Key Rating Drivers & Detailed Description

Strengths:

Healthy business risk profile marked by strong market position, diversified revenue base and fairly integrated operations: CUMI's healthy business risk profile is supported by its well-diversified revenue streams. The abrasive division contributed upto 44% of the total revenue of CUMI supported by robust demand in domestic and overseas market and contribution from RHODIUS and AWUKO in first 9 months of fiscal 2023. Electrominerals accounted for 36% of the overall revenue in the first nine months in fiscal 2023. Ceramic & refractory segment accounted for remaining 20% of the business. Contributions from the abrasive segment is expected to remain high in the medium term due to higher contribution coming in from the newly acquired companies.

The company has a leadership position in the domestic abrasives market and strengthening market position in the global electro-minerals market. It also has a highly diversified customer base in terms of end-user industries, with revenue contribution from international markets (~50% of consolidated turnover) such as Russia, Australia, China, North America, and Europe. CUMI 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 working. With the two acquisitions done in Germany, the company expanded their market and cemented their market positions in the European market.

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 the 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 also achieved healthy cost advantages through its strategy of securing the back-end. It integrated backward into silicon carbide, zirconia, and brown/white fused alumina, which are key inputs for its businesses. CRISIL Ratings believes that the diversified revenue profile will benefit CUMI's business position over the medium term, and benefit of recent acquisitions will enable it to register healthy double digit revenue growth over the near to medium term. Operating profitability is also expected to sustain at healthy levels of 13-15%, supported by better utilisation of capacities in the newly acquired companies and continued focus on cost reduction through debottlenecking.

Healthy financial risk profile and the financial flexibility as part of the Murugappa Group:

CUMI's financial risk profile remains healthy as reflected by its gearing of under 0.10 times at March 31, 2022; gearing levels are expected to be low in the medium term, despite moderate increase in working capital borrowings. CUMI's strong balance sheet strength has provided it with the flexibility to weather material volatility on its cash accruals, as was witnessed during fiscal 2013 to fiscal 2015.

The improvement in profitability from fiscal 2015 onwards, and reducing debt levels, has strengthened CUMI’s debt protection metrics over time; its interest coverage and net cash accruals to debt ratios for fiscal 2023 are estimated to be over 40 times and over 1 time, respectively, from 11.1 times and 0.61 times in fiscal 2015. CRISIL Ratings believes that CUMI's debt protection metrics will remain strong on the back of healthy cash accruals and only moderate capital spending. Company not planning to raise any material debt in the medium to fund its capexplans. Liquidity also continues to remain healthy, as reflected in only moderately utilised bank lines ~Rs 400 crores (standalone) as of December 2022. Cash surpluses expected to moderate at Rs.50-75 crores in the current fiscal, with most surpluses used up for acquisitions.  Besides, it is a leading company of the Murugappa group, which adds to its financial flexibility.

Weakness:

Volatility in operating profitability across business segments:

CUMI's profitability margins across its key business segments - abrasives, electro-minerals, and industrial ceramics and refractories have been volatile from fiscal 2013 onwards. The abrasives division had been impacted by competitive pressures and rise in input costs due to rupee depreciation in the past. However, with an increase in volumes, the margins have improved since fiscal 2015. Though the abrasive segment witnessing strong demand and healthy growth, operating margins have come under pressure due to higher raw material cost, competitive pressures, elevated energy prices and higher expenditure done towards ramping up of operations in the newly acquired companies in fiscal 2023. However, strong ramp up in industrial ceramics business and electromineral businesses will arrest any significant decline in profitability in the near term. The electro-minerals business was earlier impacted due to weak capacity utilization in South-Africa. The division’s profitability is now improved driven by relocation of facilities of South African entities, uptick in pricing due to strict environmental regime in China and improvement in demand environment.

Furthermore, continuation of improvement in industrial activity is expected to bode well for CUMI's profitability across business divisions over the medium term. CRISIL Ratings, however, believes that CUMI’s profitability will remain susceptible to economic cycles over the medium term. Besides, trade regulations, sanctions and volatile foreign exchange movements also render moderate susceptibility to business performance of its key subsidiary, VAW.

Rating Sensitivity factors

Upward factors

• Significant improvement in CUMI’s scale of operations and sustenance of operating margins at over 18-20%, leading to better cash generation
• Prudent expansion plans and working capital management, resulting in continued strong debt  metrics; for instance, gearing of 0.5 times on a sustainable basis
• Substantial increase in cash surplus

Downward factors: 

• Sharp decline in CUMI’s scale of operations leading to pressure on its operating profitability, and cash generation
• Significant increase in gearing beyond 1.2 times due to large acquisitions or larger-than-expected debt-funded capex or working capital requirements

Key Financial Indicators

Annexure – List of entities consolidated

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