Carborundum Universal Ltd

Abrasives Ceramics Electrominerals ACE of Abrasives!

We initiate coverage on Carborundum Universal Ltd (CUMI), a part of Rs42bn, Murugappa group with a Long Term Buy recommendation at Rs241. Market leadership, quality management, growth in end user-industries and economic revival coupled with attractive valuations makes this company a very good play on the overall growth in Indian economy.

Analyst Ajay Shethiya+(91 22) 2685 0101 December 2003 ([email protected]) Dealing (+91 22)2685 0505 Sandeepa Arora 5540 9033 Biren Patel 5540 8601

It’s all about money, honey! Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH Investment Rationale Overall growth in the economy leading to spurt in user-segment is likely to drive Recommendation demand growth for CUMI’s product profile. BUY Market leadership in Indian abrasive segment, which contributes 74% to its total CMP Rs 241 revenue. 52 week H/L Rs 245/100 Market Cap Rs 2.25bn Joint Venture with Wendt Gmbh, enabled CUMI to offer both conventional and super abrasive, leaving virtually a duopoly in the industry, with only competition from Grindwell Norton. Share Holding Pattern % Promoters 45.54 Institutional Investors 23.97 Being a part of Murugappa group, CUMI enjoy the group’s professional style of Other Investors 2.90 General Public 27.59 working, leadership status and its high standard of corporate governance.

The stock is trading at 7.7 times FY05E EPS of Rs30.9 and 1.36 times its FY05E Book Value of Rs177.

Share Price Chart Key Financials (Amt in Mn) FY01 FY02 FY03 FY04E FY05E Net Sales 2488.9 2479.8 2475.7 2723.2 3050.0 % yoy - (0.4) (0.2) 10.0 12.0 Net profit 232.0 215.2 365.5 242.7 288.9 % yoy - (7.3) 69.8 (33.6) 19.0 EPS 24.9 23.1 39.2 26.0 30.9 % yoy - (7.3) 69.8 (33.6) 19.0 Equity 93.4 93.4 93.4 93.4 93.4 Capital employed 2362.0 2383.6 2188.0 2091.8 2134.3 OPM (%) 19.2 17.9 13.6 13.9 14.2 RONW (%) 16.6 15.7 23.9 15.5 17.5 Debt-Equity (x) 0.7 0.7 0.4 0.3 0.3 Book NAV (Rs) 149.7 146.5 163.9 167.9 176.8

December 18, 2003 2 Carborundum Universal Ltd: Ace of Abrasives!

Investment Rationale

COMPANY RESEARCH Background CUMI, a flagship company of the Rs42bn, Murugappa Group was founded in 1954 as a tripartite collaboration between Ajax Products Ltd., India The Carborundum Co., USA and the Universal Grinding Wheel Co. Ltd., U.K. With technical assistance from its collaborators, CUMI undertook the ambitious project of manufacturing India’s first Coated and Bonded Abrasive products. Besides this, CUMI also pioneered the manufacture of Super Refractories, Electro-Cast Refractories, Electro-Minerals, Industrial Ceramics, Ceramic Fibres and Ceramic Colours in India.CUMI, a pioneer and market leader in the manufacture of abrasives in India has one of the widest ranges of bonded abrasives in the world

Quality Management Being a part of Murugappa group, CUMI enjoys the group’s professional style of working and its leadership status. Mr. M V Murugappan, Chairman of CUMI is leading the top management. He has over 20years of managerial experience with Murugappa group and has been instrumental in CUMIs expansion and diversification plans. Mr. Ramesh Agarwal, President and Wholetime Director has been associated with the same Industry and has varied experience with top companies. We believe that CUMI has a well knit team.

