Carborundum Universal Ltd Upgraded to Sell on Valuation Improvement Despite Weak Financials

Valuation Improvement Triggers Upgrade

The key catalyst behind the upgrade is the change in Carborundum Universal’s valuation grade, which has shifted from "very expensive" to "expensive". The company’s price-to-earnings (PE) ratio currently stands at 56.33, a slight premium compared to peers but lower than its previous valuation extremes. Price-to-book value is at 4.37, indicating the stock trades at over four times its book value, while enterprise value to EBITDA (EV/EBITDA) is 26.95. These figures, although still elevated, suggest a relative easing in valuation pressure compared to competitors such as Grindwell Norton and Wendt India, which remain in the "very expensive" category with PE ratios of 45.32 and 56.41 respectively and higher EV/EBITDA multiples.

Additionally, the company’s return on capital employed (ROCE) is 10.38%, and return on equity (ROE) is 7.76%, both modest but stable metrics that support the valuation adjustment. The dividend yield remains low at 0.47%, reflecting limited income generation for investors.

Financial Trend Remains Weak Despite Valuation Relief

While valuation metrics have improved, Carborundum Universal’s financial trend continues to deteriorate. The company has reported negative results for three consecutive quarters, with the latest quarter (Q2 FY25-26) showing a 14.5% decline in profit before tax (PBT) to ₹95.62 crores and a 10.2% fall in profit after tax (PAT) to ₹74.51 crores compared to the previous four-quarter average. Operating profit growth over the last five years has been a modest 6.02% annually, which is below expectations for a company in the industrial products sector.

Return on capital employed (ROCE) for the half year is at a low 11.49%, signalling inefficient capital utilisation. The company’s return on equity (ROE) of 7.8% further underscores the subdued profitability. These financial trends have weighed heavily on investor sentiment, contributing to a 33.62% decline in the stock price over the past year, significantly underperforming the Sensex, which gained 8.51% in the same period.

Quality Assessment and Industry Comparison

Carborundum Universal operates in the abrasives segment within the industrial products sector. Its quality grade remains challenged by the weak earnings trajectory and below-par profitability ratios. Compared to peers such as Grindwell Norton and Wendt India, which maintain higher valuations but also stronger financial metrics, Carborundum’s quality scores remain subdued. The company’s low debt-to-equity ratio of 0.01 times is a positive factor, indicating minimal financial leverage and lower risk of solvency issues.

Institutional investors hold a significant 40.71% stake in the company, reflecting confidence from well-resourced market participants who typically conduct rigorous fundamental analysis. However, this has not translated into a sustained price recovery given the company’s operational challenges.

Technical Indicators and Market Performance

Technically, Carborundum Universal’s stock price has shown mixed signals. The share price closed at ₹859.30 on 2 January 2026, up marginally by 0.31% from the previous close of ₹856.65. The stock’s 52-week high was ₹1,324.95, while the low was ₹810.00, indicating a wide trading range and significant volatility. Over the past week, the stock gained 1.42%, outperforming the Sensex’s decline of 0.26%, but over the one-month period, it declined 2.42%, underperforming the benchmark index’s 0.53% fall.

Longer-term returns remain disappointing, with a 33.62% loss over the last year and a 1.72% decline over three years, compared to Sensex gains of 8.51% and 40.02% respectively. Despite a strong 10-year return of 362.86%, the recent underperformance and negative earnings trend have dampened technical momentum.

Summary and Outlook

Carborundum Universal Ltd’s upgrade from Strong Sell to Sell reflects a nuanced investment stance. The valuation grade improvement from very expensive to expensive provides some relief to investors, suggesting the stock is less overvalued than before. However, the company’s financial performance remains under pressure, with declining profits, weak returns on capital, and negative quarterly results continuing to weigh on the stock.

Technically, the stock has shown some short-term resilience but remains vulnerable given its underperformance relative to the broader market and peers. The low debt level and strong institutional ownership are positives, but these factors have not yet translated into a sustained turnaround in fundamentals or price momentum.

Investors should weigh the valuation improvement against the ongoing financial and operational challenges before considering exposure to Carborundum Universal. The current Sell rating reflects this cautious stance, signalling that while the stock is less unattractive than before, it still carries significant risks.

Only Rs. 9,999 - Get MojoOne + Stock of the Week for 1 Year (MRP = Rs. 34,999) Start Saving Now →