Carborundum in Rs 250 crore expansion at Volzhsky Abrasive Works

Carborundum Universal (Cumi), the Murugappa group owned industrial abrasives company, is adding to its silicon carbide capacity in Russia, through Volzhsky Abrasive Works (VAW), the company it acquired in September 2007. It will spend $50mn or about Rs 250 crore to build a new plant in the Volgograd region, Russia.

The new plant will produce 100,000 tpa of silicon carbide, taking up capacity to 165,000 tpa in phases. Cumi had paid $37mn in September 2007 (Rs 148 crore at then prevailing fx rates). Its total rupee investment in Russia will thus be closer to Rs 400 crore. The new plant will use fusion technology which it claims is more environment friendly and energy efficient. Silicon carbide is one of the common materials used for making abrasives.

The VAW plant is located close to silicon deposits, explaining Cumi’s interest in expanding capacity over there. VAW is the world’s second largest producer of silicon carbide and in 2007 it exported 44% of its production, chiefly to Europe. Its sales during 2007 was Rs 277.4 crore but only 7 months of its operations were included in Cumi’s performance in FY08. Cumi’s consolidated sales rose by 54% to Rs 336 crore during the September’07 quarter, due to good performances in India, Russia and Australia.

Part of this was also a base effect; the September’07 quarter included only one month of VAW’s sales. It said appreciation in mineral prices and efficiencies saw higher sales and profitability at VAW. Cumi’s performance will get affected by the global slowdown in the near to medium term. Its products are used primarily by industries; a slowdown in output will put pressure on its own output and prices. Debt to equity has gone up, to 0.85:1 in FY08 compared to 0.6:1 in the previous year and its cash generated from operations too has gone down, primarily due to a jump in inventories and debtors.

The funding of this expansion hence may put some more pressure on its gearing. Its focus in the next few years should be on integrating its acquisitions and organic growth. It does have a diversified product base spread across abrasives, ceramics and electro-minerals. But its exposure to the Indian market, despite these acquisitions is significant, contributing nearly 90% of revenues. The Cumi stock closed on Friday, Nov 28 at Rs 90.5, marginally up from its previous close and 5% over its price a week ago.

Update#1: Crisil has reaffirmed its existing ratings on Cumi and given a AA+stable rating for a new Rs 50 crore non-convertible debenture issue. Crisil has said that Cumi has plans for a Rs 300 crore capex between FY09 and FY11. It says that the rating outlook could be revised to Stable if the company’s capital structure improves, due to better cash accruals used to pay down debt and could also be revised to negative if the capital structure worsens due to unforeseen expenditure, including acquisitions.

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