Buy Carborundum Universal for target price of Rs. 350

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Pee Vee
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Buy Carborundum Universal for target price of Rs. 350

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Carborundum Universal (Q4 FY17): Steady quarter; Positive outlook – BUY

CMP (Rs) 297, 12-mts Target (Rs) 350, Upside 18%

Carborundum’s (CUMI) Q4 FY17 results were lower than expected due to lower contribution domestic Electrominerals division (EMD). EMD’s performance was impacted by higher power costs, increase in raw material costs and costs involved to rampup new capacities. Company’s hydro power generation has been impacted by lower rainfall, leading to higher power costs and production cuts. We believe EMD margins would improve from Q1 FY18 as product prices have improved and with new EMD plants commissioned, management expects higher volumes and better margins. The management was quite confident in achieving its Rs.30bn revenue target over the next 2-3 years on the back of improvement in utilization rates (currently 70-75%) and rampup of relocated capacities. Ceramics and abrasives division has witnessed strong traction in FY17 and is expected to register stronger growth in FY18. The combined effect of higher utilization, ramp up of relocated capacities, superior product mix, and reduced losses of its Chinese and US subsidiaries would lead to 19% earnings CAGR over FY17-19. We maintain our buy recommendation with a price target of Rs.350.

IIFL
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