Expansion In Ceramics Division Will Open New Opportunities In Armoring And Semiconductors

Key Takeaways

• Growth in Ceramics and Electrominerals, alongside efficiency plans, may enhance revenue and net margins amid strong demand and capacity expansion.
  
• Strategic domestic focus and streamlined expenses could stabilize revenue and protect earnings, despite initial impacts on profitability.
  
• Sanctions and financial pressures, including declining margins and weakening subsidiary performance, threaten Carborundum Universal's revenue growth and profitability.

Catalysts

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

• The company expects continued growth in its Ceramics and Electrominerals segments, driven by increased capacity and robust demand, potentially boosting future revenue.
  
• Plans for increasing efficiency and managing costs within RHODIUS and AWUKO operations could improve net margins as these subsidiaries reduce losses.
  
• Expansion projects within the Ceramics division, particularly in the armoring and semiconductor sectors, are on track and aligned with customer readiness, which might accelerate revenue growth and enhance profitability when they come online.
  
• A strategic shift to focus more on domestic revenue for VAW amid geopolitical challenges may stabilize revenue streams, although this might initially impact profitability due to resizing for reduced output.
  
• Streamlining unallocable expenses and maintaining capital discipline with controlled CapEx and no debt at the standalone level could continue to protect earnings and support long-term shareholder value.

Carborundum Universal Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Carborundum Universal's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 11.1% in 3 years time.
• Analysts expect earnings to reach ₹7.1 billion (and earnings per share of ₹37.19) by about March 2028, up from ₹4.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹6.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.2x on those 2028 earnings, down from 46.7x today. This future PE is greater than the current PE for the IN Chemicals industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.52%, as per the Simply Wall St company report.

Carborundum Universal Future Earnings Per Share Growth

Risks

• The designation of Volzhsky Abrasive Works (VAW) as a Specially Designated National by the U.S. government due to sanctions may impact revenues significantly, as the company will be unable to transact in USD or EUR, sharply reducing export sales.
  
• The company's PBIT margins have declined, and further cost pressures, such as higher input costs and pricing pressure, particularly in the Electrominerals and RHODIUS segments, could continue to erode margins.
  
• The weakening financial performance of subsidiaries like AWUKO and Foskor Zirconia, which are experiencing losses and lower sales than anticipated, could impact consolidated earnings.
  
• The dependency on markets with pricing pressures, such as those faced by RHODIUS and challenges in the abrasives sector due to increased competition, might hinder revenue growth.
  
• Unallocable expenses have increased due to higher project-related costs and exchange losses, which might negatively affect net margins and overall profitability.

Valuation

• The analysts have a consensus price target of ₹1156.7 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 ₹1620.0, and the most bearish reporting a price target of just ₹862.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹63.7 billion, earnings will come to ₹7.1 billion, and it would be trading on a PE ratio of 45.2x, assuming you use a discount rate of 13.5%.
• Given the current share price of ₹976.55, the analyst price target of ₹1156.7 is 15.6% 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.