Grindwell norton (GNO)

About
Grindwell Norton Limited (GNO) is one of the subsidiaries of Compagnie de Saint-Gobain (Saint-Gobain), a transnational Group, with its headquarters in Paris and with sales of €43.8 billion in 2008.
The main business segments for the company are – Abrasives and Ceramics & Plastics

Financials
The company had a revenue of 523 Crs in 2008, showing a growth of 13% over the previous year. The company has shown a consistent growth in excess of 10% per annum for the last 5 years. In addition, the company has maintained an ROE in excess of 15% during this period. Inspite of the rise in RM costs during this period, the company has been able to maintain a net margin of around 10%.
The net profit has grown much more rapidly during this period. However due to the sudden slowdown in the economy, the company had a bad Q4 and has had a small drop in net profit in 2008.The company has no debt on its book and actually has some surplus cash.

Positives
The company is in a duopoly situation in the abrasives market. Along with carborundum universal, Grindwell is the only other major player in the market. In addition, the company has R&D support of its parent. The company has been investing in new facilities in India and is looking at growing the business.
The company has a wide range of products, good brands and a strong marketing, sales and distribution network.
Financially, the company has done fairly well in the past and has grown its sales and net profits are a decent rate, while maintaining a high ROE. The company has a dividend payout of almost 40% and has been investing the rest of the capital in the business.

Risks
The company faces the risk of imports from china and from the unorganized sector. In addition, the company had a bad Q4 in 2008 and will face a tough 2009. The company has Indian partners too, but still one cannot rule out the possibility that the MNC parent may try to buy out the minority holders cheap.

Competitive analysis
The key competitor for GNO for comparative purpose is CUMI (Carborundum universal limited). Although both the companies are in similar businesses, their profiles are quite different. CUMI has now expanded into the foreign markets with acquisitions and JV’s in the last 2 years. CUMI has also taken a substantial debt load (Debt equity now at 0.9:1) to fund these investments in acquisitions and new facilities.
In view of the slow down in sales, higher debt loads and higher RM prices, the Bottom line for CUMI has dropped by 20%+ in comparison to the 10% odd drop for GNO (excluding the one time income and charges).
CUMI now sells at around 11-12 time earnings (considering the debt) compared to 7-8 times for GNO. CUMI has higher upside due to its foray into international markets and new facilities, but also has a higher business risk compared to GNO.


Management analysis
I have added this new section to my analysis. This is necessarily a subjective exercise. I am looking at analyzing the management on certain parameters (details in a separate post)

Capital allocation – Management seems to be doing fine on this count. They have decent dividend payout and are not hoarding capital. Capital is being invested and the returns from invested capital have been good in the past.

Communication – Not good, nor bad. The management has discussed the plusses and minuses of the business briefly and could do a better job at it

Management compensation – The management compensation does not seem to be high. The MD is being paid at around 20 million per annum and there are no stock options for the management.

Related party transactions – Nothing odd in the section, except for some sales and purchases with associate companies. So no red flags here

Valuation
The company sells at an adjusted PE (net of cash and adjusted for non operating income) of around 8-9. The current EV is around 400 Crs. The company is going through a slow down and the current valuations are depressed. The company could see a growth of 15-20% in profits in the next 2 years.

The intrinsic value range is around 700-800 Crs for the company based on a growth assumption of 8%, net margins of 9% and CAP (competitive advantage period) of around 8 yrs.

Conclusion
The company is reasonably undervalued. This is not a stock or company which will give huge returns. The company has low business risk due to moderate competitive advantages in the business, strong balance sheet and decent market position. This is a moderate risk, moderate return stock.

Disclaimer
I hold the stock and hence the above may not be an unbaised analysis of the stock. Please read the disclaimer in blog too.