TY for the input and the response , I am following this company for some time it appears overvalued by 15 rupees per share , based on the current figures - which would be more appropriate than factor in on the FSI increase in real estate , which is not their main business .
The stock is in downward trend since it touched 52W high . What is impacting the downfall?
Fall may be due to high crude oil that leads high raw material cost.
What is others opinion?
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Grauer and weil(I) ltd
The Industry:
⢠Expected growth in metal finishing industry from 2017-2023
World : CAGR 3.5%
India : CAGR 5.68%
⢠Metal finishing is mainly required in auto,aviation,railways,marine,defence,industrial & construction sectors.
⢠With increase in expected GDP rate,there will be expected increase in spending by peoples on luxuries and thus with increase in auto, aviation, construction there will be increase in metal finishing industry demand.
⢠Competitors in India in metal finishing sector are - Metal guard Pvt Ltd,Henkel india,BASF india ltd,Chemtex speciality,Dimetrics chemicals,KCH pvt ltd.
(Source-marketfutureresearch.com)
The business:
SEGMENTS:
- Chemicals-
⢠Core business(Contributed 68.7% of total revenue)
⢠Surface treatment/Intermediate chemicals/Speciality chemicals. - Engineering
⢠Makes components for electroplating as well as has waste water treatment plants.
⢠Automation was done last year using German technology
⢠Stagnant growth - Paints
⢠Has 5000 KL p.a. plant made at cost of 8.3 Cr running from Jan17
⢠Contributes to 15% of total revenue - Lubes
⢠Stagnant growth - Real estate
⢠Growel 101 mall in Kandivali
⢠87% occupancy as per march-17 report
⢠Good revenue and profit
PLANTS :
⢠Chemical and paints plant-
1)Dadra 2) Himachal Pradesh 3) Vapi 4) Jammu
⢠Engineering plant - Pune
⢠Mall - Mumbai
SUBSIDIARIES:
- Growel-Shanghai :
⢠100% holding
⢠Net profit in 2017 : (-80 Cr) - Growel-Bangkok :
⢠100% holding
⢠Net profit in 2017 : (-26.27Cr) - Growel-UK :
⢠100% holding
⢠Operations not started yet as per 2016&17 report.
ASSOCIATES:
- Growel goema pvt ltd :
⢠30% hoolding
⢠Net profit in 2017 : 25.34 Lakhs - Grauer and weil (Thailand) :
⢠49% holding
⢠Net profit in 2017 : (-30 Lakhs) - Growel SIDASA Pvt ltd :
⢠50% holding
⢠Net profit in 2017 : (-0.36 Lakhs) - Poona bottling pvt ltd :
⢠31% holding
⢠Net profit in 2017 : 1.56 Cr
Equity shares:
Authorised shares = 50 Crores
Issued shares = 22.67 Crores.There is high probability of issuing bonus shares.However,bonus shares have there own pros and cons.
Financial analysis
Sales:
Sales have grown at CAGR of 11% since 2008.Sales growth has steady rate since long.
OPM:
Opm has been 19% in 2017 with an overall avg of 17-18% in last 10yrs.
Tax rate:
The tax rate at around the 28-30%.
Other income:
Company has about 3% of its revenue as other income.Its primarily from interest and dividends.
It has FD of 41 Lakhs.
Cash flow from operations:
CFO is 452 Cr.Capex is 213 Cr.Free cash flow is about 239Cr which is 52% of CFO.
Some ratio analysis
Asset turnover:
has steadily increased since 2011, recently being 2.10,which means company is making good use of its fixed assets.
Receivable days:
is around 63.19 recently,gradually reduced over years.
Inventory turnover ratio:
is 143(gradually raised).
Debt to equity:
0.06
Current ratio:
2.24
ROE and ROCE:
is average around 18% and 17% respectively.
Cumulative Net profit/CFO:
= 250.81/451.53, which means company is able to nicely convert its profit into cash.
SSGR:
is 17% which says company can continue its operations without and external capital.
Networth:
Companies net worth has improved from 169 Cr to 302.7 Cr in 5 years.
R & D:
Company spended 2.21% of its revenue on R & D in 2017.
