual to total/adjusted debt ratios are expected above 35 times and over 2 time, respectively, in fiscal 2024 from 11.1 times and 0.61 time, respectively, in fiscal 2015. The debt protection metrics will remain strong backed by healthy cash accrual and moderate capital spending. The company is not planning to raise any material debt over the medium term to fund its capex plans. Liquidity remains healthy, as reflected in cash surplus of over Rs 400 crore and utilised bank lines of Rs 450 crore (standalone) at 31% on average in the past 12 months. Besides, CUMI is a leading company of the Murugappa group, which adds to its financial flexibility.

 

Weakness:

Volatility in operating profitability across business segments

Profitability across key business segments - abrasives, electrominerals and industrial ceramics, and refractories - has been volatile from fiscal 2013. The abrasives division had been impacted by competitive pressures and losses in the newly acquired companies in Germany, which are precision abrasive manufacturers. However, with ramp in the new subsidiaries, profitability is stabilising and inching towards preceding levels. The electrominerals business is impacted owing to weak capacity utilisation in South Africa and unfavourable currency conversion rate for the Russian subsidiary, VAW, which contributes around 20% of the consolidated revenue of CUMI. The division’s profitability is impacted by dumping of Chinese product at lower price in the market. China is the biggest producer of electrominerals in the world. The division’s profitability will improve in the medium term with cost cutting measures and various debottlenecking exercises implemented at the South African entity and continuous improvement in demand. Also, profitability in the industrial ceramics and refractories businesses will arrest any decline in profitability in the near term.

 

Furthermore, continued improvement in industrial activity will boost profitability across business divisions over the medium term. CRISIL Ratings, however, believes that the profitability will remain susceptible to economic cycles over the medium term. Besides, trade regulations, sanctions and volatile foreign exchange movements render moderate susceptibility to business performance of its key subsidiary, VAW.

Liquidity: Strong

Cash and equivalent stood at Rs 460 crore on consolidated basis as on December 31, 2023. Cash accrual above Rs 500 crore per annum will sufficiently cover yearly capex of Rs 300-350 crore and debt obligation of Rs 17 crore per annum till fiscal 2026. Additionally, the company has access to bank lines of Rs 450 crore, which were utilised at a moderate 31% on average in the past 12 months.

 

Given the company’s strong fund-raising abilities and expected healthy cash accrual, CRISIL Ratings believes CUMI will maintain strong financial flexibility over the medium term.

 

ESG Profile of CUMI

CRISIL Ratings believes that Carborundum Universal Ltd’s Environment, Social, and Governance (ESG) profile supports its credit risk profile.

 

The manufacturing sector has moderate impact on the environment and social impact, given the nature of its operations and their influence on the surrounding community.

 

Key ESG highlights:

• CUMI is pursuing emission reduction measures with a goal to reduce remission by 25% by 2025. Fiscal 2023 saw a decrease in emission intensities compared to the previous year (by 13%)
• CUMI has reduced its water consumption intensity in fiscal 2023 by 17% along with reduction in energy consumption.
• CUMI’s  attrition rate remains one of the lowest in the industry at less than 6%. CUMI has addressed 86% of the customer grievances and maintained a consistent approach to grievance resolution over the years.
• The Company’s governance structure is characterized by 63% of its board comprising independent directors, split in chairman and CEO position, strong investor grievance redressal and extensive financial and non-financial disclosures.

 

There is growing importance of ESG among investors and lenders. CUMI commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its  share of market borrowings in its overall debt.

Outlook: Stable

CRISIL Ratings believes CUMI will maintain its strong business risk profile over the medium term driven by diversified revenue streams and strong market position. The company will sustain adequate operating profitability over the medium term. Besides, it will maintain its strong financial risk profile driven by healthy cash generating ability and well-managed balance sheet.

Rating Sensitivity Factors

Upward Factors

• Significant improvement in scale of operations, while maintaining strong market positions in key verticals, and improvement in operating margin to 16-17%, leading to better than expected cash accruals
• Prudent expansion plans and working capital management resulting in continued strong debt metrics
• Substantial increase in cash surplus

 

Downward Factors 

• Decline in scale of operations leading to pressure on operating profitability and cash generation
• Increase in gearing beyond 1.2 times owing to acquisitions or larger-than-expected debt-funded capex or working capital requirement

About the Company

CUMI, a part of the Rs 74,000 crore Chennai-based Murugappa group, manufactures abrasives, ceramics, refractories and electrominerals. The company has manufacturing plants in several locations across India, besides having plants in Russia, Germany, South Africa and Australia, and marketing operations in China, the Middle East and North America.

 

For the first nine months of fiscal 2024, CUMI, on a consolidated basis, reported net profit of Rs 334 crore on revenue of Rs 3,501 crore (Rs 293 crore and Rs 3,455 crore, respectively, for the corresponding period of the previous fiscal).

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 level	Rating assigned with outlook
NA	Bank guarantee	NA	NA	NA	8	NA	CRISIL A1+
NA	Cash credit*	NA	NA	NA	182	NA	CRISIL AA+/Stable
NA	Cash credit^	NA	NA	NA	356	NA	CRISIL AA+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	204	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 bank guarantees

^Interchangeable with short-term loan, working capital demand loan, packing credit in foreign currency, buyer’s credit, bill discounting, bank guarantee and letter of credit.

#Yet to be placed