Gulshan Polyols(GPL) - Business by FMCG and Valuation by Commodity

Stock Opportunities Untested - but worth a good look
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This stock is always part of my core portfolio for the last 4 years. I enjoyed the multibagger run always and surprised to see it is never covered in VP blog.

Gulshan Polyols :
It is demerged entity from Gulshan sugars in the year 2000.

GPL’s business portfolio covers Starch Sugars, Calcium Carbonate; Agro based Animal Feed, Alcohol business & On-site PCC plants. PL has 10 manufacturing units spread across 8 locations.

  1. Starch Sugar division constitutes products such as Sorbitol70%, Dextrose Monohydrate (DMH), Malto Dextrine Powder(MDP) and Liquid Glucose. GPL is the biggest producer in most of these products according to my knowledge in India. These products are widely used across the industries.

2. Calcium Carbonate and it’s by products:
GPL manufactures different types of Calcium Carbonates using Lime stone. Premium quality Activate Calcium Carbonate (ACC), Precipitated Calcium Carbonate (PCC), which finds applications in Plastic industry, Paint, Rubber, Cosmetics and Printing ink etc. GPL manufacturing activity spread across 4 plants with a capacity of 1, 05,000 MTPA backed by power plants.

Onsite PCC concept:

Gulshan Polyols Ltd is the first to introduce the concept of On-site PCC plant in India, at the site of Magnum Papers ltd. This has been recorded in the Limca Book of Records, 2010.Gulshan provides the know-how to set up an On-site PCC plant and maintains the supply of the raw material for the same. After success of its first partnership in this field, it is tying knot with other paper mills for On-site PCC technology.

Gulshan is supplying PCC for alkaline paper to Paper Mills like ITC Ltd, TNPL, BILT, Shree Krishna Paper Mills Ltd etc.

Onsite PCC Projects:
(1) ITC Ltd. Hoogly, Kolkota (PCC)·, (2) OPIL, BirlaGroup, Amlai (PCC)· (3)BMPIL, Meghnaghat, Bangladesh (PCC)· (4) BMPIL, Joya, Bangladesh, (WGCC)· (5)DSG Paper,Patiala (PCC)· (6)Magnum Paper, Sahibabad (PCC)

3. IMFL division:
GPL manufacture and supply of a low range of Alcoholic Beverages under the brand name “Tiger”. Management expects this segment as one of the future growth drivers and it has plans to setup 4 Grain based distilleries across India.

GPL’s distillery unit located at BoregaonIndustrial Area center in Madhya Pradesh with a capacity of 4.5 Lakh cases per month. Current blending capacity is 1.5 Lakh cases per month. Company has plans to manufacture Extra Neutral Alcohol (ENA) in the same location with capacity of 60,000 KLPD and commencement by March 2016.

4. Animal Feed:
Good thing about the company which I like mostly is the management is continually introducing new products in starch/rice segment and increasing the value products thereafter. The raw material for this division is derived from “By-product of the wet milling of corn to produce cornstarch, sweeteners, oil and applying steam drying OR produced in the processing course of corn starch”.

This division manufactures the products such as Cattle Feed, Corn Gluten, Rice Gluten, Corn Gemand others.Company claims their cattle feed products are vitamin rich such as amino acids, Proteins which are necessary for animal growth and their milk yield.

Both Animal Feed and IMFL divisions will provide additional revenues on both sides(top &bottom) considering that they are still in nascent stage.

Achievements:

  • GPL is the first Indian company to produce Dextrose Monohydrate (DMH)
    from rice.
  • GPL has been recorded in Limca Book of Records, 2010, for pioneering in setting up the first on-site PCC plant in the country.
  • GPL is the single largest producer of Sorbitol and Calcium Carbonate in the Country in the organized sector, which meets the requirements of all the customers in the various industries, and the customer’s list includes top corporations in Tooth Paste, Pharmaceuticals, Paper and Paints etc.
  • The Company has its own power generation plants of 15 MW located at Muzaffarnagar and Bharuch plants that makes it self sufficient in meeting the energy demand 24x7.
  • Long term agreements with most of its marquee clients.

Recent Developments:

  • Company shares allotted to Antara fund @175 rs.
  • Company shares listed on NSE exchange.
  • Promoters had given 6% of stake to reliance growth fund @255 rs.
  • Dividend payout increased from 2.5 to 3.5 rs for the completed FY.

