PL Stock Report: Grindwell Norton (GWN IN) - Q2FY24 Result Update – Reasonable Q2; long-term outlook remains intact - BUY

Grindwell Norton (GWN IN) - Amit Anwani - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs2,159 | TP: Rs2,604

Q2FY24 Result Update – Reasonable Q2; long-term outlook remains intact

Quick Pointers:

♦ Digital Services revenue rose 26.7% YoY to Rs463mn, at a 35.7% margin.

♦ Gross margin expansion (+175bps YoY) was offset by higher other expenses (up 99bps YoY as a % of sales).

Grindwell Norton (GWN) reported muted revenue growth of 5.2% YoY, with EBITDA margin inching up 40bps YoY to 19.7%, led by healthy gross margin expansion of 175bps YoY to 55.2%. During H1FY24, Abrasives revenue rose marginally at 3.0% YoY to Rs6.6bn, with EBIT margin for the segment coming in at 14.0% (vs 13.4% in H1FY23). Ceramics & Plastics segment reported subdued results during the first half, with revenue growing 4.8% YoY to Rs5.6bn and EBIT margin dipping 303bps YoY to 19.7%. We expect margin improvement for this segment in the near to medium term, driven by higher volumes and better product mix. Digital Services was the best performing segment, as revenue grew robustly at 33.7% YoY to Rs968mn in H1FY24, with EBIT margin expanding significantly to 37.1% (vs 20.3% in H1FY23).

We believe GWN will likely see long-term profitable growth on the back of its 1) focus on technologically advanced niche/high performance products in performance plastics, 2) penetration in newer high growth markets, 3) attention on tapping new verticals in Ceramics & Refractories, 4) capacity expansion in coated abrasives, engineered ceramics and performance plastics, and 5) strong balance sheet, operating cash flows and return ratios (25.5% ROCE). We expect Revenue/PAT CAGR of 16.7%/9.5% over FY23-26E. The stock is trading at a PE of 55.6x/46.6x/38.7x on FY24/25/26E earnings. We maintain ‘Buy’ rating with a TP of Rs2,604 (same as earlier) valuing it at PE of 51x Sep’25E (same as earlier).

Higher other expenses offset gross margin expansion: Consolidated revenue grew 5.2% YoY to Rs6.7bn (PLe ~Rs7.1bn), driven by growth in the Digital Services segment. EBITDA grew 7.3% YoY to Rs1.3bn (PLe ~Rs1.5bn), with EBITDA margin increasing slightly by 40bps YoY to 19.7% (PLe ~20.5%), as gross margin expansion of 175bps YoY to 55.2% was offset by higher other expenses (up 99bps YoY as a % of sales) and higher employee costs (up 36bps YoY as a % of sales). PAT grew 13.1% YoY to Rs1.0bn (PLe ~Rs1.1bn), aided by higher other income (up 50.8% YoY to Rs226mn).

Digital Services segment reported strong revenue growth and profitability: Abrasives revenue came in at Rs3.4bn (up 6.4% YoY), while Ceramics & Plastics revenue was almost flat at Rs2.8bn (up 0.9% YoY). Digital Services revenue grew 26.7% YoY to Rs463mn. Abrasives margin increased to 14.3% (vs 12.8% in Q2FY23), Ceramics margin fell to 20.0% (vs 21.7% in Q2FY23), and Digital Services margin rose sharply to 35.7% (vs 17.6% in Q2FY23).

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