Other Important points to be considered-
Bad debts written off:
2013 : 32 Lakhs
2014 : 2.86 Cr
2015 : 4.5 Cr
2016 : 8.15 Cr
2017 : 2 Cr
Donât know how and why every year bad debts are occurring.
Management analysis
Salary :
Chairman - 77.6 Lakhs
MD - 1.3 Cr
CEO - 1.3 Cr
All other directors - 4 Cr
All salary are as per ceiling/act
Shareholders:
Couldnât find any controversy and frauds.
Dividends:
Increasing y-o-y last being 28%
Conclusion:
Overall company is good and has profitable core function,with zero fradulents by management .Recently,it has got certification from aviation company as well as got membership of Transocean so that it can enter into aviation and marine sector.It has got attached to Rollsroyce jet engine makers as well.Working with big brands will definitely contribute lot to GROWEL.Investor should definitely think of loss making subsidiaries and associates on other side as well.
Edit:
AR 2018 Notes :
*Gross sales and net profit consistentlysince 5yrs.
*Net sales increased by 15.6% and net profit by 9.6% which means RM prices have affected OPM.
*Debt in traces
*ROE and ROCE increasing gradually but reduced this yr compared to last yr as RM hiked.
*Dividends increasing yrlyâŚlatest 40%
*Plan to double the plant capacity in dadra by dec18 end.
*Opened branch in Dhaka
*Stagnant growth in exports
4 Likes
The story was published before one yearâŚwhich pumped the price more than 75% (50 to 82) âŚthe guys who bought at 82 lost more than 50% as many story teller might booked profit.
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Note from AGM on August 30 2018, based on discussion with Board of Directors in reply to queries of various shareholders. Please note that I have small tracking position in the company and my views may be biased. There is also possibility of some misunderstanding at my end while writing notes. Future investors are expected to do their own due diligence.
Business Segment: The Company business broadly comprises two business segments i.e. Real Estate and Manufacturing. Manufacturing further have 4 verticals, Metal Finishing, Engineering, Paints and Lube. Real estate comprise 101 Mall located at Kandivali East.
Kandivali Real Estate
Based on new DP plan, the Kandivali Land âTechnicalâ development potential is around 1.9 mn sq. ft. However, the development would include cost of FSI purchase from BMC and given current market condition, there is limited scope to absorb the full development in the neighborhood market. The company has planned to do development in phases. In first phase, it intend to spend around 120 Cr over 2-3 years for developing 750,000 Lakh sq. ft., additional area of which Rs 75 Cr would spent in FY19. The company would continue to watch market condition, cash flow position and then decide development of real estate in phases. It does not intend to leverage balance sheet significantly and do real estate development.
Currently nearly 97% available area (around 50% mall area, as other half is for parking and lobbies/staircase/washroom) is currently leased out. The company get average lease of around Rs 95/ sq. ft. per month. The tenant cost is further higher as it needs to pay for maintenance and other charges. The recent lease renewals are at around 130-140 per sq. ft. per months. If one considers only WDV of building, then current mall ROCE would also be in range of 25%.
The company is confident to renting out 7 Lakh sq. ft. which it would be developing over next three years given the current demand in Kandivali/Borivali Area.
Chembur Land
Chembur Land was previously used for Paint manufacturing. With commencement of Dadra Plant, Chembur Land is currently being utilised for Research center. The company has 3 plots with total area of around 2.5 Acres. All three plots are on leasehold term of 99 years, of which ~50 years period is remaining. Since the Land of the company are classify as âZâ Zone by BMC, it would not be simple just to do commercial development. The company may explore exiting this Land in case appropriate commercial offer is available.
Manufacturing Business
Chemical/Metal Finishing
The company is market leader in Surface Treatment /Metal Finishing business with around 40% market share with estimate market size of around RS 1000 Cr. The company is the largest player with Goenka and another group (not remembering the name) is other two organised players with 15-20% market share each. Balance market is scattered among unoganised/small players. The margin in Metal Finishing business is around 15-17% at net level which is sustainable. The growth in industry is generally in line with Nominal economy. However, Industrial production is main driver for growth. Automobile is main contributor accounting for around 30% of end use, while Auto component is further 10% and Imitation Jeweler being around 5-10% of total endues. There are multiple endues sector which account for balance 50% of market. The ROCE achieved in the business are upwards of 50%+. The industry is however not very high growth.