End user-segments to fuel growth Automobile The Indian Automobile sector grew at 16.53% in FY03 contributed by export growth of 65.35% and domestic growth of 14.80% as compared to FY02.Infrastructure has received a fillip in last 2 years through N-S-E-W corridor and Golden Quadrilateral projects. The transformation of road transport through these initiatives as well as higher economic growth would lead to higher demand for commercial vehicle industry. Passenger Cars continue to grow in double digit driven by rising aspirations and cheap and easy availability of finance. Within two wheelers, we expect motorcycle industry growth to continue on its growth path. After two bad years, the tractor industry is also likely to witness a turnaround with completion of inventory correction phase and good monsoons is likely to drive demand. Thus, we expect. Automobile and Auto Ancillary jointly accounts for 35% of the total demand for Abrasives and we expect all segment of automobile industry to report strong growth in the coming year in turn fuelling the growth for Abrasives.

Auto-Ancillary India’s automotive components industry manufactures almost the entire range of parts required by the domestic automotive industry for various types of vehicles. The demand for automotive components is a function of the demand for automotives in India. With

December 18, 2003 3 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH the automotive sector likely to show better growth, automotive component industry will witness a revival of fortunes. This apart, exports of automotive components from India hold promise for growth with India likely to become the sourcing hub for global automotive companies. Indian auto component industry, which grew by 17% in the last five years, the exports has risen by a robust 25% in the same period. The auto ancillary sector in India is likely to better this growth rate given its export competitiveness and outsourcing opportunities.

General Engineering The engineering sector is the second largest user segment for Indian abrasives market accounting for 20% of abrasive sales. The manufacturing sector has grown at 6% in FY03 and capital goods have shown a robust growth of 10.5% in FY03. The Indian economy is expected to grow by 6.5-7% in FY03-04. The overall revival in industry and manufacturing will drive capital investments and spur growth in the engineering industry – the second largest customer for abrasive industry. Export potential and overall growth in the economy had lead to an encouraging environment for the engineering sector. With India’s competitive advantage in terms of skilled and technical manpower, low labor cost, local availability of raw materials, huge domestic demand is likely to spurt growth in the overall engineering sector. On April 29, 2003, RBI had projected a GDP growth of about 6.0% for the year 2003-04, based on the assumption of rainfall at around 96 per cent of its long period average. In busy season credit policy, this has been increased to 6.5-7% on the back of good monsoons and an overall growth in all sectors. With the overall economy in up swing and potential growth seen in user segments, we expect better growth for CUMI as all this factors augurs well for the growth of the Company.

Exhibit 1: User-Segment Share

Fabriction 10% Construction General 8% Engineering 20%

Steel 8%

Auto-Auto Ancillary Others 30% 24%

Source: Company/ India Infoline Research

December 18, 2003 4 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH Virtual duopoly with competition only from Grindwell Norton In India there are three main players in this Industry. Apart from CUMI, Grindwell Norton Ltd and Wendt India Ltd are the major players. In order to mitigate the competition risk, CUMI entered into a joint venture with Wendt India and holds 40% of its share capital. After the joint venture, it now offers full range of abrasives to its customer’s viz. conventional and super abrasives. Super abrasives are manufactured by Wendt India Ltd. at its plant located at Hosur in Tamil Nadu.CUMI is a market leader in Indian abrasive industry and enjoys a share of more than 45% followed by Grindwell Norton which has a share of 40% in the total Rs5bn abrasive market.

Division wise performance CUMI operates in three segments viz Abrasives, Ceramics and Electrominerals.After the joint venture with Wendt India, it now offer conventional and super abrasives. We have discussed in details the business segments and their product offerings.

Segmental Analysis

Business Segment Product Offering Abrasives Bonded & coated abrasives and metal working fluids Ceramics Industrial ceramics and super refractories Electrominerals Brown fused alumina grains, white fused alumina grains and silicon carbide grains

Abrasives Abrasives division contributes around 74% to the total sales of the company. Abrasives are products used for material removal, polishing and finishing. They are broadly of three types Bonded Coated and Super abrasives.

Bonded and super abrasives are mostly in the form of wheels but also in other shapes such as segments, sticks etc. Coated abrasives are flexible abrasives and are in the form of sheets, belts and discs. CUMI is the market leader in the Indian Abrasive Industry. The sale of the CUMI in abrasive sector was affected in the fourth quarter due to introduction of VAT and ended up registering an overall growth of 10%. Enhanced basket of products, application of engineering support and innovative marketing initiative from CUMIs is likely to take advantage of recent growth seen in its user industry viz. automobile, auto ancillary and general engineering.

