Grindwell Norton (GWN) has been upgraded to a “BUY” by Prabhudas Lilladher with a revised target price of Rs 2,528, following a recent price correction. Although the Q2FY25 performance was mixed, with revenue up by 4.0% YoY but margin pressures persisting, GWN shows promise in growth segments and market expansion. Here’s an in-depth look at the key metrics, growth drivers, and risks for prospective investors.

Q2FY25 Performance Overview

Mixed Revenue Growth:

Total revenue for Q2FY25 rose by 4.0% YoY to Rs6.9 billion, driven by growth in Abrasives (3.7%) and Ceramics & Plastics (4.9%). However, Digital Services revenue fell by 1.8% YoY, dampening the overall performance.
EBITDA margin decreased by 107 bps to 18.6%, impacted by lower profitability in Ceramics & Plastics and Digital Services. Gross margin saw a slight improvement, rising by 54 bps YoY to 55.7%.
Margin Contraction:

Segmental margins were under pressure. Abrasives, Ceramics & Plastics, and Digital Services recorded declines in EBIT margin by 143, 344, and 874 bps YoY, respectively.

Sectoral Performance Highlights

Abrasives Segment:

Revenue increased by 3.7% YoY to Rs3.5 billion. EBIT margin, however, fell to 12.9% in Q2FY25 from 14.3% in Q2FY24, primarily due to rising input costs and pricing pressures.
Growth drivers include expanding demand for solar glass edge grinding and high productivity solutions in steel and construction sectors.
Ceramics & Plastics Segment:

This segment achieved revenue of Rs2.9 billion, a 4.9% YoY increase. However, EBIT margins declined to 16.5%, down from 20.0% YoY.
Margin recovery is anticipated as the product mix improves and export demand rebounds, especially with new market penetration strategies.
Digital Services Segment:

The only segment to see a revenue decline, Digital Services fell by 1.8% YoY to Rs455 million, with EBIT margin dropping by 874 bps to 27%.
GWN is refocusing this segment to leverage digital advancements and streamline operational costs.

Revised Financial Projections for FY25-FY27

Downward Revisions in EPS:

Prabhudas Lilladher has revised the EPS estimates for FY25 and FY26 downward by 7.9% and 8.0%, respectively, accounting for lower growth in revenue.
Forward Valuation:

GWN is currently trading at a P/E of 56.9x for FY25, with projections for FY26 and FY27 at 46.8x and 39.1x, respectively. The stock’s valuation remains robust, reflecting strong fundamentals despite recent headwinds.

Growth Catalysts

1. Niche Product Focus:

GWN’s focus on high-performance, technologically advanced products in performance plastics and ceramics enhances its positioning in niche markets with high entry barriers.
2. Expansion in Coated Abrasives and Engineered Ceramics:

GWN is expanding capacity in coated abrasives and engineered ceramics, aiming to capture greater market share across high-growth verticals.
3. Increasing Presence in Emerging Markets:

Efforts to penetrate new, high-growth markets, particularly in sectors like steel and construction, present a significant upside for GWN’s revenue and market share.

Challenges and Risks

1. Margin Pressures Across Segments:

Persistent contraction in EBIT margins for key segments could pose challenges in sustaining profitability. Cost pressures from raw materials and higher depreciation expenses will need careful management.
2. Dependent on Export Recovery:

The recovery in export demand is essential for the Ceramics & Plastics segment, as it influences the overall margin profile and growth trajectory.
3. Slowdown in Digital Services:

As digital transformation accelerates, the slowdown in Digital Services growth could limit GWN’s ability to fully capitalize on digital and operational efficiencies in the short term.

Investor Outlook and Target Levels

Investment Recommendation:

Given the recent stock price correction and potential growth catalysts, Prabhudas Lilladher’s revised target price of Rs2,528 offers an attractive entry point with a projected upside.
BUY Rating: GWN’s robust balance sheet and strategic market positioning support a strong recommendation, with the stock expected to deliver growth as it leverages its product and market expansion initiatives.
Key Levels for Investors:

Support Level: Rs 2,150 – This level provides a cushion based on recent price trends and valuation adjustments.
Resistance Level: Rs 2,750 – Investors may look to take partial profits if the stock approaches this level in the near term.
Target Price: Rs 2,528 – Represents a reasonable valuation given current and projected financial performance.

In summary, Grindwell Norton (GWN) remains a solid investment with a focus on expanding its product offerings and penetrating emerging markets. Despite short-term challenges in segmental margins and a downturn in Digital Services, GWN’s emphasis on high-performance products and capacity expansion offers promising growth potential for long-term investors.