Carborundum Universal Limited analyst Q&A

Thank you very much. We will now begin the question and answer session. We have our first question from the line of Bhoomika Nair from D AM Capital Advisors. Please go ahead.

Good morning Sir and thank you for the detailed opening remarks. Sir my first question is on ceramics if I see this quarter on both standalone and also on consolidated basis there has been a decline in the revenues I remember the previous quarter you had highlighted there was some inventory correction which was happening by the client so just wanted to understand what is the status of that right now and how should we look at the ceramic s business going forward given that we are doing a lot of initiatives to grow the same and also if you can talk about how metallised cylinders and wear ceramics are also performing out here. That is my first question.

Thank you Bhoomika. I think it is a good question and concern. As we said earlier it was one customer in ventory correction that they were going through, which I think is what currently we are facing that is why in my opening remark also we said there is a growth which is substantially high at about 22% in all other business segment of the ceramics and a degrowth in engineered ceramics which cost the overall growth of 6%. We believe that once this correction which I think would get addressed by this year we will get back to an overall growth of 20 plus percentage as normal that we used to have in the past.

Sir can we quantify what is the decline in the engineer ed ceramics in some manner so that we get a sense of what is being the 22% kind of a growth, what is the base number that it can possibly decline to?

22% is the growth in rest of the ceramic business , metallised cylinders, wear ceramics, those are the businesses which are growing at 22% whi le this is having a degrowth. We expect this correction to get completed and in the next year we will have overall growth of about 20 plus percentage.

The question is that from here into the fourth quarter will there be a further decline in the ceramics revenues you think or is this quarter your thing that this is bottom and should not decline further from here?

I do not think we expect further decline. I think we already have seen all the corrections , etc., so it should be fine and I do not think we would get back to any further challenges coming in.

Understood. So the other question is on the EM D segment, you said and spoke about the Chinese competition and the dumping which is impacting pricing both in India and also in Africa, as that been a fairly weak couple of quarters out there because of this aspect , are we seeing further reduction in prices out here or if you can just give some trend on how the SiC prices are trending and how are we trying to contain this so that our profitability does not decline on an overall basis?

So I think we have first of all good v olume growth both in alumina as well as in silicon carbide. Our aim is to definitely secure volumes and we do not want to lose any opportunity that is we are very clear but the unusual price dumping is what is causing the current problem and that is how th e margins of the electromineral is going down , but I expect that as a business they have probably bottomed out, but I am not saying that the Chinese are going to stop further dumping. We expect this trend to continue maybe for the next four to six quarters we need to wait and watch. Largely this is not a situation th at we are seeing only in India w e are seeing this across the globe and I am sure you guys notice this across industries as well it is just not in our industry , so that is why I said that the pri ce pressure will continue. We feel that we have bottomed out, there could be some minor change, but I do not think it will go any further down. So last year we ended at 14% PB IT margin and this year we could end the range of about 10% and let us say if you look at the Q3 we were lower because there are some mix play also is there, but I think 10 to 12% is something we should expect.

On the VAW side because obviously there has been also a further impact on the consolidated basis because of the Rouble translation so how should we look in terms of VAW revenue is growing they have obviously done very well as you mentioned almost 26% kind of growth for the current quarter in Rouble terms, so how should we look on consolidated basis for VAW to continue doing well and any update on both in VAW and in India on the specialty which can offset some bit of this impact of the Chinese dumping?

So as far as V AW is concerned that the company is doing fine and I think they are having both volume and price growth. See the conversion rate of last year was abnormal conversion rate of this year is not abnormal. This year it is in the range of 0.92 in that range. Normally if you have observed in the last five years we will be in the range of 0.9 to 1. This is a normal trend as far as conversion of Rouble to INR is concerned. Last year you must have noticed that when the oil prices were going up Russian Rouble had benefit and then they had really kind of shot up that is why it went up to as hig h as about 1.27 or even as high as 1.3. So hence we had the benefit of higher conversion in last year, which is not forthcoming this year.

Yes Sir, that part of translation bit I understand. I was asking more in terms of Rouble terms that this performance that we are seeing is sustainable or not.

I think Rouble terms the 10% to 12% growth is sustainable what they have grown 23% now there is certain element of these type of benefits getting passed on, but I think a 10 to 12% growth should be expected.