December 18, 2003 5 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH Performance: Abrasives Capacity Production Utilization Quantity sold Sales value Realization/unit (Ton) (Ton) % (Ton) (Amt in Mn) Bonded FY2003 9,500 8,573 90.24% 8,010 1287.61 160,750.3 FY2002 9,500 7,591 79.91% 7,595 1160.5 152,797.9 FY2001 9,500 7,725 81.32% 7,438 1238.277 166,479.8

Coated (Ream) (Ream) FY2003 337,000 264,304 78.43% 259,813 816.95 3,144.4 FY2002 337,000 220,080 65.31% 219,392 785.39 3,579.8 FY2001 337,000 220,320 65.38% 219,578 761.266 3,467.0

Industrial Cloth(Metre) (Metre) FY2003 4500,000 1933,343 42.96% 57,400 3.75 65.3 FY2002 1800,000 1029,712 57.21% 336,265 38 113.0 FY2001 1800,000 1482,244 82.35% 518,825 46.97 90.5

Ceramics In this segment, CUMI offers two product lines

Industrial ceramics Super refractories

Industrial ceramics are high alumina ceramic products. Grinding media, wear resistant liners, lined equipment and metallised ceramic products are certain varieties of industrial ceramics. Industries such as ceramic tiles, mineral processing, cement, power, defense and coal washeries are the major end users of these products.

Refractories are heat resistant and containment products. These products are mainly used in steel, cement, petrochemicals, fertiliser, ceramic insulator, carbon black and glass industries. In the refractories business, CUMI operate in the top end of the product line viz. super refractories. The competition in this segment is not likely as there are only two players.

Performance: Ceramics Capacity Production Utilization Quantity sold Sales value Realization/unit (Ton) (Ton) % (Ton) (Amt in Mn) FY2003 1,400 1,400 100.00% 1,400 194 138,571.4 FY2002 1,250 1,200 96.00% 1,250 164 131,200.0 FY2001 ------

FY2003 9,000 3,064 34.04% 2,799 171.85 61,396.9 FY2002 12,000 3,871 32.26% 3,777 316.62 83,828.4 FY2001 12,000 3,944 32.87% 3,625 326.29 90,011.0

December 18, 2003 6 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH As the Ceramics division is already operating at 100% capacity, CUMI is planning capital expenditure of Rs100mn towards it.

Electrominerals CUMI’s electrominerals division manufactures mainly three types of electrominerals – brown & white aluminum oxide and silicon carbide. Abrasive and refractory industries are the major end users of these products. Captive sales to the abrasives and refractory units contribute around 40% of its output. The business of electrominerals is likely to get affected due to following reasons:

Competition in domestic brown fused alumnia market is likely to continue due to cheaper imports from China. Removal of anti-dumping duty on imports from China in European market has effected CUMI competitive position. Increase in power tariff in Kerala, leading to increase in power cost.

In order to overcome the following challenges, CUMI is planning to introduce new products, develop on specialty grains and reduce cost as key success factors in this industry are cost, quality and innovative products. The company has exit from certain low-end markets of electrominerals segment and is focusing on profitable premium markets (high-end applications). With greater focus on premium segment of the market and new product development, the division is expected to achieve profitable growth in future.

Performance: Electrominerals Capacity Production Utilization Quantity sold Sales value Realization/unit (Ton) (Ton) % (Ton) (Amt in Mn) FY2003 24,300 14,909 61.35% 8,057 349.58 43,388.4 FY2002 26,300 16,461 62.59% 8,809 351.22 39,870.6 FY2001 26,300 18,039 68.59% 9,102 333.921 36,686.6

Exhibit 2: Division-wise Contribution

Product Mix:FY03 Product Mix:FY02 Ceramics 13% Ceram ics 17%

Electromi nerals Abrasives Electrom in 12% 75% Abrasives erals 71% 12%

Source: Company/India Infoline Research

December 18, 2003 7 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH Low interest cost The debt/equity ratio of CUMI has significantly reduced to 0.42 in FY03 from 0.74mn in FY02.The interest burden of the company is likely to reduce further as high cost debentures carrying 13.75% interest rate will be completely redeemed during the current fiscal. The interest cost has reduced by 39% to Rs12mn in Q2FY04 as against Rs19mn in Q2FY03. CUMI is planning a capital expenditure of Rs100mn in FY04 and FY05 respectively and we assume the same to be funded through internal accruals. Thus, we expect the interest burden of the CUMI to reduce in coming years.