The company sales nearly 80-85% sales through distributors which nearly no receivable days. The company has enjoyed market share of around 40% over last 4 decades and it is undisputed leader in this segment. In aviation, the chemical of the company used as maintenance chemical for Engine and also used in technical component. The company has been operating in Defense aerospace for around 15 years and has strong relationship with Boeing and Airbus. In fact, the company earned small royalty income of Rs 12.89 Lakhs during FY18 from JV with Boeing for some development work. The business is Niche cash flow generating with high ROCE and Margin but with moderate growth potential.
Exports
The company has been exporting only Chemical manufactured product. South East Asia and SAARC countries are focus area for export development. However, the company experience to set up Subsidiary in China was not good. It has decided to close Chinese subsidiary and restore old distribution driven sales for Chinese market. The company would approach neighbour countries as client servicing is critical success factor for Metal finishing business. Setting up proper team in unknown country is very challenging.
Engineering
The engineering business is more of support to chemical business to fulfill specific client requirement. Hence, standalone margin and return would continue to remain moderate. The company would continue to fulfill demand of existing customers, but do not intend to aggressively expand in this segment given poor profitability parameter.
Industrial Paints
While the margin in Paints business is lower than Chemical business, the growth opportunity is higher. Hence, company has spent around 14-15Cr on Dadra plant for industrial paint for 5000 KL Capacity. The company intends to spent further Rs 4-5 Cr to increase capacity by 50% i.e. total 7,500 KL by end of 2018. The expansion is likely to be completed in 2-3 months. The company is also exploring option to acquire Industrial paint units to double its capacity subject to appropriate prices. The management is targeting 65% volume growth and has achieved around 50% growth in first five months.
In Dadra plant, the company has employed around 181 employees. The management team is also in place for taking business to next level. However, net profit margin (~5-7%) and return in this business would be lower than chemical business. It took around 4 years for the company to turnaround paint business which was loss making. Further, the company is leveraging its client relationship in Chemical business to grow paint business. The leverage client relationship is core of the company strategy in manufacturing, and all its segments, the company is present due to client requirement. The working capital requirement for Paint business is also higher than chemical business. Hence, as share of Non-chemical manufacturing business in total revenue increased, net profit margin and ROCE from manufacturing business is likely to decline.
Industrial Lube
The company also has presence in industrial lube which is relatively lesser competitive business. While the size is small, it is something similar to Paint business 3-4 years back, when due to lower scale, the company was reporting losses. It intends to turnaround Lube business in couple of years and then wanted to scale up like it is attempting in Paint.
Capacity utilisation
At present, average capacity utilisation manufacturing plant is around 50-51% which provides revenue of around Rs 500 Cr. It would be difficult to achieve 100% capacity utilisation given the unique requirement and client specification. However, the company expects it can operate at peak level of around 75% utilisation which could give around Rs 700-750 Cr sales at current prices.
Financials
The company reported higher consultancy and legal charges as many senior people, who retired from job, were appointed as consultants. In Q4FY18, the company reported lower margin, as it tried to gain market share. One of its competitors was facing financial problem and company took tactical decision to compromise in profitability by passing on cost increase and gain market share. In Q1FY19, it resumed its profitability level again. While management was confident to achieve high sales growth shown in Q1FY19 during the year, on profitability, it would depend on volatility in Oil and exchange rate.
In my opinion, the company is trying to use cash flow from highly profitable-moderate growth Chemical business (Cash cow) to high growth business like Real estate, Paints and Lube which would drive growth in years to come.
16 Likes
These are valuable inputs Dhiraj, thanks.
Have been following this Co. for past few years. Outside of their fundamental coverage, 2 points persist in my mind -
Co. doesnât seem interested in NSE listing, despite shareholder suggestions since some years.
Despite good standing in small-cap space and good growth in last 5 years, there is no HNI/ Institutional holding, nor much coverage in research circles or in this forum. Wonder if the Co. is plagued by some governance issues that retail investors are unaware of.