So on a consolidated basis because of this whole translation impact plus the China dumping that is happening in the other markets one should kind of build in even for FY2025 because the same might continue for some time would it be fair to say that we should look at a single digit kind of a growth and 12% odd and 12% margin profile on consolidated basis?

Are you talking margin profile or growth profile?

For FY2025 if I were to build in like a single digit growth on consolidated revenues and margin profile of 12% odd would that be fair or you think there is some upside out there?

I think this year my guess is that we could end around 12-12.8% I prefer the growth that we could end and at the same time we also had losses this year from Foskor and we also had some challenges forthcoming because of issues in AWUKO progressing in terms of the recovery, etc., and the losses in AWUKO and RHODIUS to further come down. So if I look at it I feel that these are losses that would go away and probably we will be in a better position. Those are th e additional upsides that one is to consider. As far as the growth is concerned I will probably come and share with you more when we meet in April or May.

Sure. Sir I will come back in the question queue for other queries. I have more question s there. I will come back in the question queue Sir.

The next question is from the line of Bhavin Vithlani from SBI Mutual Funds. Please go ahead.

Good morning Sridharan and the team. Good performance especially on the bottomline front. So I have a few questions when we acquired the German companies , at that time we had outlined a path two double digit EBIT margins so the question here is the same I had asked previously is do you believe that those level of margins are achievable , a re the timelines that we anticipated are same changing while we are moving in the same direction and qualitatively if you could talk about what makes you believe that from a loss to a break even we could get to a double digit margin level that is the first question. Second is if I look at the standalone abrasives as a segment , then after first quarter of FY2023 prior to that we were clocking high teens growth rate. The underlying growth rate has nosedive d to low single digit sub 5% and you alluded to some competitive pressures especially in the thin wheel segment while we have seen the margins going up, so if you could talk qu alitatively on the standalone abrasive segment it seems that the margin expansion is driven by the mix change towards a higher share of bonded, which is a better margin segment and how do you see this growth rates coming back, the efforts that the company has been taking underway last time you mentioned that there are a lot of effort being taken to kind of take the growth rate up to double digit or teen , s o if yo u could kind of talk about this, last bit is in the previous participant’s question you did kind of alluded but if you could talk about the green energy segment, the hydrogen where in the previous instances we have mentioned that as the customer moves to version one to version two, there could be an intermittent st uff, but there is a significant incr ease in the content for CUMI c onsequently there could be a geometric growth from an arithmetic growth, so if you could talk more about it qualitatively and that you said that next year the growth rate for the segment as a whole can jump to 20% how does that lead to profitability and these are my three questions.

Thank you. I think first let me take the RHODIUS question. So we said that we would take five years to get back to the double digit PB IT margin and we feel confident of that trajectory. So what is happening in the current context is that one Europe is going through demand challenges whic h I think you all know and you are all seeing across many industries plus Germany especially went through a huge cost pressure particularly comi ng from the energy and similarly on the other raw materials, which are all now slowly get back to normal except energy costs, which is still on the higher side but for these two blips that they have to face I think once these things get addressed we are still confident that we will get back to that trajectory that we were sharing at the time of acquisition. In fact , the integration and the work that we are all doing is really good because there are a lot of projects that we are working closely in terms of electromineral supplies to RHODIUS has significantly increased. Similarly, we are able to work closely on various technology projects that we could work together on the thin wheel area . I think probably we will share more in the next say 18 months, 24 month s as we start making use of it. To your second question, which is largely on the abrasives standalone, so we look at the abrasive standalone in three broad segments abrasives that goes to the industrial application and precision abrasives and abrasives tha t goes through the retail segment , t he first two segments are growing well and we think that growth rate should really pick up and we should be able to put our acts together well . As far as retail, the challenge is below last year and that is what is pulling us down and we have putting a set of various action s in terms of retail initiatives and that is why I said that we will take about four to six quarters to put our acts together to get back to the normal growth rate of abrasive that we used to have. So I would not call that just as a demand challenge s or competition challenges etc , I think majorly it is majorly an internal challenge that we need to start addressing. Definitely there is a challenge of Chinese dumping and the price pressure that we are faci ng. So that is definitely there but besides that we clearly face our own internal challenges which I think we will work and put together in the next four to six quarters. Now as far as the ceramics goes you were talking about hydrogen-based ceramics, I thi nk perhaps you are talking about ceramics that goes into hydrogen economy perhaps that is what I am inferring from your comment . W e are working with certain customers who are in the field of solid oxide fuel cell manufacturers . They used a similar technolo gy for the hydrogen and they are using our product testing, bringing their own products , etc., so we will get to that. I am not sure about your comment of geometrical progression. If there is some impression like this I would probably ask you to take that away and we will get back to you once we have clarity in terms of how the product gets established but definitely our products are getting used, tested by them. We will share more as we establish our product.

