>WENDT LIMITED (Industry - Abrasives)

Bangalore-based Wendt (India) Ltd (Wendt) is a leading manufacturer of superabrasives in
India. It also manufactures grinding machines and precision components. We assign Wendt a fundametal grade of ‘4/5’, indicating that its fundamentals are ‘superior’ compared to other listed securities in India. We assign a valuation grade of ‘2/5’, indicating that the current market price has ‘downside’ to our fair value per share.

■ Leading the superabrasives pack in India
Wendt currently commands ~35% market share in the Rs 1.5 bn Indian superabrasives industry, which is expected to grow at a CAGR of 7% over the next three-five years. Given its technological advantage, comprehensive product portfolio, strong brand image and reputed customer profile, we expect Wendt to maintain its lead. The rise in incremental demand due to a shift in customer preference from conventional abrasives to superabrasives will further boost the segment, though it is too early to factor this in.

■ Grinding machines and components to be the next growth driver
Wendt has renewed its focus on manufacturing grinding machines and precision components since FY06 while they have been making these machines since FY95. These products require high-end machines and technological expertise, which Wendt has courtesy of Wendt Gmbh, a leading manufacturer of grinding machine and precision components globally. We expect Wendt’s revenues from this segment to grow at a twoyear CAGR of 70% to Rs 274 mn by FY12 on account of a strong order flow.

■ Strong technical support from the parent…
Germany-based Wendt Holding Gmbh, part of the Winterthur Technology Group AG, is one of Wendt’s promoters. The company is globally known for its technological know-how and superior quality superabrasives. The technology sharing keeps Wendt’s product portfolio continuously updated and helps it command significant premium pricing over its competitors. We believe access to superior technology will help Wendt to maintain a strong foothold in the superabrasives segment.

■ … but technology dependence could be risky
Wendt benefits on the continuing technology inputs from Wendt Gmbh. But Wendt has over a period of time moved from being entirely dependent on the ‘Know how’ transfer to a company that operates on ‘Know why’ understanding. Over 40% of the current sales come from products that have been developed in-house by WIL. Though little but there still lies technology dependence risk which may impact the profitability.

■ Revenues to grow at a two-year CAGR of 19%, RoE to expand to 24.8%
We expect the company’s revenues to grow at a two-year CAGR of 19% to Rs 897 mn in FY12, primarily driven by strong growth in the grinding machines and components business. We expect EBITDA and net margins to marginally improve to 26.9% and 16.4%, respectively, by FY12. Consequently, RoE is expected to improve to 24.8% by FY12. We expect the company to continue to remain debt-free going forward.

To read the full report: WENDT