High Book Value The Book value of the CUMI stands at Rs161 for FY03.The CMP/BV is at 1.38x.The BV of the CUMI has increased at a CAGR of 11% from FY94.We expect the Book Value to stand at Rs168 in FY04E and Rs177 in FY05E.

Consistent Dividend Payout CUMI has been consistently paying dividend to its shareholders. It has declared a divided payout of 100% for FY03.We expect the company to pay same rate of dividend in FY04E and FY05E.

Dividend Payout

120% 100% 80% 60% 40%

Payout (%) 20% 0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004E 2005E

Source: India Infoline Research

Manufacturing Facilities Abrasive CUMIs plant facility for abrasives products is located at Tiruvottiyur, Pallikaranai and Hosur in Tamil Nadu and Gopalpur in West Bengal. Apart from, Gopalpur, all the locations are ISO 9002 certified. In order to increase the productivity of the division, it has introduced the concept of Lean manufacturing, implemented Six Sigma work practices and have taken major modification of the coated maker in Tiruvottiyur. The steps taken by CUMI have resulted in better yield ratios. We expect the Abrasives division to show better productivity.

December 18, 2003 8 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH Ceramics CUMIs plant facility for ceramic products is located at Hosur in Tamil Nadu and is ISO 9002 certified. The super refractories plant is located at Ranipet in Tamil Nadu and is ISO 9001 certified. In order to increase the productivity and reduce the overall cost of operations, CUMI has reduced the raw material cost through usage of alternative material and has also reduced the fuel cost. We expect that measures taken on raw material and fuel cost reduction supported by process improvements is likely to show better operating margins for the ceramics division

Electrominerals Brown and white fused alumina and other products manufacturing facility is located at Edapally in Kerala and manufacturing facility for Silicon carbide is located at Koratty in Kerala.Both the plants are ISO 9002 certified. The bauxite for brown fused alumina is mined at Bhatia and calcined at Okha.Hydel power generated at Maniyar is a captive source of power for this division.

Last year, CUMI had reduced the staff cost and have also taken steps to reduce the fuel cost, as it form significant part of total cost. Introduction of new products and CUMIs continued efforts to reduce cost will set better operating margins and contribution from Electrominerals division.

December 18, 2003 9 Carborundum Universal Ltd: Ace of Abrasives!

Concerns

COMPANY RESEARCH Chinese Imports With the drop in customs duty to 25%, competition is expected to increase in the direct customer segment as a result of imports from global majors. In the mass markets, competition from imports from China will continue to grow. CUMI will counter these challenges through product development thus offering an enhanced basket of products, application engineering support and innovative marketing initiatives.

Power Generation Plant CUMIs, power generation at the hydroelectric power plant at Maniyar was adversely affected by the poor monsoon. In terms of productivity, the plant generated only 23mn units in FY03 as against 37mn units generated in FY02.The wind farm at Tirunelveli generated 7mn units against 8mn units for the same period. Due, to the lower productivity from the power generation plants, power cost as percentage of net sales increased to 12.23% in FY03 as compared to 10.31% in FY02, an increase of almost 2%. We expect the power and fuel cost to increase in coming years and this remains a concern as power and fuel cost forms around 11% of total cost of sales.

