The Hindu Business Line : Carborundum Universal: Buy

Growth of Carborundum is predicated on the entry into new export markets, introduction of product lines and concentration on premium specialised products.

Several new initiatives taken over the past year could start paying off over the next couple of years. Aided by strong demand from user industries such as auto, auto-ancillary, construction and engineering, the prospects appear bright on the domestic front, too.

The stock, trading at 25 times its financial year 2006 per-share earnings, has the potential for appreciation from current levels.

Overseas ventures

Carborundum is actively pursuing overseas markets to expand its reach. It recently acquired a Canadian company that will give it access to the North American market. The acquired company has a presence in the niche segment of floor polishing and has been growing at 20 per cent per annum over the last three years.

This acquisition has enabled Carborundum's penetration into the North American market for its other product ranges, too.

Through its new marketing subsidiary in West Asia, Carborundum is scouting for opportunities in the booming Gulf market.

Construction and oil exploration activity is hotting up in West Asia and may provide immense potential for abrasive products. Carborundum also plans to set up a manufacturing facility after testing the market.

Overseas demand for abrasives is increasingly moving towards specialty premium products such as super abrasives. The joint venture with Wendt (India), which makes super abrasives, completes Carborundum's premium range of products.

Carborundum has a strong foothold in the premium range and has a fair chance of succeeding in the overseas market. The company's new manufacturing facilities for premium and specialty products would go on stream in the financial year 2007. Exports now contribute only 11 per cent of the company's turnover but have been growing at a fast rate. For the financial year 2006, exports rose 38 per cent.

Upstream integration

Carborundum plans to concentrate on premium products across various segments. It started test marketing high-alumina ceramics for industrial applications in December 2005.

Dedicated manufacturing lines for high-end products are also being planned.

Strengthening its presence in the premium segment will give it a competitive edge in niche markets. The strategy could also improve overall margins.

New promising market

The introduction of bio-ceramics into its product portfolio has opened up a new promising market. The product helps in healing wounds faster, is easy to use and cost-effective.

Rising healthcare costs and demand for hospital beds could create demand for such products, as they help faster healing, and, hence, reduce the time spent at the hospital.

The product will initially be imported from Cedak, a South African company, which has the patent to the product.

This new product segment could add to revenue growth over the next couple of years.

Surging input costs

Surging input costs could be a key risk. Prices of alumina, a key input, have been on the rise and could pressure margins.

However, the company's efforts to de-bottleneck its manufacturing capacities could bring in manufacturing efficiencies and offset rising input costs to some extent.

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