Investment Idea - Grindwell Norton

Hi Friends
Markets have fallen more then 32% from the top and mid/small cap index is down to more then 50% but still some of our investment ideas are trading just below our recommended price because of very strong fundamentals and valuations. An example of that is Elgi Equipment. Recomended @ 60 the stock is still moving in the range of 52-58. Another Investment idea which I feel would be a multibagger once the market sentiments improve is Grindwell Norton.
Investment Rationale

Ø GNL, 51.33% subsidiary of Euro 43 billion Saint–Gobain (SG) of France and India ’s leading manufacturer of Abrasives, Silicon Carbide (SiC) & High Performance Refractories, has reported excellent performance for Q4 CY 2007. Net sales grew @ 29.2% to Rs. 123.3 crore led by 54.7% spurt in Ceramic & plastic sales of Rs. 34.8 crore (Rs. 22.5 crore). Abrasives sales were up by 19.1% to Rs. 86.7 crore (Rs. 72.8 crore). OPM% enhanced considerably to 17.5% (15.6%) mainly because of strict control on other expenses (20.9% of sales as against 26.2% in Q4 CY 2006) and reduction in power cost (to 7.7% from 9.5% of sales). Further aided by 58.8% spurt in other income of Rs. 5.4 crore, PBT shot up by 59.1% to Rs. 23.7 crore and PAT by 53.5% to Rs. 15.5 crore.
Ø For CY2007, Net sales were up by 18.2% to Rs. 440.8 crore. Abrasives turnover increased to Rs. 330.2 crore (Rs. 285.6 crore), growth of 15.6%, while Ceramics & Plastics turnover grew @ 25% to Rs. 106.5 crore (Rs. 85.2 crore). OPM% declined to 16.6% mainly because of rising raw material and personnel cost. However, strong sales growth coupled with 64.9% jump in other income of Rs. 21.6 crore led to 20.1% increase in PBT of Rs. 82.3 crore and 22.8% increase in PAT (before extra ordinary items) of Rs. 56.5 crore. Net of tax profit on sale of stake in Lincoln Helios (group company) of Rs. 77 crore (NIL) boosted PAT substantially to Rs. 133.5 crore.
Ø GNL caters to diverse industries like construction, automotive, steel, foundry, bearings, fabrication, laminates etc. In view of growing economy, GNL’s all user segments have been doing well and are expected to do well to provide scalable and de-risked growth profile in future. To meet growing demand and to further strengthen its competitive position (market share of ~31%), company is setting up a plant in tax haven in Himachal Pradesh for abrasives products at capex of Rs 37 crore in Phase I. Commercial production is likely to commence in H2 CY 2008. Further capex of Rs.20 crore will be incurred in Phase II. This plant will be key growth driver and it will give GNL an edge over its competitor & unorganised sector in terms of pricing : cost. Acquisition of bonded abrasive business of Orient brasives for Rs 26 crore in CY 2009 resulted in expansion of GNL’s product range and has given it an advantage in terms of new distribution channels, dealers and sales team.
Ø Company has set up 70:30 JV in Bhutan in partnership with Singye Group of Bhutan (30%) to set up Rs.34 crore project to manufacture 20,000 tpa of Silicon Carbide in two phases of 10,000 tpa each. While 1/3rd production will be utilised in-house, 2/3rd would be sold outside. This plant will enable GNL to get SiC at cheaper rates, at the same time, it will be able to sell SiC to outside parties at high EBIDTA of ~25-30%. Full benefits of this project will be available from CY09 onwards.
Ø Because of strong parentage, GNL has access to the best of products and technology and a global base. Company can buy raw materials / products from anywhere in the SG world to bring down costs. China , India and Brazil are 3 low cost manufacturing bases of SG. Over a period of time, SG will rationalize its manufacturing facilities so that GNL could become one of the hubs for certain products and certain markets.
Ø GNL generates strong cash flows and has cash surplus to the extent of ~ Rs 85 crore after having sold investment in a group company that works out to Rs.15 per share.
Ø The company is also declaring a dividend of Rs 4 on the stock for which the record date is 25th Mar to 28th Mar 2008.
All n All its a very good buy at current levels given the business model and the valuations.
Long Term Investors can see a tgt of 250+ within 12-15 months. Its really hard to recommend anything for the short term, but still is the market conditions are good then the stock can cross 160 levels pretty soon.

Happy Investing
Investomaniac
JAIDADIKI