Prabhudas Lilladher has raised its rating on Carborundum Universal (CU) from "HOLD" to "ACCUMULATE," citing the stock's recent price correction and a revised target price of Rs 1,601. CU’s Q2FY25 performance showed a 7.6% year-on-year (YoY) revenue increase and an EBITDA margin rise to 15.9%, up by 131 basis points YoY. While the company retains its revenue guidance of Rs 51-52 billion for FY25, it has adjusted the PBIT margin forecast downwards due to subdued performance in subsidiaries AWUKO and Foskor Zirconia. CU's focus on ceramics, electrominerals, and high-purity silicon carbide (HPSiC) is expected to drive long-term growth, with added resilience in domestic demand and international expansion.

Mixed Quarterly Performance

Revenue and Margin Highlights:
CU reported a 7.6% YoY increase in consolidated revenue, reaching Rs 12.1 billion in Q2FY25. The EBITDA margin rose by 131 bps YoY to 15.9%, attributed to cost efficiencies despite higher alumina costs and competitive pressures in electrominerals. Consolidated PAT rose by 13.7% YoY to Rs 1.2 billion, supported by operating improvements.

Segment Performance:

Abrasives: Sales increased by 6.4% YoY to Rs 5.4 billion, though margins dipped to 6.3% due to weaker profits in Sterling Abrasives and AWUKO.
Ceramics: This segment recorded a 5.5% YoY growth in sales, reaching Rs 2.8 billion, with a solid margin of 28.5%.
Electrominerals: Sales rose by 6.5% YoY to Rs 4.0 billion, though margins contracted due to rising alumina costs and pricing pressure from Chinese imports.

Strategic Moves and Subsidiary Performance

Acquisition of Silicon Carbide Products (SCP):
CU recently completed its acquisition of SCP for an enterprise value of $6.66 million, enhancing its portfolio in high-quality silicon carbide products. SCP’s established customer base in America positions CU to enter critical markets like power, steel, and mining.

Challenges in Subsidiary Performance:

AWUKO: Sales grew by 17% YoY, but profitability remains constrained. The revised FY25 revenue forecast for AWUKO has been lowered significantly, with anticipated losses of Rs 4.5 million.
RHODIUS: Revenue grew 8.5% YoY in Q2FY25 but faced a sequential decline. The management has moderated RHODIUS's FY25 guidance, now aiming for breakeven by year-end.
Foskor Zirconia: Sales increased by 38% YoY but declined 32% QoQ, largely due to pricing pressures from Chinese competition and a strengthened RAND.

Growth Drivers and Market Positioning

Expansion in High-Purity Silicon Carbide (HPSiC):
CU's greenfield expansion in HPSiC remains on schedule and is expected to be fully operational by December 2025. This segment aligns with the rising demand for HPSiC in semiconductor and defense applications, which could drive significant long-term growth.

Focus on Ceramics and Refractories:
Demand for CU's ceramic products is robust across sectors such as steel, cement, and chemicals, both domestically and internationally. The company’s ceramics division has seen sequential improvement in margins, supported by a healthy order pipeline and demand growth in engineered ceramics.

Domestic Market Resilience:
CU's stable domestic demand outlook is bolstered by planned capacity expansions in abrasives and electrominerals, reinforcing its competitive position. The company expects growth in refractories and ceramic products to continue at 12-14% YoY.

Valuation and Recommendation

SoTP Valuation Breakdown:
Prabhudas Lilladher’s target price of Rs 1,601 is based on a sum-of-the-parts (SoTP) valuation, with individual segment valuations as follows:

Abrasives: Valued at Rs 461 per share based on a 37x Sep’26E EPS multiple.
Ceramics: Valued at Rs 836 per share using a 50x Sep’26E EPS multiple.
Electrominerals: Valued at Rs 307 per share at a 26x Sep’26E EPS multiple.
Projected Financial Performance:

FY25E: Sales of Rs 51.3 billion with an EBITDA margin of 16.3%.
FY26E: Sales of Rs 58.6 billion, EBITDA margin improving to 17.4%.
EPS: Expected to rise from Rs 26.8 in FY25 to Rs 34.9 in FY26.

Outlook and Risks

Positive Long-Term Outlook:
CU’s focus on high-margin segments, international expansion, and a steady domestic market underscores a favorable growth outlook. Capex plans of Rs 3 billion for FY25 reflect the company's commitment to strengthening its core segments.

Key Risks:

Pricing Pressure from China: Competition from Chinese imports continues to impact electrominerals pricing and margins.
Volatile Input Costs: Rising alumina prices pose a risk to margins, particularly in the electrominerals division.

Conclusion

Prabhudas Lilladher’s “ACCUMULATE” rating on Carborundum Universal reflects confidence in the company’s strategic direction, robust domestic market position, and international growth potential. With a target price of Rs 1,601, CU presents a solid long-term investment case for investors seeking exposure to the industrial ceramics and electrominerals sectors. Despite near-term challenges in subsidiaries, CU’s disciplined expansion and product innovation efforts reinforce its competitive advantage.