Just a followup on the last bi t, in our previous discussion we understand our content l ike in auto we say content for vehicle is the content for SOFC for Carborundum going up for that product and that itself can lead to further significant growth for the segment as a whole as you are guiding 20% growth for the segment is in itself a substantial growth?

We used to be more than 20% growth. It is just one customer correction is where this challenge has happened but I think once that is addressed, but we are also putting together a programme where how do we address such a thing not to affect us in future. There are 10 different initiatives we are working on to counter that, s o considering all that I am saying that we will get back to the 20% growth trajectory.

Great Sir. Thank you so much for taking my questions.

Thank you. The next question is from the line of Harshit Patel from Equirus Securities . Please go ahead.

Thank you very much for the opportunity Sir. S ir my first quest ion is on our ceramic segment. Sir could you give a flavor on the exports that we do from this particular segment so what would be the share of exports within necessary refractories and similarly what would be the share of exports within the we ar ceramics, technical ceramics that we do and over the past few years have you seen any change in this mix between domestic to exports because I reckon seems a lot of newer industries which are growing in India let us say the renewable energy, lot of new wind capacit y coming on board where we supply those initial cohorts we do quite a lot of business into metal lised cylinders as well which go i nto the high voltage equipment, s o since this kind of industries are growing is there a case for domestic revenues to grow fas ter than the exports or will it continue to grow faster on exports because we are acquiring new customers over there , so if you can give some idea about the export within this segment that would be very helpful.

Thank you Mr. Harshit. So as far as the mix change that you are asking definitely within the overall ceramics industrial ceramics is highly export oriented. I would say 80 plus percentage is exports and that continues to be in that zone. I do not think any major change is happening. A s far as refractory is probably 20 to 25%, but tha t is where the mix is changing, t here is more exports happening and the orders on industries where we have established in India people are looking at using similar applications elsewhere that is how the growth also is happening on the refractory side. So I think your observation of the demand for such products outside this is a correct observation and it is increasing more towards export.

Understood. Sir my second question is on VAW since you have mentioned the pricing is under pressure especially in India with respect to the fused alumina business have we seen the similar kind of pressure in the silicon carbide business as well at V AW or because we are the largest producer of SiC over there and one of the low est cost producers we are still insulated from those kind of pressures and given that you have mentioned that we could grow our revenues 10 to 12% in the Rouble terms over there per annum do we have sufficient capacity to grow or we have already put in motion the expansion plans over there?

I think as far as V AW is concerned it is just not the price alone. I think the ability for them to work with the customer and application basis product allows them to be real ly competitive both in terms of the lowest cost manufacturer as well as highly technically capable manufacturers. So these two factors allow them to compete in the market so well and that is also the reason where we feel that this trend could continue.

Sir in terms of any capex plans over there apart from the usual debottlenecking that we do?

I think we have the normal capex plan plus I think the last couple of years we have added a few capacities more in the silicon car bide fusion capacity, which we shared earlier is good enough to cover and address the growth rate that we are looking at.

Understood Sir. Just last one bookkeeping question, could you quantify what was the sales and profits for Foskor Zircon ia for the nine month s FY2024, that would be my last question?

It is about Rs.115 Crores of sales and Rs.10 Crores of loss.

Understood Sir. Thank you very much for answering my questions.

Thank you. The next question is from the line of Amit An wani from PL Capital. Please go ahead.

Hi Sir. Thanks for taking my question. My first question on the German subsidiary I just wanted to understand in previous quarters you did talk about the energy contrac t getting terminated the higher cost energy contracts and it will be getting into the new er contract so any update on that and second thing despite the volume growth this quarter in the subsidiaries what exactly led to the performance improvement this quarter?

