GHCL - Soda ash & home-textiles player


(Ankit Sharda) #1

GHCL, earlier known as Gujarat Heavy Chemicals Ltd was incorporated in October 1983. The company is engaged in manufacturing of inorganic chemicals (soda ash & sodium bicarbonate) along with presence in exports of home textiles (primarily bed sheets).

https://www.screener.in/company/GHCL/
https://www.researchbytes.com/GHCL-G0361.htm

In FY 2015, inorganic chemicals contributed 59.6% of the total revenues while home textile contributed 40.4%.

Company enjoys industry leading margins (about 30-32%) in the soda ash segment due to captive control of raw material & fuel (own lignite mines). Current capacity utilization in soda ash stands at 87%.

Last 3 yrs sales have grown by 7-8% CAGR and PAT has grown with a CAGR of 21% mainly due to higher capacity utilization > operating leverage > margin expansion.

Mgt has guided for a capex of for increasing soda ash capacity from 8.5 Lakhs MT to 9.5 Lakhs MT by FY 17 with an outlay of Rs 375 crs.

Net debt / Equity as on Q3 FY 16 stands at 1.37x. As per mgt., this ratio should fall below 1x in the next two yrs despite the capex.

Textile segment margins are lower as compared to peers but expected to inch up higher due to higher capacity utilization / better product mix / power cost going down.
Q3 FY 16 textile segment EBITDA margins stand at 12% vis-a-vis Q3 FY 15 EBITDA margin of 8%. Target operating margin of this segment as per mgt is 17-18% (Q3 FY 16 concall).

Valuation –
At CMP Rs 108 – TTM PE 4.1x; P/B 1.16x; Div yield 2%
Promoters have been buying from the mkt.
Promoter pledging of shares has recently been revoked.

Concerns –

  • Low promoter stake of 18.5%
  • Potential removal of anti-dumping duty on soda ash by the govt.
  • RSPL which currently contributed 14% of soda ash sales is coming up with its own capacity in 3 yrs time.

Views invited.

Disclosure: Invested & adding.


(Ravi) #2

GHCL is the lowest cost producer of soda ash compared to Nirma & Tata chem due to their access to captive mines and reduction in logistics costs. Other Positives are highlighter in the above post.

Some big negatives missed out -

  1. There are some promoter issues which if you google you can find out.
  2. Their debt levels may not reduce in the near term as there is more capex required for the next 3 years
  3. China is world’s largest producer of soda ash and expect more dumping from them.

For the reasons stated above it is likely that their valuation multiple will remain low for a long time to come. More importantly Soda ash is a commodity and the company would get valuations of a commodity company.

Thanks,
Ravi S
Disc - No positions. Avoided entering here after careful study.


(Ankit Sharda) #3

Thanks Ravi.

  1. Had no idea abt the promoter issues -
    http://articles.economictimes.indiatimes.com/2009-04-21/news/27648545_1_ghcl-promoters-hike-stake-promoter-holdings
    But, ultimately, SEBI did let them off the hook
    http://www.business-standard.com/article/companies/33-ghcl-promoters-relieved-from-charges-by-sebi-109070700256_1.html

Moreover, GHCL has a professional mgt. and to the best of my knowledge promoters are not involved in the day-to-day operations of the company. Though, I agree it’s a red flag on the part of promoters.

  1. Net debt / Equity as on Mar 15> 1.72x; Sep 15> 1.53x; Dec 15> 1.37x.
    Some of it may be due to equity expansion also. But as long as this ratio is in the vicinity of 1x > leverage shouldn’t be too much of an issue.
    Also, operating cash flow for last 3 FYs is around 300 crs.

  2. China threat for this industry is not new, but GHCL has been able to maintain it’s mkt share & margins in the face of it for the past 5 yrs. Further, logistics / transportation cost is a big determinant of feasibility in serving the mkt here. Hence, the share of imports in India’s total consumption is around 25% only mainly to the coastal areas.


(atishay1) #4

Glad to finally see a thread on GHCL.

GHCL and Tata Chemicals are the main soda ash producers in India with ~9 lac MT each. India is 27-30 lac MT soda ash market while balance 25% is imported.

GHCL dominates supply to northern, western and southern parts due to closeness to the plant. Eastern part is where they are trying to enter by utilizing their customer relationships and selling imported soda ash strategically. This business is High ROCE, low growth but generates stable free cash flows. It has a distinct MOAT due to oligopoly nature and vertically integrated lowest cost producer. Soda ash may be a commodity globally but in India it can hardly be called so due to anti dumping duty and oligopoly business. Also same can be seen from historical margins for GHCL, Tata chemicals and their ability to pass on increase in costs to the customers through regular revisions. Debt levels dont concern me too much due to high ROCE business, in fact RoE should improve with leverage. Given limited domestic players, its highly unlikely that anti-dumping duty would be removed which is currently applicable uptil 2017.

In textiles, they are following the model of Indocount, Welspun i.e. vertical integration and gradually moving up the value chain as can be seen from the improving margins and recent concal notes.

Discl: Invested from lower levels and adding


(atishay1) #5

And yes, its a professionally managed company with limited control of promoters (low stake in the company).

Market seems to undervalue the stock and rating it equivalent to a commodity business with no growth. Even if that’s the case it still seems highly undervalued. Easily deserves a PE rating of 10-15.