Latest Financials: Q2FY04

Period to 03/03 03/02 Growth 03/03 03/02 Growth Rs mn (3) (3) % (6) (6) % Sales 673 640 5.0 1212 1176 3.1 Other income 28 20 41.3 36 26 41.8 Total income 701 661 6.1 1248 1201 3.9 Expenditure (539) (499) 8.0 (988) (935) 5.6 Operating profit 162 161 0.4 261 266 (2.1) Interest (12) (19) (38.6) (25) (39) (35.6) Depreciation (33) (32) 3.8 (66) (62) 6.2 PBT 118 111 6.1 170 166 2.6 Tax (14) (24) (43.9) (25) (85) (70.1) PAT 104 87 20.2 145 81 78.9 Extraordinary items (37) (18) 103.3 (36) 182 (119.8) APAT 67 69 (1.6) 109 263 (58.5) OPM (%) 19.9 22.0 (2.2) 18.5 20.5 (2.0) Equity 93.4 93.4 - 93.4 93.4 - EPS (Rs) 28.9 29.3 - 23.3 56.2 -

CUMI has reported a 5% yoy growth in the topline at Rs673mn in Q2FY04 as compared to Rs640mn in Q2FY03.The operating margin of CUMI dropped by 220 basis points due to increase in raw material cost by 7.3%.

December 18, 2003 10 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH Segment-Wise Analysis

(Amt in Mn) 03/03 03/02 Change 03/03 03/02 Change Product Profile (3) (3) % (6) (6) % Abrasives 587 554 5.8 1046 996 5.0 Ceramics 131 104 25.7 245 194 25.9 Electrominerals 124 152 (18.3) 219 296 (26.1) Less:Inter sale (67) (68) (2.6) (118) (135) (13.0) Total sales 774 741 4.4 1392 1352 3.0

EBIT Abrasives 89 87 2.5 152 149 2.0 Ceramics 19 13 49.6 37 24 53.1 Electrominerals 16 28 (42.6) 14 44 (69.5)

Capital employed Abrasives 1169 1216 (3.8) 1169 1216 (3.8) Ceramics 216 228 (5.5) 216 228 (5.5) Electrominerals 338 420 (19.6) 338 420 (19.6) Others 610 563 8.4 610 563 8.4 Total 2333 2427 (20.5) 2333 2427 (20.5)

EBIT/Capital employed Abrasives 7.6% 7.1% 0.00 13.0% 12.2% 0.01 Ceramics 8.8% 5.6% 0.03 17.1% 10.6% 0.07 Electrominerals 4.7% 6.6% (0.02) 4.0% 10.6% (0.07)

The abrasives, which contribute around 76% to the total sales has increased by 6%, ceramics which contribute around 17% increased by 26% and electro minerals which contributed 16% has shown de-growth of 18.3%.The de-growth in electrominerals was due to low realization seen in some of the grains product and due to increase in power cost.

December 18, 2003 11 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH Projected Income Statement

(Amt in Mn) FY01 FY02 FY03 FY04E FY05E Gross sales 2857.2 2833.7 2842.6 3126.5 3501.7 Excise duty (368.3) (353.9) (366.9) (403.3) (451.7) Net sales 2488.9 2479.8 2475.7 2723.2 3050.0 Expenditure Raw /packing materials (724.9) (734.2) (738.2) (827.9) (927.2) Employee costs (387.4) (390.7) (451.8) (490.2) (549.0) Stores and spares (114.3) (107.6) (103.0) (108.9) (122.0) Power and fuel (262.5) (255.7) (302.9) (335.0) (375.1) Rent, rate and taxes and insurance (45.4) (53.3) (53.8) (59.1) (66.2) Repairs & maintenance (81.2) (78.0) (75.7) (81.7) (91.5) Travel and conveyance (46.1) (49.0) (43.9) (48.2) (54.0) Advertising and publicity (9.8) (9.8) (12.5) (13.9) (15.6) Frieght, delivey and shipping charges (68.8) (69.0) (70.9) (77.9) (87.2) Printing, stationery and communication (33.3) (31.3) (30.5) (33.5) (37.5) Provision for bad debts (9.9) (20.3) (9.2) (8.2) (9.1) Services outsourced (86.1) (107.6) (113.6) (125.0) (140.0) Miscellaneous expenses (60.8) (63.8) (51.8) (49.0) (48.8) Other expenses (79.7) (65.4) (80.4) (85.8) (94.5) Cost of sales (2010.4) (2035.6) (2138.1) (2344.1) (2617.8) Operating Profits 478.5 444.3 337.6 379.1 432.2 Other Income Dividend/interest 71.2 93.8 106.4 110.0 112.0 P/L on sale of investment 0.0 3.3 (17.0) 0.0 0.0 Profit on sale of undertaking 34.6 0.0 221.0 0.0 0.0 Other income 105.8 97.1 310.5 110.0 112.0