Conclusion : Stock is currently trading at 315 rs with a PE of 12 in the current bull market. The current market capitalization of 300 crores is still small with plenty of growth opportunities ahead with good promoter integrity. I strongly feel that it can be a multibagger even from the existing levels.

Disclosure : I bought the shares at different levels @58(tracking position) @175 (medium quantity) and recently @319 levels. Hence my views are biased.

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Excellent write up chaitu.

Anybody wanting to start a new thread should take a lesson from how a new thread needs to be started.

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Good write-up. I was invested in Gulshan at one point of time. But there are certain red flags with regards to the company and that is the reason for its cheap valuation I feel. Firstly, the company’s tax rate is very low which to me suggest some manipulation in its numbers. The average tax rate over last 3 yrs to Mar’14 is around 15% inspite of being profitable. Return numbers are pretty poor as well. Further, consistency is missing in its quarterly performance. All said and done, it has the potential if the management gets its act together.

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@hitesh2710,
Thanks for appreciation and which surely increases my confidence and responsibility.

@neointown,
Thanks for sharing the counter view to understand the story better.
This is the first time in the last 4 years that i received negative comment about the promoters, i request you to share more details if possible to change my view about promoters.
Since i tracked the company from early stages, my views regarding management integrity.

  1. Every year management bought the shares from open market till 2014.
  2. The open market purchase price is higher even in levels @224(22k shares) i remember clearly .
    These actions may be enough to show the management confidence towards the business.

When Reliance MF is allotment completed this march, we can certainly say that they have done some kind of preliminary analysis such as books verification,plant verification etc…Even i gathered plants information from localites in some cases.

My Comment on Consistent revenues:
Since GPL’s contracts are long term in nature with most of the clients, this provides more clarity w.r.t consistent revenues. They also had to depend only on GPL considering it is the biggest player in the country with all the approval certificates.

// Firstly, the company’s tax rate is very low which to me suggest some manipulation in its numbers.
I always felt some TAX rebates in states such as Himachal Pradesh, Baruch in gujarat are the reasons for the same. But i will clarify on these points later with more concrete details.

My comment on return numbers:
GPL is able to maintain 14% operating margins with increased sales for the past 4 years.
Net profit margins also increased from 6% to 8% during the said period.

The recent ventures such as IMFL and Animal feed (can some one point other than KSE limited in animal feed division) divisions by management is actually to increase the revenues going forward and which is going to increase the share holder wealth.

Negatives: The completed capital expenditure activity increased the debt levels to 79 crores but this can be offset by debt capitalization and also if the company manages the current growth levels for next 2 years, i will not be surprised by Debt free status. Management clearly not worried about cash levels and their actions can be seen by interim dividend declaration starting with middle of the last year.

The below two statements are contradictory and which i take it as a positive conclusions from your end.
// Firstly, the company’s tax rate is very low which to me suggest some manipulation in its numbers.
//All said and done, it has the potential if the management gets its act together.

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Chaitu,

Excellent write up Chaitu… You have put all things in one place nicely… I was thinking of starting a post on this company but unable to come up sewing everything together.

It is an interesting company but into too many disparate things, so difficult to value the core strength of the company and its key value drivers … How profitable is IMFL bottling business? Recently, IFB Agro sold it off to Tilaknagar saying it is a non-profitable area … But this information I didn’t probe much.

And why so low payout ratio year after year? Their WC capital is manageable / no major capex to my knowledge except in Boregaon facility / LT debt is not huge …

These are questions which kept me away from probing in any great detail…

Good that you have started the thread…

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Chaitu,

thanks for the thread.

I second Aveek’s thoughts.

The ENA production / IMFL bottling business has no pricing power. Tilaknagar are themselves in talks with Chhabrias to get taken over, and this is not a good business to be in.

Not comfortable buying due to diversification to such a poor area.

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@aveekmitra , @Value_Seeker,

Would like to clarify some doubts from my side.

