Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil AA+/Stable/Crisil A1+’ ratings on the bank facilities and debt instruments of Carborundum Universal Limited (CUMI).

 

The ratings continue to reflect the healthy business risk profile of the company, supported by the strong market position in key products, diversity in revenue profile and integrated operations. The ratings also factor in the strong financial risk profile with comfortable capital structure and robust debt protection metrics, and the financial flexibility emanating from being part of the Murugappa group. These strengths are partially offset by volatility in operating profitability across business segments.

 

CUMI’s revenue grew by ~5% to Rs 3,677 crore during the first nine months of fiscal 2025 compared with Rs 3,501 crore in the previous corresponding period. Its ceramics division’s revenue registered growth of 9%, abrasives 4% and electro minerals 3% on-year. Domestic operations accounted for 57% of consolidated revenue during the current fiscal and international revenue, the balance.

 

Crisil Ratings has taken note of the press release by United States Department of State in January 2025, wherein Volzhsky Abrasive Works (VAW), a subsidiary of CUMI, has been designated as “Specially Designated Nationals (SDN) and Blocked Person”, part of the US Department of Treasury's Office of Foreign Assets Control (OFAC), for operating or having operated in the manufacturing sector in Russia. VAW posted revenue of RUB 763 crore in the nine months ending fiscal 2025 as against RUB 746 crore in the previous corresponding period and derived ~60% of revenue from within Russia and the balance from international markets. On account of the sanction, VAW’s export business has been impacted; the management expects to make partly offset impact on revenue by increasing sales within Russia. Overall, CUMI’s revenue is expected to grow by 4-5% over the medium term driven by steady demand across its divisions, though realisation, both in electro minerals and abrasives, is facing stiff competition from cheaper Chinese imports.

 

The operating margin increased to 15.4% during the first nine months of fiscal 2025 from 15.1% in the previous fiscal’s corresponding period, supported by better contribution from its subsidiaries. The operating margin is expected at 14-15% over the near-to-medium term owing to slight loss of contribution from VAW, which typically offers better operating margin. Also, as a result of the sanction on VAW, CUMI recorded an impairment exercise of Rs 104.13 crore as exceptional expense affecting profit for the current fiscal.

 

Albeit the above, CUMI’s business risk profile will remain healthy as it enjoys a healthy market share in its product categories and remains one of the largest producers of abrasives in the domestic market with over 30% market share.  

 

CUMI’s financial risk profile is expected to remain healthy over the medium term supported by a strong balance sheet with minimal debt. As on December 31, 2024, the company had total debt of Rs 109 crore which is expected to remain at almost similar level by the end of fiscal 2025. Cash generation is expected at Rs 500-600 crore which is expected to meet the company’s working capital requirement and capital expenditure (capex) plans of ~Rs 500 crore for the next fiscal. Interest coverage and total outside liabilities to tangible networth (TOLTNW) ratios are expected above 40 times and less than 0.5 time, respectively, over the medium term.

Analytical Approach

Crisil Ratings has consolidated the business and financial risk profiles of CUMI and its subsidiaries owing to operational and financial linkages between them.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong market position, diversified revenue profile and integrated operations: The business risk profile is supported by its well-diversified revenue streams. The abrasives division accounted for 44% of CUMI’s revenue in fiscal 2023 supported by robust demand in domestic and overseas markets. The acquired subsidiaries, viz RHODIUS Abrasive GmbH, CUMI AWUKO and Pluss Advanced Technologies, have started contributing to the revenue with over Rs 700 crore in fiscal 2023 and around Rs 600 crore in the nine months of fiscal 2024. The acquisitions in Germany have strengthened the market position of the company in Europe. Electro minerals accounted for 31% and abrasives accounted for 42% of the revenue in the first nine months of fiscal 2025. Ceramics and refractory segments accounted for the remaining 23%. Contribution from the abrasives segment will remain material over the medium term owing to high contribution from the newly acquired companies.

 

The company has leading position in the domestic abrasives market and strengthening market position in the global electro minerals market. It also has a diversified customer base in terms of end-user industries with revenue contribution from international markets (50-55% of consolidated turnover) such as Russia, Australia, China, North America and Europe. Also, it caters to a diverse set of end-user industries, including auto original equipment manufacturers (OEMs), auto ancillaries, general engineering, fabrication, foundry, industrial projects, construction and metal work.

 

With a market share of over 30% in the bonded abrasives segment, CUMI is a strong player in the Indian abrasives industry. The acquisition of VAW in 2007 and 51% stake in South Africa-based FZL in 2008 established CUMI among a handful of global players with product offerings across the electro minerals value chain; besides, with these acquisitions, the company emerged as the second-largest producer of silicon carbide and the third-largest producer of zirconia globally. The company has achieved healthy cost advantage through its strategy of backward integration. It has integrated backwards into silicon carbide, zirconia and brown/white fused alumina, which are key inputs for its businesses. Crisil Ratings believes the diversified revenue profile will continue to benefit the business over the medium term and recent acquisitions will enable it to register healthy revenue growth over the medium term. The operating margin is expected to sustain at 14-15% supported by better utilisation of capacities in the newly acquired companies and continued focus on cost reduction through debottlenecking.

 

• Strong financial risk profile and financial flexibility as part of the Murugappa group: Gearing was below 0.10 time as on March 31, 2024, and will remain comfortable over the medium term despite high working capital need. A strong balance sheet has provided the flexibility to weather material volatility in cash accrual as witnessed during fiscals 2013 to 2015.