Total Income 584.3 541.4 648.1 489.1 544.2 Interest (113.0) (115.5) (74.0) (41.0) (29.0) Depreciation (113.7) (116.5) (119.5) (124.5) (130.0) Profit before tax 357.5 309.4 454.6 323.6 385.2 Provision for tax (125.5) (94.2) (89.1) (80.9) (96.3) Profit After Tax 232.0 215.2 365.5 242.7 288.9 Extra ordinary /P.Y.A. 0.0 0.0 0.0 0.0 0.0 ----- Adjusted PAT 232.0 215.2 365.5 242.7 288.9 Dividend 70.0 93.4 93.4 93.4 Dividend Tax 11.9 11.9 11.9 Dividend Payout 105.3 105.3 105.3

December 18, 2003 12 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH Projected Balance Sheet (Amt in Mn) FY01 FY02 FY03 FY04E FY05E Equity capital 93.4 93.4 93.4 93.4 93.4 Capital reserve 43.8 43.8 43.8 43.8 43.8 Revaluation Reserve 35.0 34.5 33.7 33.7 33.7 General reserve 915.4 964.5 1168.0 1168.0 1218.0 DRR 177.7 91.2 70.7 70.7 70.7 IFR 40.0 40.0 0.0 0.0 0.0 Profit and loss account 92.1 100.6 120.8 158.2 191.8 Net worth 1397.3 1367.9 1530.4 1567.8 1651.4 Secured loans 471.8 522.0 499.1 324.0 233.0 Unsecured loans 492.8 487.6 151.6 200.0 250.0 Long term lease liability 0.0 6.1 7.0 7.0 7.0 Total debt 964.7 1015.8 657.7 524.0 483.0 Capital employed 2362.0 2383.6 2188.0 2091.8 2134.4 Gross block 2100.0 2236.6 2163.6 2263.6 2363.6 Accumulated depreciation (1135.8) (1239.5) (1237.4) (1374.0) (1434.7) Net block 964.2 997.1 926.2 889.6 928.9 Capital WIP 43.2 26.1 18.6 15.0 10.0 Total fixed assets 1007.4 1023.2 944.8 904.6 938.9 Investments 372.9 559.2 502.0 502.0 502.0 Inventories 438.1 383.1 369.5 370.0 374.0 Sundry debtors 592.4 586.7 592.4 589.0 596.0 Cash & bank 59.7 103.6 83.6 73.0 74.0 Loans & advances 190.8 195.8 236.1 199.0 194.0 Sundry creditors (277.0) (241.2) (251.1) (278.0) (291.0) Other liabilities (40.2) (40.7) (24.3) (27.4) (28.2) Provision for dividend (65.3) (70.0) (93.4) (93.4) (93.4) Provision for dividend tax (6.7) 0.0 (12.0) (12.0) (12.0) Working capital 891.8 917.2 900.8 820.2 813.4 Deferred tax liability 0.0 (184.9) (159.5) (135.0) (120.0) Miscellaneous expenses 89.9 68.9 0.0 0.0 0.0 Capital deployed 2362.0 2383.6 2188.0 2091.8 2134.3

Notes: Sale of under taking In April 2002,CUMI had sold its electroplast refractories plant at Palakkad for total consideration of Rs311.46mn to M/s SEPR refractories India Ltd.The profit of Rs221.04mn realized is reflected in sale of undertaking. Due to which, the net profits had been higher for the year. CUMI does not plan to sell any undertaking for the coming years.

Acquisition of CAPL During the year, CUMI has acquired a 51% stake in CUMI Australia Pty Ltd; Australia (CAPL) at a cost Rs15mn.The Company is into designing, marketing and application of industrial ceramics and also ceramic lined equipment for the coal processing industry in Australia. CAPL procures a major part of its requirements of industrial ceramics from CUMI. CUMI holds 51% of its equity. The investment into CAPL is expected to help CUMI increase its presence in Australia.