IMFL division is grain/starch based vs Tilak Nagar(Molasses) based, Grain based IMFL always will have premium over the molasses one. More over don’t compare it with debt trapped Tilaknagar. It is also like comparing toddler (GPL) with 50 year man (Tilaknagar).
For more info please see the link
Source: http://www.business-standard.com/article/companies/rs-3600-capex-for-india-made-foreign-liquor-production-114112700536_1.html

Too many divisions
At a higher level there seems to be several , but i can say only 2 considering the following factors.
According to me Starch Sugar, IMFL and Animal Feed divisions are interlinked and output of one division can be considered as input for the other. Similarly ACC, PCC and Onsite PCC projects are under CACO3 division according to me.

  1. Grain / Starch --> Sorbitol, DMH & IMFL
    |
    –> Wastage --> Animal Feed

  2. CACO3 --> ACC,PCC & Onsite PCC

Most important thing here that Domain experience of Management (Nearly 3 decades of experience) should be considered, which is a major advantage and with out this chances of Di-worsification may happen .

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@chaitanyak

I am referring to the structural problems for this sector:

The Indian Liquor Industry is a high risk industry primarily because of high taxes and the numerous governmental regulations that they face. Government regulation at every level creates structural rigidities and taxes and levies account for upto 65% of the consumer price.

Regulations relating to licensing, expansion of distilling and bottling, distribution, advertising and manufacturing processes (whether grain or molasses based) also create further hinderances.

Further, every state has different regulations and tax rates, as well as levies on inter state movement.

Liquor companies suffer from low pricing flexibility and have inefficient capacities. There is a high degree of competition in the industry and consumers have a tendency to trading down for lower brands when faced with a price increase.

My belief is that this is a sector where giant MNC’s can come in for the long haul. For smaller producers due to prevailing regulatory environment and taxation it is not worthwhile.

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@Value_Seeker,

Got it…thanks for sharing the info…

Disclosure: Not invested…Planning to create a tracking position.

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@chaitu

Regarding Point no.01 where you have highlighted that GPL is biggest producer. I would like to mention few names who also makes starch-glucose derivatives…Sahyadri Industries Ltd, Sukhjit Starch & Chemicals Ltd, Anil Ltd, and Riddhi Siddhi. As per my understanding, Riddhi Siddhi which was backed by french partner (Roquette) used to be the biggest maker of starch based derivatives in India.
Many of these players are listed so as to get an idea of domestic market size.

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@vj2084,
Source for claiming the largest producer. From 2013 annual report…

Sahyadri Industries : It is in building material space…No need to compare it with GPL according to me.

Previously i hold investment in Sukhjit starch and i tracked Anil as well : In both cases Management has stuck to initial plans and there is no growth strategy and passive management attitude exist in these companies. For the same reason their EPS had not grown for the last 5 years where as GPL every year they are coming with some new plants/busines and delivering it in the results (Please check last 5 years annual reports)

I am quoting the last 3 available Annual Reports with me.
2012 : In March 2012, the Company has set up a new plant for Grounded Calcium Carbonate at Abu Road, Rajasthan. Further, the facilities for producing the IMFL are being set up at Boregaon, Distt. Chhindwara Madhya Pradesh and operations of bottling is expected to commence in August 2012.

2013 : NEW BUSINESSES During the year, the Company has set up the facilities for Onsite Precipitated Calcium Carbonate (Onsite PCC) Plant at Patiala (Punjab) for a Company in Paper Industry namely M/s DSG Papers Private Limited.

2014: During the year, the company has set up and commissioned the following projects:
i. In competition with various MNC vendors, ITC Limited had awarded GPL to set up an Onsite PCC (Percipated Calcium Carbonate) plant for their specialty Paper division at Tribeni, West Bengal.

Company has successful commissioned and supply the desired quality for their Cigarette paper making plant. This is the 3rd Onsite PCC plant set up by the Company in India for supply of specialty PCC suitable for Paper industry.

ii. Long awaited, commercial production of Indian Made Foreign Liquor (IMFL) has also been commenced at its bottling unit situated at Boregaon, Madhya Pradesh. The product is very well received in the market under the brand name of ‘Tiger Gold’.

iii. The Company has also received the environmental clearance from Ministry of Environment and Forest (MOEF), New Delhi, to set up a Grain based distillery at Boregaon. Further Clearance from Madhya Pradesh Pollution Control Board is expected soon.

iv. The Company’s Grain based plant for manufacturing Dextrose Monohydrate (DMH), Maltodextrin Powder (MDP) and Liquid Glucose has also started the commercial production at Muzaffarnagar, Uttar Pradesh.

v. The Company has successfully commissioned the plant & equipment for updating the technology of Sorbitol manufacturing and making more environment friendly together with enhancement of capacity at Bharuch, Gujarat.

