Rating Rationale
April 27, 2018 | Mumbai
Carborundum Universal Limited
Ratings Reaffirmed
Rating Action
Total Bank Loan Facilities Rated Rs.550 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
Rs.200 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Rs.60 Crore Short Term Debt CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on debt instruments and bank facilities of Carborundum Universal Ltd (CUMI).

CRISIL's ratings continue to reflect the company's healthy business risk profile, marked by its strong market position in key products, the diversity in its revenue base, and its fairly integrated operations. The ratings also factor in the company's healthy financial risk profile, marked by a very comfortable capital structure and robust debt protection metrics and the company's financial flexibility as part of the Murugappa Group. These rating strengths are partially offset by the volatility in CUMI's operating profitability across business segments.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of CUMI) and its majority owned subsidiaries (prominent among them are Volzhsky Abrasive Works (VAW)).
CRISIL has also amortised the goodwill related to the acquisition of VAW of Rs.68.72 crores over a 10-year period. This has resulted in goodwill amortisation (for six months) of Rs.3.4 crores for fiscal 2008 and Rs.6.9 crores (for 12 months) from fiscal 2009.

Key Rating Drivers & Detailed Description
* 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 abrasives business (43% of consolidated revenues in fiscal 2017) remains the largest contributor to its revenue followed by electro-minerals (33%) and industrial ceramics and refractories (20%). 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 (42% per cent) 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. None of the industries account for more than 10% of revenues.
With a market share of over 38% 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 Foskor Zirconia (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 believes that the diversified revenue profile will benefit CUMI's business position over the medium term.
* 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 estimated gearing of under 0.2 times at March 31, 2018; the gearing levels are estimated to be almost at the lowest levels over the past five years. 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 2018 are estimated to be over 25 times and over 1.1 times, respectively, from 11.1 times and 0.61 times in fiscal 2015. CRISIL believes that CUMI's debt protection metrics will remain strong on the back of healthy cash accruals and only moderate capital spending, which will not necessitate material debt raising. CUMI's financial flexibility also continues to remain healthy, as reflected in its own largely unutilised bank lines, and cash surplus of ~Rs 120 crores. Besides, it is a leading company of the Murugappa group, which adds to its financial flexibility.
* 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 over the past three years ended fiscal 2018. Ceramics business had witnessed moderation in profitability, owing to project deferments in domestic business. However, strong ramp up in industrial ceramics business is expected to bode well for 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 expected to improve driven by relocation of South African entities, uptick in pricing due to strict environmental regime in China and improvement in demand environment.
Furthermore, expected improvement in industrial activity is expected to bode well for CUMI's profitability across business divisions over the medium term. CRISIL, however, believes that CUMI's profitability will remain susceptible to economic cycles over the medium term.
Outlook: Stable

CRISIL believes that CUMI will maintain its business risk profile over the medium term, driven by its diversified revenue streams and strong market position in the abrasives segment. CRISIL also believes that CUMI will maintain its healthy financial risk profile driven by its strong balance sheet.
Upside scenario
* Significant improvement in CUMI's scale of operations and operating margins to 17-18%, leading to higher cash generation and continued strong credit metrics
* Prudent expansion plans, such that gearing remains comfortable under 0.5 times on a sustainable basis
Downside scenario
* 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.

About the Company

CUMI, a part of the Rs.30,023 crore Chennai-based Murugappa group, manufactures abrasives, ceramics, refractories, and electro-minerals. The company has manufacturing plants in several locations across India, besides a plant each in Russia, South Africa, and China, and marketing operations in Australia and Canada.
For the first nine months of fiscal 2018, CUMI, on a consolidated basis, reported a net profit of Rs 156 crore (Rs 137 crore for the corresponding period in the previous year) on revenue of Rs 1764 crore (Rs 1661 crore for the corresponding period in the previous year).

Key Financial Indicators
As on / for the period ended March 31  Unit 2017 2016
Revenue Rs crore 2112 1945
Profit After Tax (PAT) Rs crore 177 149
PAT Margin % 8.4 7.6
Adjusted debt/adjusted networth Times 0.12 0.28
Interest coverage Times 20.2 14.9

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs crore)
Rating Assigned
with Outlook
NA Bank Guarantee NA NA NA 10 CRISIL A1+
NA Cash Credit* NA NA NA 400 CRISIL AA+/Stable
NA Proposed Term Loan NA NA NA 140 CRISIL AA+/Stable
NA Short Term Debt NA NA 7-365 days 60 CRISIL A1+
* Interchangeable with short term loan, working capital demand loan, packing credit in foreign currency, buyer's credit, bill discounting, bill guarantees and letter of credit.
** Yet to be placed
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT  0.00
CRISIL AA+/Stable      25-04-17  CRISIL AA+/Stable  25-04-16  CRISIL AA+/Stable  09-04-15  CRISIL AA+/Stable  CRISIL AA+/Stable 
                29-03-16  CRISIL AA+/Stable       
Short Term Debt  ST  60.00  CRISIL A1+      25-04-17  CRISIL A1+  25-04-16  CRISIL A1+  09-04-15  CRISIL A1+  CRISIL A1+ 
                29-03-16  CRISIL A1+       
Fund-based Bank Facilities  LT/ST  540.00  CRISIL AA+/Stable      25-04-17  CRISIL AA+/Stable  25-04-16  CRISIL AA+/Stable  09-04-15  CRISIL AA+/Stable  CRISIL AA+/Stable 
                29-03-16  CRISIL AA+/Stable       
Non Fund-based Bank Facilities  LT/ST  10.00  CRISIL A1+      25-04-17  CRISIL A1+  25-04-16  CRISIL A1+  09-04-15  CRISIL A1+  CRISIL A1+ 
                29-03-16  CRISIL A1+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 10 CRISIL A1+ Bank Guarantee 10 CRISIL A1+
Cash Credit* 400 CRISIL AA+/Stable Cash Credit* 400 CRISIL AA+/Stable
Proposed Term Loan 140 CRISIL AA+/Stable Proposed Term Loan 140 CRISIL AA+/Stable
Total 550 -- Total 550 --
* Interchangeable with short term loan, working capital demand loan, packing credit in foreign currency, buyer's credit, bill discounting, bill guarantees and letter of credit.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Engineering Sector
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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