(vivekchoraria) #6

The difference between local and chinese prices of soda ash is huge. if the anti dumping duty goes away and we cannot be sure that it will remain, who knows how affected ghcl will be. There might be a huge drop in margins, right? Dont think we have any precedence to say that the duty will remain.

Also, when the new capaicty comes up in 3 years time, will the company make up for the lost customer in terms of the business lost?

The operating parameters of the company look fine as it is today but many worries on the horizon.


#7

This had serious corp governance issues in past


(atishay1) #8

Yes, thats the risk we carry which explains the cheap price. However that risk I believe is mitigated given the oligopoly nature of business. Govt. would never push the only two major soda ash producer out of business and thats my bet.

I dont feel corporate governance is any issue since its a professional managed company with not much intervention by the promoters. Another good thing they recently started is to have concalls with minority investors.


(Elusionist) #9

There are many positives here -

  • Soda Ash Duopoly business, high margins
  • Textile margins are improving
  • high free cash flow
  • reducing debt

Having said this, the biggest uncertainty is the anti-dumping duty decision which will be taken in May 2017. There are multiple arguments as to why this duty may be continued or dismissed.

But removal of this duty is a trigger which will severely impact GHCL. The ability of the stock to get a PE expansion is solely dependent on the antidumping duty continuing beyond May 2017 .


(Vishnu) #10

(Ravi) #11

There are many companies which have continued to trade at much lower valuation multiples due to their chequered past. Here are a couple of examples of companies which had promoter issues in the past similar to GHCL.

  1. DHFL - This is the only HFC which trades at a lower P/BV even when you have the best of the valuations for this sector.
  2. Manappuram - Manappuram is trading at ~1 x P/BV and at ~6% dividend yield. These #s might look optically good, but when you dig deep you will realize that this company also had promoter issues.

Ignoring such concerns may be at individual’s comfort level & investing style - Everything works in market as long as the trade/investment is executed properly. But one must be definitely cognizant of the fact that a company with a chequered past might continue to have a lower valuation multiple for a very long time.

Thanks,
Ravi S


(atishay1) #12

Don’t think where promoters’ issue has been in the past for GHCL,and having done my due-diligence I am willing to bet on this professionally run-company. So even if market gives lower multiple,it cant ignore the earnings and continuous dividend history for long. As a value investor, I can see the value which is much more than it currently is given by market, hence makes all the more sense to invest now. If the market does offer the right valuations/multiples, there might not be enough MOS to invest. You can’t time the market so I am willing to invest for a long period of time believing the company’s business model in particular the soda ash cash cow business.


(Bobby Mehrotra) #13
  1. http://www.vccircle.com/news/others/2014/07/09/golden-tobacco-ghcl-promoter-sanjay-dalmia-held-real-estate-cheating-case

  2. http://www.moneycontrol.com/news/market-news/sebi-slaps-rs-9-lakhghcl-promoters_1059387.html

  3. http://articles.economictimes.indiatimes.com/2009-04-21/news/27648545_1_ghcl-promoters-hike-stake-promoter-holdings


(Ravi) #15

This is a 1.5 year old event and not 7 year old news. Promoter getting arrested for cheating is not something to be looked at lightly.

“Dalmia was handed over to the EOW, which brought him to Mumbai yesterday and placed him under arrest. He was then produced in a court which remanded him in police custody till July 14, Prasanna said.” from the above article.

After the above episode, how can one be absolutely sure about the numbers that GHCL is reporting? Why wont he cook up the #s to get higher market cap?

To your previous point on MoS - In investing we have known(operational, nature of business) + unknown risks(Satyam type black swan events). How can you quantify this unknown risk(promoter integrity) and assign appropriate MoS? -> These are difficult questions for even a seasoned investor to answer.

From here it is up to one’s individual comfort level.:+1:

Thanks,
Ravi S


(Bobby Mehrotra) #16

Well, this was not for the first time :slightly_smiling:.


(atishay1) #17

Thanks for pointing,post withdrawn. And yes,its upto individual comfort level.


(Vivek Gautam) #18

Any chance of Sanjay Dalmia handing over the reigns to next gen Neelabh Dalmia his nephew?This may lead to sharp rerating.


(Vivek Gautam) #19

GHCL came with good set of results

http://ghcl.co.in/wp-content/uploads/2016/05/Intimation-Investors-Presentation_Q4FY16-Business-Update1.pdf

Latest concall transcript not yet loaded.last qtr concall transcript

http://ghcl.co.in/wp-content/uploads/2016/03/Filing-of-Transcript-regarding-Investors-conference-held-on-February-1-2016.pdf

invested recently @137-150


(Vivek Gautam) #20

There are some concerns on owner of Ghcl Sanjay Dalmia on Corp Governance issues in the past. I HV taken a small bet betting on professionals running ghcl n since Sanjay is in 70s maybe the new gen is better.

Other Dalmias managed cos seem better


(SecretInvestor) #21

Excellent earnings from GHCL. They have also appointed E&Y which is a major positive. The company is now professionally run.

Home Textile margins are on an upswing which will improve earnings going forward. Also, they are expanding Soda Ash capacity by nearly 20%.

At a PE of 5x (162 CMP), I really think there is good margin of safety here.

Cheers
S.I