April 13, 2009

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.

15 comments:

Anonymous said...

Good Review. Thanks Rohit.
I also hold GN when i read your post a year ago. Currently Divd yield is also good, to consider.

regards
ani

Anonymous said...

Rohit,
How did you come up with a CAP of 8 years? Why not 3 or 15?
Curious to know what the valuation would look like for 3 to 15 yrs.

Khali-pili-lafda

Sachin Purohit said...

Coincidentally, this company as well as this industry (abrasives) came in my radar, too just a couple of months ago. I did some comparative study between the two and decided in favour of buying GN. However, I wanted to buy it at < 70 a share. But finally settled down for 80 a share.

Anonymous said...

Hi Rohit,

Nice coverage. Its great to see that you have covered most of the stocks that are already in my investment radar like CRISIL,GRINOR,INDGAS,NIITEC etc. It gives me the confidence that I may be proceeding in the right track.Did you every look into Godfrey Philips and VST industries. They are into tobacco business and currently going at great valuations. I like VST better than Godfrey as they give back money to the shareholders and has not diversified into unrelated businesses unlike Godfrey. VST current dividend yield is very good. Both are cash cows with minimal capex and great owner earnings. Last few quarters were not great as anticipated in their ARs due to VAT rollout and excise increase. Please let me know your thoughts on these if you have ever analysed them.

Regards
Ravi

Vic said...

Hi Rohit,

I liked your emphasis on Mgmt aspect in your analysis.

Thanks,

Vikas

Rohit Chauhan said...

Hi ani
yes , GNO has a decent dividend yield too ..almost 40% payout. thats quite encouraging

regards
rohit

Rohit Chauhan said...

Hi Khali-pili-lafda
I have not put the valuation for 3 yrs or 10 yrs ..but 3-4 yrs coincides with my pessimistic model and 10 yrs is my optimistic model.

reduce around 40 rs from the instrinsic value for 3 yrs or add 25 rs for the 10 yr model

personally i think 3-4 yrs is too low as the company has much more sustainable advantages..however 15 yrs is way too high ..i would give that kind of CAP to a company like CRISIL only

however all of the above is subjective ..

btw interesting handle - Khali-pili-lafda ...are you from mumbai ?

regards
rohit

Rohit Chauhan said...

Hi sachin

i looked at GNO almost 1+ yrs back and had to hold myself from buying @ 120 -100 levels. lucklily it has dropped since then ..i have not waited below that as it has hit below 50% of my intrinsic value estimates ..i personally avoid bottom fishing

for me it is difficult to time it that close ..if i see a good company ..going cheap i will buy it

regards
rohit

Rohit Chauhan said...

Hi ravi

i have covered VST earlier here - http://valueinvestorindia.blogspot.com/2007/07/vst-industries.html

personally it is small holding for me. it is not a very exciting stock for me ..dividend is good and all that ..but in the end the business is stagnating and the intrinsic value in note growing.

also they have done a few bad diversifications in the past. also their earnings problems are not due to VAT alone ..there is hardly any volume growth in the industry

i put some money at the hieghts of the bull market ..since there are much better companies available cheap ..so i have not bothered too much with VST.

I had INDGAS ..but exited long time back ..i have written about it on my blog ..i prefer gujarat gas more

regards
rohit

Rohit Chauhan said...

Hi vikas

I have done this analysis earlier ..but did not write in detail ..my valuation templates have the checkpoints.

what has changed for me is that i have started giving more wieghtage to it ..if the numbers look good, but there are red flags on the management ..i will give the stock a pass ..

i was analysing my personal picks and have seen the max gains from companies where the management is good.

regards
rohit

Vic said...

Thanks Rohit. That tells again that the management aspect is extremely important.

I have a question regarding Stock Dividends.
1) Where do I get the info on when it is declared? From the company's website?
2) How do we receive the dividends? electronic credit to bank a/c or a check in the mail?

KhailpiliLafda seems to be from Mumbai..handle speaks for itself..:-)

Thanks,

Vikas

Rohit Chauhan said...

Hi vic
dividend information is available from the company's website or their annual report too.

on second point, if you have a demat account linked to your savings account, the dividend comes directly to the account

regards
rohit

SKR said...

Hi Rohit

I really liked your analysis will definitely like to read such stuff

Sushant

sumayya said...

Hi Rohit

The analysis seems very good.I have trouble timing my buys.GNO is definitely a really good company sound financially. I read in your comments that a buy below 120 levels is good. So this seems like an excellent time to buy.

Would want to read your analysis on CUMI as well

regards
sumayya

Rohit Chauhan said...

hi sumaya
intrinsic value calculations are necessarily subjective. so i would urge you to do your own analysis
i personally dont try to time too much. i will create 50% position once the price is below 50% of intrinsic value and add to the position as the price drops

regards
rohit