>GRINDWELL NORTON LIMITED (HDFC SECURITIES)

We had initiated coverage on GNL on May 29, 2008 at a price of Rs.125.05 and recommended to accumulate on dips to Rs.106-110 band for a target of Rs.154. The stock subsequently made a high of Rs.133 on June 13, 2008. The stock later underperformed in line with the other small/midcaps and touched a low of Rs.70 on March 06, 2009. It later recovered and made a high of Rs.126 on June 03, 2009. Currently, the stock is quoting at Rs.101.80.

Company Profile:
Grindwell Norton Ltd. (GNL) came into being when a technical collaboration in 1967 between Grindwell and the then world leader in abrasives – Norton Company, USA, grew into a financial collaboration in 1971. GNL is a 51.3% subsidiary of Saint Gobain (SG) of France and India’s leading manufacturer of Abrasives (bonded, coated and super abrasives), Silicon Carbide and High Performance Refractories.

Q1CY09 Result Update
GNL recorded a 2.9% degrowth in revenues on a Y-o-Y basis in Q1CY09 and 2.3% fall Q-o-Q at Rs.114.3 cr. This was mainly on account of sharp fall in volumes and value of each of GNL’s products. Bonded abrasives witnessed fall of 15-20% in volumes, coated abrasives saw a fall of 5% whereas thin wheels volumes improved by 5% in Q1CY09. Performance Plastics and refractories also witnessed a volume degrowth of 10% and 15% respectively. However, the others division, which accounts for revenue from the Project Engineering has done well during the quarter.

The total expenditure fell by 3.3% Y-o-Y and by 3.8% Q-o-Q. Raw materials and staff cost have risen 250 bps and 150 bps respectively as a percentage of sales in Q1CY09. Staff cost increased on account of 6% hike in salary and higher wages post settlement been paid at one of GNL’s plant. Power and fuel cost has dipped by 170 bps Y-o-Y and 220 bps Q-o-Q as a percentage of sales. With the full-fledged commencement of operations at the Bhutan Plant in July 2009, the power and fuel cost could further see a dip on consolidated basis, which could ease the pressure on the margins. Other expenditure has dipped to 18.6% as a percentage of sales. Although the sales have dipped, control in costs have led to margin expansion by
40 bps Y-o-Y and 140 bps Q-o-Q to 14.3%.

Despite the benefit of excise and income tax for 5 years at the HP plant, GNL continues to pay 31% tax rate as the plant hasn’t been fully utilised. GNL has managed to keep its PAT margins at the same level of 10.4% in Q1CY09. During the quarter, GNL earned an EPS of Rs.2.1, down by 5.7% Y-o-Y and down by 4% Q-o-Q.

To see full report: GRINDWELL NORTON LIMITED