Seeking your feedback if either of these were discussed between peer shareholders.
x
On NSE listing, they said management would consider same in Board meeting.
On institutional holding, I think small size and moderate growth has kept institutional investor out of company.
Hi Dhiraj,
Thanks for sharing your detailed notes. Had a couple of things to add -
Cost for expansion of 750000 square feet of the mall will be Rs 400 crores to be incurred over 3 years. Rs 120 crores would imply a construction cost of only Rs 1600 per square feet which is too low. Also, to avail the additional FSI the company would need to pay a cost to the government in the form of TDR at the rate of Rs 4500 per sqaure foot for the leasable area being constructed.
Out of this expansion of 750000 square foot, roughly half will be leasable. So net-net, we should expect lease income on further 375000 sqaure feet ( Rental yield should be Rs 1500-1800 per square foot per annum implying additional lease income of Rs 50-60 crores in the next 3 years,the whole of which will be cash profit for the company-for reference,FY18 cash profit would be Rs 75 crores I think)
Real estate will then become a segment which can rival the surface treatment/chemicals business in terms of profitability
Of course these are all estimates and projections,so all investors should treat them with caution
2 Likes
My reply to your points is as under:
The expected 750,000 sq ft expansion can also be in phases. If my memory is correct, even the current mall of around 4250,00 sq ft, first commenced Big bazar and Cinemax Theatre. Following link provide details about commencement of Growel mall over period.
https://www.indianretailer.com/article/whats-hot/property/Best-shopping-malls-2015-Growel-s-101-Mall.a3405/
So in my opinion, the company may go for expansion of 750,000 sq ft also in phases. While it may may not require any TDR purchase etc for 750,000 sq ft in my opinon and hence need to spent only construction cost. The cost of construction as per 750,000 sq ft and 400 Cr provide Rs 1600 per sq ft, however, we do not know exactly whether Rs 400 Cr is for full 750,000 sq ft or for part of 750,000 sq ft area. I do not have exact information about same.
Appreciate your efforts and calculation of cost of construction being lower, but I do not have correct reply to your query.
GWIL has been great story for last 4-5 years.The profit growth has been very impressive.Financials give an impression of an extremely efficient Co.Also in its area of operation it has limited
competition. What puzzles me a little is the static growth in revenues in last 3 years.Is the opportunity size of the business limited or is it a consolidation?Growth looks to be the only show stopper.It would be great if someone can put more insights into this.
Disc:Invested
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Grauerâs topline depends on private capex growth and growth in capital goods. These two areas have witnessed muted growth generally over the past many years.
G&W is primarily in the anti-corrosive coatings business. Also its paints and engineering divisions are not very profitable.
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Grauer & Weil has a sales growth of approx. 10% over the last 10 years and 6% for the last 3 yearsâŚIt might be slowing down.
But as per the Care Ratings report of Oct. 18 , the company is going for a Capex of about Rs. 206 Cr. which is 58% of its current tangible worth. The capex will be completed by FY 20 and will be through internal sources. This capex is very important as it may help the company to get over itâs current period of stagnation.
Disc.: Invested
rating 08_10_18.pdf (413.6 KB)
How do we if the capex is demand driven?
Grauer and Weil has been covered in the latest edition of Outlook Business. IMHO, their is a significant Margin of safety at play here. Even if you take into account a modest 7-8% top-line growth-it is available at a 1-year forward P/E of 16- a business which has high double digit operating margins & core operation having an ROCE in excess of 50% and all of this at only half the capacity utilization. Going ahead if utilization improves it can be a operating leverage play. Add to this the land bank at Chembur and the Growel 101 mall at Kandivali. Paint division has been a drag. Overall IMHO this definitely worth looking at!
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Very well said Ayush ji. First part of this thread contains all vital points
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FY19 Q4 Results: https://www.bseindia.com/xml-data/corpfiling/AttachLive/b5b0510d-7fdd-4f85-b4b7-8b73d18afb20.pdf
Decent numbers
Will the Rs.6 cr exceptional loss get written back when they receive insurance? EBIT is very good
Sharing my notes from the AGM of the company held last week. Please note that these are based on my understanding and interpretation of the proceedings, shared here in good faith. But there could be errors and omissions. This is not a recommendation to buy or sell the stock. I am invested in the company and my views may be biased. Please do your own research before investing.