Consolidated Accounts On a consolidated basis, the topline of CUMI grew by 6% to Rs3196mn in FY03 as compared to Rs2626mn in FY02.The net profits grew by 88% to Rs446mn as compared to Rs237mn in FY02.The EPS of Company on consolidated basis stands at Rs42 in FY03 as against Rs24 in FY02.

December 18, 2003 13 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH Details about CUMIs subsidiary

December 18, 2003 14 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH Capital History

History Of CUMI

1954: The Company was Incorporated at Chennai. The Company manufacture bonded and coated abrasive products, refractories, refractory grains, calcined bauxite etc. The Company also represents Carborundum Co. for their sales of electrocasts refractories and crucibles and the Universal Abrasives, Ltd. for abrasive grains. 1994: The Company commissioned a wind farm of 2 MW capacity at Perungudi and Tamilnadu. During the year a project for manufacture of brown aluminium oxide grains was commissioned with additional capacity of 8,000 tonnes at Edappally.

1995 : Four windmills were also added for increasing the capacity to 2.925 MW in order to meet power requirement of Hosur factory.

2000: The Company has sold its refractory unit in Visakhapatnam for a sum of Rs 780mn.The Company has received shareholder approve to its decision to buy-back up to 27-68 lakh shares at Rs. 115 per share through a tender offer on a proportionate basis. The Company proposed to buyback the fully-paid equity shares of Rs. 10 each of the company.

2002: Sold its Electrocast refactories unit at Palkkad for Rs.310mn.

2003: The Company has acquired a 51% stake in CUMI Australia Pty Ltd.

December 18, 2003 15 Carborundum Universal Ltd: Ace of Abrasives!

About the Industry

COMPANY RESEARCH Abrasives Abrasives are used in modern industrial applications. The total size of Indian abrasives industry is estimated at Rs5bn.They can be classified as coated and bonded abrasives. They are used in industries like automobiles, capital goods, construction, etc for metal removal or finishing. India’s abrasive industry is a virtually a duopoly with CUMI and Grindwell Norton Ltd (GNL), controlling 85% of the market. CUMI is the market leader in Indian abrasives industry with market share of 45% fallowed by GNL with share of around 40%.Customized nature of products acts as a strong entry barrier. Grinding and abrasive products are used in the last stage of manufacturing operations, for material removing and polishing. Manufacturers and end users have to develop products fitting the required specifications. Technology for development of special grains used in abrasive products is restricted to a few manufacturers in the world. These factors have enabled CUMI and GNL to maintain a combined share in excess of 80% in the last 40 years. The main user sectors for abrasive products are automobile, steel, bearings, construction and fabrication and we expect the demand for Abrasive to increase as, with the economic revival all the user segment are expected to perform better.

Introduction An abrasive is a substance that is used for grinding and polishing operations. It should be pure and have uniform physical properties of hardness, toughness and resistance to fracture. Abrasives have been largely responsible for ushering in the precision capabilities of the twentieth century. Modern abrasive machines have made minute tolerances and fine surface finishes possible. Extensive research has changed grinding from a metal- finishing operation to a competitive metal-removal method as well. Abrasives find applications in the manufacture of a variety of items in our daily use.

The size of the abrasive grains used in manufacturing of abrasive products is extremely small (for instance approximately 3.5 million grains are contained in a single gram). The grains used are very special and manufacturing them is a complex and power intensive operation.

December 18, 2003 16 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH Other types of abrasives • Natural abrasives like emery (often used as an abrasive on coated cloth and paper), sandstone, carborundum and diamonds (known to be having the highest hardness). •Synthetic abrasives that have been developed over the years like silicon carbide, aluminum oxide and cubic boron nitride (CBN). 1. While natural abrasives like diamonds can withstand temperature upto 816C, synthetic abrasives like CBN can withstand temperatures above 1371C. Diamonds may be classified as both natural and synthetic abrasive materials. Natural stones, which are unsuitable for gems are termed boart and are crushed for abrasive use.