 

Improvement in profitability in the recent years and reducing debt have strengthened the debt protection metrics as reflected in interest coverage and net cash accrual to total debt ratios at 45.6 times and 5.21 times, respectively, in fiscal 2024 compared with 31.73 times and 2.40 times in fiscal 2023. The debt protection metrics are expected to remain healthy backed by strong cash accrual and moderate capital spending. The company is not planning to raise any material debt over the medium term to fund its capex plans. Liquidity remains healthy, as reflected in cash surplus of over Rs 312 crore as of December 31, 2024 and unutilised bank lines of Rs 495 crore (standalone) for the past 10 months ended January 31, 2025. Besides, CUMI is a leading company of the Murugappa group, which adds to its financial flexibility. The company has also grown through inorganic means over the years and any sizeable debt-funded acquisition in future will remain monitorable.

 

Weakness:

• Volatility in profitability across business segments: Profitability across key business segments — abrasives, electro minerals and industrial ceramics, and refractories has been volatile. The abrasives division had been impacted by competitive pressure and losses in the newly acquired companies in Germany, which are precision abrasive manufacturers. However, with ramp-up in the new subsidiaries, profitability is stabilising and inching towards preceding level. The electro minerals business is impacted owing to weak capacity utilisation in South Africa and unfavourable currency conversion rate for the Russian subsidiary, VAW, which contributes around 20% to the consolidated revenue of CUMI. The division’s profitability is impacted by dumping of Chinese product at lower price in the market. China is the biggest producer of electro minerals in the world. The division’s profitability will improve in the medium term with cost cutting measures and various debottlenecking exercises implemented at the South African entity and continuous improvement in demand. Also, profitability in the industrial ceramics and refractories businesses will arrest any decline in profitability in the near term.

 

Furthermore, continued improvement in industrial activity will boost profitability across business divisions over the medium term. Crisil Ratings, however, believes that profitability will remain susceptible to economic cycles over the medium term. Besides, trade regulations, sanctions and volatile foreign exchange movements render moderate susceptibility to business performance of its subsidiaries, as recently witnessed in case of VAW.

Liquidity: Strong

Cash and equivalent stood at Rs 312 crore on consolidated basis as on December 31, 2024. Annual cash accrual of Rs 500-600 crore will sufficiently cover yearly estimated capex of ~Rs 500 crore next fiscal and minimal debt obligation till next fiscal. Additionally, the company has access to bank limit of Rs 495 crore, which was unutilised for the past nine months ended January 31, 2025. Besides, given the company’s strong fund-raising abilities and expected healthy cash accrual annually, Crisil Ratings believes CUMI will maintain strong financial flexibility over the medium term.

 

ESG Profile of CUMI

Crisil Ratings believes that CUMI’s Environment, Social, and Governance (ESG) profile supports its credit risk profile. The manufacturing sector has moderate impact on the environment and social impact, given the nature of its operations and their influence on the surrounding community.

 

Key ESG highlights:

• CUMI has set a target to reduce its emission intensity by 25% by fiscal 2025 from its fiscal 2022 base line. Against this target, the company has been able to reduce its emission intensity by 21% in fiscal 2024 (over the fiscal 2022 baseline) to 7.03 tCO2e per Rs mn of revenue earned.
• This was on the back of several initiatives taken including efficiency improvements in furnace operations and automation (enhancing process efficiencies and minimising turnaround times), waste heat recovery and others.
• CUMI’s attrition rate of permanent workforce is lower compared with peers (at ~7%). However, it fares weaker on safety parameters with lost time injury frequency rate (for workers) at 2.29 as well one worker/employee fatality and thus is an area of improvement for the company.
• Its governance structure is characterized by 71% of its board comprising independent directors, 14% woman board directors, dedicated investor grievance redressal system and extensive financial disclosures.

Outlook: Stable

Crisil Ratings believes CUMI will maintain its strong business risk profile over the medium term driven by diversified revenue streams and strong market position. The company will continue to sustain adequate profitability over the medium term. Besides, it will maintain its strong financial risk profile driven by healthy cash-generating ability and well-managed balance sheet.

Rating sensitivity factors

Upward factors:

• Significant improvement in scale of operations, while maintaining strong market positions in key verticals, and improvement in operating margin to 16-17%, leading to better than expected cash accruals
• Prudent expansion plans and working capital management resulting in continued strong debt metrics
• Substantial increase in cash surplus

 

Downward factors:

• Decline in scale of operations leading to pressure on operating profitability and cash generation
• Increase in gearing beyond 1.2 times owing to acquisitions or larger-than-expected debt-funded capex or working capital requirement

About the Company

CUMI, part of the Rs 78,000-crore Chennai-based Murugappa group, manufactures abrasives, ceramics, refractories and electro minerals. The company has manufacturing plants in several locations across India, besides having plants in Russia, Germany, South Africa and Australia, and marketing operations in China, the Middle East and North America.

 

CUMI reported net profit of Rs 269 crore on operating income of Rs 3,677 crore in nine months (April-December 2024) compared with net profit of Rs 334 crore on operating income of Rs 3,501 crore in the corresponding period of fiscal 2024.

Key financial indicators

As on/for the period ended March 31	Unit	2024	2023
Revenue	Rs crore	4,702	4,654
Profit after tax (PAT)	Rs crore	476	442
PAT margin	%	10.13	9.5
Adjusted debt / adjusted networth	Times	0.04	0.09
Interest coverage	Times	45.63	31.73

Note: Crisil Ratings-adjusted numbers

Any other information: Not Applicable