The management freely invited shareholders to come up to the podium & ask questions. Later most of the questions were answered with lot of specific details and numbers. Management mingled with the shareholders for a long time after the meeting was over.
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Company is debt free, debt is zero. If you are seeing any debt it might have been taken for some short term transactional purposes, but otherwise there is no debt.
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Margins: At a company level, margins will be lower in future due to 2 reasons viz. there is increasing competition and product profile is changing. Paints business is lower margin and its contribution will increase going ahead.
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Subsidiaries: All our subsidiaries are profitable.
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Capacity Utilization: Current capacity utilization at the company level is 55% on average, with individual plants ranging from 30 - 60 %. All our 6 divisions are profit making.
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Automobile sector: Our exposure to automobile sector is around 15% of total revenues.
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Capex: We have decided to go slow on capex since there is a slowdown. We are conserving cash. Right now, we do not want to invest if we are not sure of the returns. Capex plan for this year is Rs.57 crore. Going ahead, there will be more capex in manufacturing and less on property development. In Dadra, we have purchased a factory costing Rs.17 crores of which Rs.10 crores is for Land and Rs.7 crore is for the plant & machinery. In addition, we have purchased a small property in Vasai costing Rs.7 crore where the Tech centre for R & D will be shifted from Chembur. This will become functional in another 18 months.
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Fire incident: Major part of the loss was stocks. That is why you are not seeing any reduction in the Fixed Assets. We have lodged an insurance claim for Rs.14 crores, of which around Rs.4 crores has already been received as an advance.
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Electroplating: This is the cash cow, but it is a saturated market with around Rs.900-1,000 crore market size in India. We are already a market leader and hence double digit growth is not possible in this.
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Paints: This will propel the growth in future. New capacity for Paints is coming up in the first half of next year. In Paints, we are focussed in highly specialised industrial paints where technology is the main driver and not marketing. Right now, we are majorly into Oil & Gas, Pipelines, Infrastructure, Defence, Space etc. We are approved vendor for works on Sukhoi, MiG, Rafael (in progress), PSLV, BrahMoS etc. We are trying to get into Commercial Aviation which will be big once we get it. We are also trying to get into Railways. The paints business works on approvals - becoming an âapproved vendorâ is costly and time consuming. But once you are an approved vendor, orders are large in size. For example, we got an ONGC order recently for Rs.28 crore. Paints business is more working capital intensive. There is pressure on working capital since they (government / PSUs) release payments with delays & all. Paints business will have higher volume but lower margins, leading to higher absolute profits for the company. In Paints, we have grown very fast in the last couple of years compared to the competition. Why have we been so successful in Paints? There are two reasons. One, we are cost competitive compared to the competition, many of which are expensive MNC players. Two, we are excellent in service - both pre & post sale servicing. We have a very good team. Main competition in paints are - Indian (Shalimar Paints, Berger Paints) and many MNCs like Akzo Nobel etc.
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Real Estate Development: We have large plans in this but they are dampened due to constant change of rules. We can get around 11 lac square feet FSI. But FSI has become very costly, so it is not worth investing right now when market conditions are not favourable. Options to develop Chembur land are very limited due to its size and location. But some decision on this may come up in near future. We are planning to develop 4 lac square feet in the current mall, and are waiting for clearances. Metro work on the WE Highway is expected to go on till 2022. We also have a small share in Pune property which is under development.
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Oils: Our current sales in these are small but this business also has a lot of potential. Even these are ultimately surface treatment products only.
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Royalty payments: Last year there was some royalty income due to a project from Boeing. That project is over and hence this year there is no such income.
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Listing on NSE: We feel there will be no value addition due to NSE listing. On the other hand, it will increase costs and compliance burden. Hence we are not interested in NSE listing at this stage. We may go for listing in future if we have to raise money from the market or some such reason but right now we donât see any tangible benefit.
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