CARBORUNIV - Carborundum Universal Ltd. Share Price

Carborundum Universal Limited's management provided a cautious yet optimistic outlook during the Q1 FY '26 earnings call. They reported consolidated sales of INR 1,207 crores, reflecting a 1.9% growth year-over-year, while standalone sales increased by 5.2% to INR 698 crores. However, the consolidated profit after tax (PAT) saw a significant decline of 45.2%, dropping to INR 62 crores due to lower volumes in the VAW segment, impacted by logistical challenges at Rhodius and domestic market issues.

Key forward-looking points highlighted include:

1. Ceramics Segment Growth: The management maintained its sales growth forecast for the Ceramics division at 16% to 18% over the full year.
2. Electromineral Division (EMD): Previously projected growth of 1% to 2% remains unchanged, although margins are now expected to be lower at 4.5% to 5.5% due to input cost pressures.
3. Abrasives Segment Adjustment: Initial guidance of 5% to 6% for the Abrasives segment has been revised down to 4% to 5% considering the adverse impact from Rhodius.
4. Profit Margins: Consolidated PBIT margins are now projected to decline by 250 to 300 basis points compared to the previous year's 11.2%.
5. Operational Stability: Management expects Rhodius to stabilize operations and recover sales by the end of August, aiming for a return to last year's sales levels in subsequent quarters.

Overall, while challenges persist"”especially related to logistics and segment-specific downturns"”the management is optimistic about recovery and maintaining solid cash flows, with free cash flow ratios over 100% at the standalone level.

Question: Sir, three questions. So first is on VAW. So could you help us understand the way forward given that now we almost have 6 months since the sanctions? What is your thought process in mitigating and how do we get back to normal levels and when in your view?

Answer: As for VAW, we expect volumes to be lower by 25-30%, consistent with our previous guidance. This quarter's sales figures reflect that decline. Our future recovery is tied to the geopolitical situation between Russia and Ukraine. We're currently focused on a profitable domestic market, and while we cannot predict the timeline for normalization, we continue to operate profitably within current constraints.

Question: Second is in the domestic Abrasives segment, if you could give us a bit more colour on where are we seeing slowdown given that we have three segments that you outlined: retail, industrial, and precision. Where exactly is the impact?

Answer: You're correct; the slowdown is primarily in the retail segment, with significant inventory clearance challenges faced by our major distributors. While precision and industrial segments show reasonable growth, retail has been hindered by stock and credit issues within the distributor network, impacting overall sales.

Question: Third is if you could just help us understand on the German subsidiaries, what is the one-off that was there in the quarter? How do you see these two Rhodius and Awuko over a 9-month period and the full year basis, excluding this?

Answer: Rhodius faced a logistical disruption this quarter, leading to an €4 million sales loss compared to last year. We anticipate that over the next three quarters, sales will stabilize in line with prior year numbers, but we expect overall losses this year due to recoverable volume shortfalls tied to logistics delays, particularly around software implementation and warehouse transitions.

Question: Sir, just one more question, a bookkeeping question. Employee expenses for the consolidated is up by 24% and if I look at the subsidiary piece, which is minus the standalone, they are up by little over 30%. So if you could just help us understand that?

Answer: I'll need to get back to you on those specific employee expense details, as they require a deeper dive into our cost structures across subsidiaries. Understanding these increases is important for accurate context, and I appreciate your patience as we gather the relevant information.

Question: My first question is with respect to the standalone Electrominerals business. The margins are kind of still on the compressed side. You had mentioned that it was because of raw material prices going up, and now we are passing it on. But earlier, you had mentioned competition from Chinese players. What is the status with respect to that competition?

Answer: The alumina prices have fluctuated significantly; they doubled and then fell sharply, affecting our margins. Although competitive pressures from Chinese suppliers persist, we maintain reasonable pricing strategies and product differentiation, aiming for stabilization and improving margins as we pass on increased costs and liquidate our held inventory.

Question: And with respect to Ceramics sales for EVs and semiconductor industry, is that a big driver of growth over the next 1, 2 years or 3 years?

Answer: Yes, the Ceramics segment, especially related to EV and semiconductor applications, is expected to be a significant growth driver in the coming years. Our products are well-positioned to meet the demand from these emerging sectors, and we are actively engaged in this area.

Question: Sir, firstly, on the U.S. tariffs, what would be the impact on our Abrasives and Ceramics exports to the North American base? Could there be a substantial impact?

Answer: At this stage, the evolving U.S. tariffs present uncertainties. We are currently evaluating how existing suppliers can pivot to adapt. We do not foresee immediate threats but are monitoring developments closely, as they could impact our competitive positioning in that valuable market.

Question: What are our capex plans for the next two years, FY '26 as well as FY '27 across all three major segments?

Answer: We are sticking to our previous guidance of INR350 crores in capex for FY '26, across all segments. This includes significant investments in fused alumina and specific projects related to ceramics for semiconductor applications. Further long-term projects will also be carefully aligned with strategic growth areas.

Question: So only one question I have on the standalone Abrasives; is the industry not growing? Is it the demand or competition? Any color on that will be helpful.

Answer: The Abrasives industry is indeed growing; however, our challenges are not strictly industry-wide. Rather, they stem from specific situations with our major distributors facing credit and inventory issues. Competition is growing, but we remain confident about our market position amidst these industry dynamics.

Question: If you can just help us understand what has been the benefit of acquiring Rhodius and how are we seeing profitability and revenue growth there?

Answer: Since acquiring Rhodius, we have consistently turned a profit, barring this year that faced a €4 million loss due to unexpected logistical issues. We are optimistic that in the coming quarters, sales will stabilize, but we will not recover the lost volumes from this quarter. We maintain a focus on long-term profitability.

These summaries encapsulate the key queries raised during the Q&A session and their accompanying detailed responses while respecting the character limits provided.