Grindwell Norton: Up 40% in 6 days! This midcap is on fire through rain or shine. Red flag goes up

Up 41 per cent from its May 3 low of Rs 911, the stock of

has been on a roll.

The maker of abrasives, ceramics and plastics delivered a solid 29.3 per cent profit growth in the Covid-hit FY21. It logged free cash flows for the 12th straight year, which analysts said has led to a strong balance sheet (with a net cash of Rs 640 crore) and consistent overall return on capital employed (RoCE) of 16 per cent for FY21.

Margin for the year also expanded by 304 basis points to the highest level at 19.8 per cent.

Post earnings update, a few brokerages have upgraded the company’s earnings estimates by about 20 percentage points each for FY22 and FY23, and also upped price targets for the stock, believing it deserves a premium valuation.

Dalal Street, however, seems to have taken an even more optimistic view, as the stock has already breached those revised targets in less than 24 hours!

But chartists said technical charts are stretched and short-term traders should consider booking profits and look to buy on dips.

Background
A part of the Saint-Gobain Group, Grindwell manufactures a wide range of abrasives such as bonded, coated and super abrasives. It also manufactures ceramics such as silicon carbide grain and refractories.

It has seven manufacturing facilities, six of which are located in India and one in Bhutan. Abrasives accounted for 61 per cent of FY21 revenues, ceramics & plastics (C&P) 36 per cent and the other segments for the rest. Over the past five years, the C&P segment has grown at 11 per cent compounded annually compared with 3 per cent annual growth for abrasives. Margins in the ceramics & plastics increased to 24 per cent in FY21 compared with 14 per cent in FY20.

March quarter earnings
The company almost doubled its March quarter consolidated net profit at Rs 80.54 crore from Rs 41.42 crore reported for the year-ago quarter. Sales for the quarter jumped 30 per cent to Rs 521.24 crore from Rs 375.55 crore in the year-ago quarter, which was higher than peer Carborundum’s 27 per cent. Ebitda margin expanded 572 bps to 22.2 per cent, the highest ever, thanks to operating leverage.

What does the management say
Despite Covid disruption, the company’s FY21 revenue grew 4 per cent, as it outperformed core markets. This growth was led by demand in sectors like automotive, metals and life sciences, besides exports and import substitution. The management remains bullish for the medium- to long-term owing to a push for infra spends, privatisation and geopolitical shift spurred by the government’s Atmanirbhar campaign.

It expects growth in the C&P segment to double in next three–four years led by expansion in the prevailing markets. It expects exports to grow structurally, given its manufacturing capability in advanced products and suggests margin may sustain at these historical high levels.

What do fundamental analysts say
Edelweiss said a strong industrial cycle uptick, driven by revival of private investment, potential doubling of C&P in 3-4 years, Chinese import substitution and robust exports growth underpin its thesis on the stock.

Post March quarter earnings , the brokerage raised its EPS estimates by 19 per cent for FY22 and 21 per cent for FY23 on the back of Grindwell’s improving outlook and market outperformance.

In a note to clients on Monday, the brokerage raised its valuation for the stock to 46 times Q2FY23 EPS from 42 times earlier, which it said was at the higher end of its historical band.

But Edelweiss’ revised target of Rs 1,282 for the stock could not sustain a single day, as the scrip hit a high of Rs 1,288 on Tuesday, before closing at Rs 1,240, up 11 per cent in a weak market.

ICICI Securities said despite a challenging FY21, the company was able to gain 100 basis points market share in domestic abrasives market with strong margins. Exports grew by a strong 14 per cent YoY and the management foresees good potential as the parent company looks at India as a global sourcing hub.

ICICI’s revised target of Rs 1,287 from Rs 1,220 on Tuesday was breached on the same day.

Chartists say book profits, buy on dips
Aditya Agarwala, Senior Technical Analyst at YES Securities, said the stock rally was seen after it broke out of a Triangle Pattern consolidation. The rally, he said, is backed by extreme high volumes, confirming the strength in the breakout.

“However, following this 40 per cent rise, the stock is sitting in an extremely overbought territory on multiple time frame charts. A fresh long position is not recommended as risk-reward has become skewed,” Agarwala said.

Mazhar Mohammad said Grindwell stock has a habit of consolidating at regular intervals, before resuming the upmove.

“On the long-term charts, the resistance seems to be placed around Rs 1,290 level and for a sustainable bounce, the stock needs a breakout above the said hurdle. Any correction into the Rs 1,155-1,117 zone can be an opportunity for a fresh entry with a stop below Rs 1,075 on a closing basis. As upsides look stretched, traders should consider booking profits and wait for a dip before going long,” he said.

Agarwala said traders who are sitting on decent profits can hold with trailing stop loss at Rs 1,210. He sees the immediate hurdle at Rs 1,300 level.