Calculated Expansion In Silicon Carbide And Ceramics Set To Capitalize On Semiconductor And EV Market Growth

Key Takeaways

• Strategic acquisitions and expansions in silicon carbide and technical ceramics aim to boost revenue and profitability in semiconductor and defense sectors.
  
• Enhancing overseas subsidiaries' performance and targeting synergies to increase international competitiveness supports earnings and market presence.
  
• Competitive pricing pressures and operational challenges reduce profitability, while increased costs and underperforming subsidiaries strain liquidity and financial stability.

Catalysts

Manufactures and sells abrasives, ceramics, and electrominerals in India and internationally.

• The strategic acquisition of Silicon Carbide Products is expected to accelerate growth by doubling NBSiC production capacity and increasing market reach, which could enhance revenue through expanded product offerings and increased customer base, particularly in critical thermal applications such as power and steel sectors.
  
• The potential synergies from integrating SCP's technology and customer base with CUMI's product lines are projected to add $5 million in annual revenue, impacting positively on earnings through growth and cost efficiencies.
  
• The new high-performance silicon carbide plant is expected to enhance future revenue by enabling CUMI to meet growing demand within the semiconductor industry, driven by the increasing adoption of electric vehicles and 800-volt charging systems.
  
• The company's strategic expansion into engineered and technical ceramics for the semiconductor and defense markets is anticipated to support higher margins due to the premium nature of these products, driving overall profitability.
  
• Continued focus on improving the performance of overseas subsidiaries, particularly RHODIUS, with targeted growth strategies and operational synergies is expected to positively affect earnings through enhanced international competitiveness and market presence.

Carborundum Universal Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Carborundum Universal's revenue will grow by 11.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.9% today to 11.7% in 3 years time.
• Analysts expect earnings to reach ₹7.7 billion (and earnings per share of ₹40.52) by about January 2028, up from ₹4.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹8.5 billion in earnings, and the most bearish expecting ₹6.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 54.5x on those 2028 earnings, up from 52.0x today. This future PE is greater than the current PE for the IN Chemicals industry at 20.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.02%, as per the Simply Wall St company report.

Carborundum Universal Future Earnings Per Share Growth

Risks

• The company faces significant pricing pressures from Chinese competition in Electro Minerals and Abrasives, impacting revenue and margins negatively.
  
• The Foskor Zirconia segment has experienced losses due to pricing pressure and currency fluctuations with the South African Rand, which could further deteriorate the segment's margins and profitability.
  
• The underperformance of subsidiaries such as AWUKO, with reduced sales expectations and higher-than-planned EBITDA losses, can affect consolidated earnings and margin improvement targets.
  
• Delays in capacity utilization and product integration in new ventures, such as high-purity silicon carbide, slow expected revenue growth and margin improvements from these expansions.
  
• The increase in raw material and inventory costs without equivalent sales growth in some segments, like Sterling Abrasives, can lead to lower free cash flow and increased working capital requirements, impacting liquidity and financial stability.

Valuation

• The analysts have a consensus price target of ₹1530.8 for Carborundum Universal based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1750.0, and the most bearish reporting a price target of just ₹1198.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹65.8 billion, earnings will come to ₹7.7 billion, and it would be trading on a PE ratio of 54.5x, assuming you use a discount rate of 13.0%.
• Given the current share price of ₹1296.6, the analyst's price target of ₹1530.8 is 15.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.