ECONOMY

Carborundum Universal’s Shares Gain As Citi Initiates Coverage With A ‘Buy’

Shares of Carborundum Universal Ltd. gained after Citi Research initiated coverage on the abrasives maker with a ‘buy’ rating, citing a “long growth runway”.

Carborundum, a Murugrappa Group company, is one of the two large Indian abrasives manufacturers, making the market structure favourable for it, the research firm said in a note. It has around 25% market share in the sector. Domestic abrasive business has pan-India distribution acting as entry barrier for new players, the note said.

According to Citi, the company would also be a beneficiary of domestic capex and industrial activity improvement, with its wide product portfolio and diversified customer base.

“Its businesses are leveraged to both consumable demand growth and new projects, and we see healthy medium-term trends supported by government push on promoting domestic manufacturing,” Citi said. “Measures to move up the value chain across exports businesses augur well for profitability.”

Carborundum, according to the note, has been moving up the value chain in ceramics, its most profitable segment. “Its ceramics business is knowledge-based requiring application engineering skills, customised designs, high degree of product reliability and durability. This creates customer lock-in and higher margins.”

In electrominerals, the company targets to increase the share of specialty sales to about 35% from close to 20% now, the note said. It also aims to increase precision abrasives exports.

Citi has set a target price of Rs 950 on Carborundum, listing the company among its India industrials top picks, along with Bharat Electronics Ltd. and Larsen & Toubro Ltd.

The research firm also further upside to the abrasives stock as it currently trades at a discount to peer Grindwell Norton and non-PSU sector average. “Several new industrial/infra capex-linked opportunities have emerged for Carborundum over the last one year which, along with efforts to move up the value chain, can result in further upside.”

Citi, however, has also highlighted certain risks facing the company.

  • Near-term logistical challenges.

  • Inability to pass through raw material cost volatility.

  • Technological obsolescence.

  • Keener competition.

Shares of Carborundum rose as much as 1.5% but pared most of it to trade flat as of 12:20 p.m. on Wednesday. The stock is up more than 100% so far this year, compared with the 21% gain for the S&P BSE Sensex index. The relative strength index on the stock was above 80, indicating it may be overbought.

Of the 11 analysts tracking Carborundum Universal, 10 maintained ‘buy’ and one maintained ‘hold’ recommendation. The overall consensus price of analysts tracked by Bloomberg implied an downside of 4.3%

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