I didn’t tracked Riddhi…but initial probe shows EPS going down year after year for the last 4 years.

W.R.T market size : Since the clientele is FMCG…there will surely be lot of demand.
Small Example wrt to demand : Be it Colgate - Closeup -Pepsodent just see the ingredients listed over the pack: water, Sorbitol etc…I feel there is no dearth of demand.

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In Riddhi Siddhi promoters sold entire cash generating business to a subsidiary and subsequently divested stake in the subsidiary…hence now no starch related business in listed entity and thats why I said “It used to be one of biggest producer of starch derivatives in India”. For that matter, we can compare income of FY10 wherein Riddhi Siddhi was highest in terms of turnover. Ofcousre, products may not be entirely same but could be substitutes. So, possibly that could be biggest competitor in domestic market.
As per my understanding, French group (Roquette) continues to operate in India with better management control (earlier they held 16% stake and now they hold major stake) it is just that we don’t have numbers now to compare.

So if we can find it than it would be more meaningful.

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Second Point, Roquette is one of the five world leader in starch-gluco based derivatives products having robust clientele across globe including India.

Snapshot of their Indian Website where they claim to be leader in India.

Overview
Largest Indian starch and starch derivatives’ company
Possesses a basket of 35 products.
Product profile comprises maize starch powder,liquid glucose, dextrose monohydrate, maltodextrin,high maltose corn syrup, dextrose syrup and allied by-products.
ISO 9001-2000 and ISO 22000 certified organization.
More than 1200 employees
Part of the Roquette Group, 2rd Largest European Player and 5th Largest Global Player in Starch Industry & Bio-refinery.
Roquette Group has 21 production units, 6 application labs, more than 30 sales offices, 7800 employees, over 700 products, International Network of more than 100 Countries.
It achieved the turnover of 3.1 billion Euros in 2012.

Link: http://www.rrspl.in/about_us.html

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once this company was investigated for price manipulation by sebi refer old records and the promoters are highly doubtful refer mp news

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Many of us here would be aware about Riddhi Siddhi Gluco Biols Ltd (RSGBL). It was classic case of how minority shareholders have been neglected and cash cow was sold for the benefit of promoters.

Promoters have sold it off and presently company is renamed as “Roquette Riddhi Siddhi Pvt. Ltd.” Fully owned by Roquette group france which is one of the world leader in the business.

Please go through the link for more details.

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Gulshan Polyols is the first company in India to introduce the concept of On-site PCC (Precipitated Calcium Carbonate) plants for paper mills. The company has executed five projects in this high-margin segment and has a sixth project that is expected to be executed in the current fiscal. This is exciting and paper companies are using this concept. This is growth driver. I have been tracking this company on technical basis since 160+. Took small position after Reliance growth entered into it. I like the management profile. Saw youtube videos as well.

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@adrian007, can you post some details to justify your point instead of losing the credence.

@vj2084,
Increasing the dividend payout, purchase from open market actions should be enough …there is no point in being 360 degree pessimistic according to me in any company. Since i am with the company for the last 4 years, i will trust them more than anyone.

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@ Chaitu

Let us be logical and open to arguments for better evaluation. I am just sharing what I know about industry so as to to take “informed decision”. Staying invested for long with any company is no way criteria as per me to make investment decisions.
Anyway I am looking forward for more insights from you.
Thanx

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Two things i noticed were

1: Very low payout ratios (used to be 4-5% and now increased to around 10%)
2: Tax rate of 20% or less for the past few years

As for the lower payout ratios, the capex requirement of the business isn’t huge and there is also 70 crores cash on books(2015) while long term debt is just half of that. Could not find any possible reason for such lower dividends. However now that they have increased payout ratios albeit only marginally lets see what happens on that front. Would love to see increased payout ratios year on year

As for the tax rate need to understand how much MAT credit they are setting off or if there is something else. The taxes paid in income statement matches cash taxes paid so that is good but the low rates need to be checked

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Yesterday company reported good set of numbers. EPS for the quarter @9.7rs.