Thanks for your sharp remembering of this earlier comment and yes the contracts as they end, we get to the normal contract and the normal one prices are at lower price which is also is giving us the benefit. W hy the better performance is, see we peaked up cost increase and it starts softening and you might have noticed that the prices are coming down in terms of the commodities as well as the energy costs is coming down and these two helped us to bring this benefit in terms of lower losses and they have also improved the mix, particularly in terms of the private label customers that they could get more and that is where it is helping them plus the subsidiaries in Australia and America is doing very well and because of the higher order intake in the in these two geographies. So it is a combination of all these factors helping them doing better.

Sir my second question on lot many companies announcing the semiconductor manufacturing LLT also did announce the fabulous semic onductor facility which they will be putting up so any sense on your business outlook or product basket improving when this be incremental growth market which is going to come , any assessment on this front for CUMI?

I think the announ cements so far we have seen are all on the silicon based fab. So far we have not seen any silicon carbide based fabs so we will wait if there are better opportunities for us.

Sir my last question on the Red Sea crisis, since you explained that the ceramics business is more than 80% exports and overall we have subsidiaries and we are supplying raw materials to the German subsidiary as well so any impact of Red Sea crisis which you can say in medium to long term?

In the last quarter there are some delays in shipment we are looking at largely because of the container availability those type of challenges, t he other challenge is the freight cost going up, shipping time going up, s o it is customers who are trying to get adjusted to this, how they would like to look at it . Lot of them are looking at how can they ship using Asia to get into US and avoiding this route at all, but all these takes cu stomer-by-customer as well as their own challenges in terms of urgency v ersus cost, how do they balance, etc., but it is, it is a concern and we are working customer-by-customer.

Sure Sir. Last question if I can squeeze in about the 2 0% growth which you mentioned in ceramics for the nontechnical ceramics, w anted to understand t he technical ceramics contribution this quarter if you can highlight?

Sure Sir. Thank you and all the best.

Thank you. The next question is from the line of Ravi Swam inathan from Avendus Spark. Please go ahead.

Sir thanks for taking my question. Most of my questions have been answered . Once more on the Chinese dumping that we are seeing so if we recall some 6 -7 years ago China had shut down many of th e facilities which were th ere in the northern Mongolia belt and that had led to better realization across the world for electrominerals, n ow this dumping is because are they opening up those facilities or what is happening over there, what is resulting in this dumping over the past few quarters?

I think those days the Mongolia is largely a silicon carbide shutting down there is a story on that. Right now we face this primarily in the aluminas and yes there is a pressure on the silicon carbide as well, but not to the extent of what we are facing it in the aluminas. So I am not an ex pert on Chinese economy and difficult for me to comment, but I think what I see is there is definitely a pressure what we see from the Chinese economy . They want to sustain at whatever the cost and hence they want to prize it, which I do not know how they are getting compensated, etc., which is a very difficult thing for us to understand but this is a reality.

Alumina would be what percentage of electromineral business overall?

It is a significant percentage Ravi.

The second question is with respect to you commenting that we can grow the second segment that is the refractories and ceramics business by 20% is it going to come from overall market growth and we have products over there and that driving or is it like new product introduction our efforts into getting into newer markets can you explain some more on how that 20% would be achieved , is it just pure category growth that is going to help us or is it a bit of market share gains, new products and all these things?

The market itself is growing and look at the history of us for the last four , five years we have been doing this, s o it is a market and the combination of products what we have done and the third factor is the higher export as one of the participant was also asking refractories, we are able to get into newer geographies which we were never there. So these factors are giving us this feeling that we could do 20%.

It is a combination of volume and price.

Got it Sir. Thanks a lot.

Thank you . T hat was the last question for today. I would now like to hand over to the management for closing comments. Over to you Sir!

So thank you for all of your time. I hope we could answer all your questions. We tried our best in terms of putting up a decent opening remark with all your concerns that you may have, but I think I just like to summarize is that I feel that major parts of the business, volume and price growth is there, margins are improving, good cash flows and the return on capital employe d is improving . R ecovery in Foskor is in place and RHODIUS and AWUKO are on track. We need to put our acts together on domestic abrasives. These are some broad sense of summary that I could share. Thank you.

On behalf of ICICI Securities that concludes this conference. Thank you for joining us. You may now disconnect your lines.