Abrasive product range • Coated abrasives are mainly used for light polishing applications. Their main use is in automobile, whitegoods, dairy, tannery and plywood industries. A strip of abrasive cloth of correct length and width is formed depending on the usage into as per the specifications. Other coated products are scrubber pads and sandpaper etc. • Bonded abrasives are mainly in the form of grinding wheels. Their applications range from metal removal to finishing. They are used in industries like automobiles, construction and fabrication, steel, bearings, etc.

Grinding is the operation of removing metal in the form of minute chips by feeding the job against a rotating abrasive wheel known as the grinding wheel. Both internal and external surfaces of a workpiece may be ground. Grinding is used to finish workpieces with high surface quality. This is a finishing operation as it removes comparatively little metal; usually 0.25 to 0.50mm in most operations and the accuracy in dimensions is in the order of 0.000025mm. Grinding is also done to machine materials, which are too hard for other machining methods that use cutting tools. Grinding is done on surfaces of almost all-conceivable shapes and materials of all kinds.

A grinding wheel is a multi-tooth cutter made up of many hard particles, which have been crushed to leave sharp edges, which do the cutting. The abrasive grains when mixed with a suitable bond act as a matrix or holder when the wheel is used. The most commonly used bonding materials are ceramics, plastics, rubber, shelllac and metal. The wheel may consist of a piece or segments of abrasive blocks built into a solid wheel. The abrasive wheel is usually mounted on some form of machine depending on the application. Its uses may range from snagging wheels that remove as much as 30kg of steel per hour, to precision wheels that remove very little material but produce finishes as fine as 1-2 micron. Further, the grinding wheel has to withstand high temperatures generated during the process. Thus designing a grinding wheel is a complex task and requires in-depth knowledge of various aspects of its metallurgy.

December 18, 2003 17 Carborundum Universal Ltd: Ace of Abrasives!

COMPANY RESEARCH Major Players Abrasives Refractories Carborundum Universal Tata refractories Grindwell Norton Assocaited cements Cos. Orient Abrasives OCL India John Oakey & Mohan Vesuvius India Micro Abrasives(India) Bharat Refractories Sterling Abrasives Maithan Ceramic Valley Abrasives IFGL Refractories Electrosteel Castings Orient Abrasives Eastern Abrasive(Erst.) Carborundum Universal Cutfast Abrasive Tools(Erst.) Burn Standard Co. Alirox Abrasives South India Corpn(Agencies) Dalmia Cement(Bharat) Nilachal refractories Sand Plast (India) Marathwada Refractories Valley Magnestic Co. Raasi Refractories Shri Nataraj Ceramic & Chemical Inds. Grindwell Norton Kesoram Industries Source: India Infoline Research

December 18, 2003 18 Our Recent publications Subex Systems Ltd: Profit from Revenue Maximization - 17th December 2003 Thermax Ltd : Changing Lanes- Turns Around to Grow- 11th December 2003 Gujarat NRE Coke Ltd: C’ash on it! - December 09th, 2003 Alfa Laval (India) Ltd: Engineer Further Gains - December 06th, 2003

Toll Free 1600-22-6555 Email [email protected] 5paisa.com is the trade name of India Infoline Securities Pvt Ltd (IISPL), a wholly owned subsidiary of India Infoline Ltd. Our research reports are available on First Call Research Direct/ Thomson Financial and Bloomberg (code: IILL). IISPL is a member of the National Stock Exchange of India (NSE) and The Stock Exchange, Mumbai (BSE). IISPL is also a Depository Participant with NSDL. Published in Decmeber 2003. All rights reserved. © India Infoline Ltd 2003-4. Reference No: IIL/CR01/03/02 This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended as an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of the information contained herein is your responsibility alone and India Infoline Ltd (hereinafter referred as IIL) and its subsidiaries or its employees or directors, associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do not represent that it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this publication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiaries and/or directors, employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report. India Infoline Ltd, 24 Nirlon Complex, Off Western Exp. Highway, Goregaon(E). Mumbai -63. Tel 2685 0101 / 0505. Fax 2685 0585 it’s all about money, honey!