Garware Hi-tech films (Earlier Garware polyester)

Stock Opportunities Untested - but worth a good look
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All of these are already well known, at least to me. The processing charges are because the patents are owned by the promoter owned private entity, garware industry. Charges are at around 4% of topline, grow in proportion with topline.

if you see latest concall, some investors also requested the promoters to amalgamate the private garware industries into GHTF and to stop paying the charges.

This is just another way for promoter to get compensated. Promoter remuneration is direct, ownership of GI is indirect.

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What more can I say? If you already know that the promoters are cheating the minority shareholders through such methods, I don’t have anything more to add.

Personally I wouldn’t get into bed with such managements when they’ve already been proven as cheats.

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P.S: No investments

@gurjota Excellent observations. The high ‘processing charges’ should be a give way for a prudent investor. I doubt if it has to do with any patent fees or such. It touts on page 32 of the AR 2020 that it is “…among the only two companies in the world having patented technology for manufacturing the UV stabilized dyed films and perhaps the only company in the world with backward integration for manufacturing of Solar control films”.

Typicaly genuine processing charges are outsourced sub contracted jobs. It may be easy to miss the name of the firm - it is not Garware Industries Ltd - that one was amalgamated a while ago. This one is Garware Industriees Ltd, and can be seen at :: Garware Industriees Limited ::. Most of the key contacts of the firm trace back to Garware Polyester (and now called Garware Hi-tech). The AR of the firm for the last 3 years is missing, and AR 2017 gives an annual revenue of 31 crores. Have a look at its accounts here - http://garwareindustriees.com/downloads/GIL_BS_2016_17.pdf . and if subcontractor has gross margins of > 90%, then either the Principal giving him business is a fool or is fooling someone :slight_smile:

There are other give aways too; the intermediate subsidiary in the UK seems to be very very very bloated for just acting as an invoicing agency, just check its expense items. Makes me apply for a job there!

Anyway, these tactics have been amply written by many folks, including me, in this forum, but in case I catch a passive investor reading this, do note that a company with poor corporate governance (defined as substantially appropriating money that is fairly owed to non-controlling shareholders), is NEVER an investment candidate. It cannot be handicapped. It cannot be cheap enough to justify the leakages.

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The way this corporate structure is organized is definitely undesirable. not sure if claims of ‘cheating’ and ‘taking away unfair value from minority shareholders’ are correct or over-exaggerated but i decided to cut my exposure by selling out of this complex situation today.

IMHO the original mistake in my investment thesis was i had assumed a rerating for the stock based on the strong biz growth which i now think might not materialize with high probability, although base biz will probably still compound nicely.

Thanks to gurjota and krishnaraj for expressing their views.

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GPL.pdf (89.7 KB)

Note I had prepared on GPL a year or so ago, captures all red flags I found. Just for information and not updated in last 6 months. There were screenshots for most bullets, but I never ended up posting the thread on Twitter, and those are indexed somewhere else now. All of this information can be found in the last 4-5 ARs.

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GHFL reported good earnings yesterday.The concall was good too.Some highlights:

→ Witnessed healthy demand across product range,continue to operate at 100% capacity utilization.Value added films now >80% of revenue.

→ PPF has been tested,orders have started to flow in and product is gaining acceptance across geographies.Expect 40% capacity utilisation in FY22.Broke even at gross level in Q1.

→ NSE listing has been pushed away further.New SEBI rules require that stocks under surveillance category can opt for NSE listing only after a gap of 2 months,post exit from ASM.No clarity from BSE on this as of now but company has done all paperwork and is monitoring the situation closely.

→ Window films demand is higher than company is able to supply.Took price hikes in Q1 and will do more hikes in Q2,some LT contracts getting renewed soon.Trying to get back to 25% EBITDA,no commitments though on the timeline.

→ Subsidiary Garware Chemicals’ product range had become obsolete.Oversupply in the markets,poor end product prices led to shutdown.Company tried to switch to bio-diesel but the condition put by buyer countries was to sell only to Govt…However,the offers were at uncompetitive prices.Usable equipment was shifted to other plants of the company.

→ Lost 2 patents recently(20 years over) Company had developed in-house tech for dyeing the polyester which helps to increase the life of the film.Garware doesn’t sell this outside but one other company supplies to all their competitors.

→ “Processing charges” are on account of an intermediary product that is manufactured by another co. of Mr. Garware.This is a unique tech so GHFL doesn’t want it to be sold outside.GHFL used to buy dyed film in 2014-15,shown under RM cost.All dealings on arm’s length basis.

→ “Some thinking” going on regarding the huge land parcel,nothing concrete as of now.

→ Appointed an exclusive person in US for positioning “Global” as a B2C brand.

→ No public study to compare quality of GHFL’s films with competitors.However,at a “tint-off” event held in Orlando,a randomly chosen GHFL film from a bouquet of other company’s films, GHFL’s product ranked 2nd(out of 96 competitors) Product was judged on ease of application,speed of application and quality.

→ PPF is self-healing & leaves no scratches.Coloured films are banned in India for application on cars.However,film can be applied during manufacturing by the OEM.Coating is done on accident prone areas of the car. US is the biggest market,followed by EU and Middle East.Company has good presence in all these regions.

→ If applied within 1 year of buying the car,PPF helps to retain the look of the car for over 5-7 years.The car looks brand new.This leads to much better resell value.GHFL is offering 10 year warranty.

→ Facing lot of freight/logistic issues on the export side.Otherwise,co. could’ve done even higher revenues in Q1.

→ Already started advertisements for PPF.Undertaking tinter training programs on product usage,etc. and also deploying virtual showrooms for full product range.Currently in touch with over 4,000 tinters.

→ No succession issues.Each daughter taking care of different segments: one oversees production,finance.Other handling R&D+HR.While the third one is managing international marketing.They keep rotating these responsibilities among each other.

→ Other income on account of investment in Garware Technical Fibres,value of stock has gone up meaningfully bumping up the line item.

→ 6-7 lk cars/month is the addressable opportunity in India for PPF(any car above Rs. 15 lk selling price) The PPF on a Mercedes would cost Rs. 120k if applied on the complete car.Have 22 dealers currently,developing the market in India.Also see a huge market for architectural films on tinted glass.Film can absorb UV radiation & even radiation from nearby telecom towers.GHFL will seriously look at this market only post new capacities coming on-stream since all existing capacities are being used for other products.

Company seems to be moving well with it’s stated plans while demand for existing products continues to be strong.

Disc.: Invested.Views are biased.

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Sep quarter result looks good and growth is good , not sure still muted response on share price. Any observation if any business impact or may be market looking forward for even better numbers ?

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EBITDA margins and more importantly Gross margins have continued to slide since last 3 quarters.Mgt had assured that they’ll recover by Q2 but as we see these were the lowest margins in a while.The management hasn’t addressed any of this margin pressure in any of it’s communication to the exchanges.So markets being circumspect is quiet fair.On the other hand,it was good to see that inspite of a high base company was able to achieve growth on an absolute basis.The concall was held today.Some highlights:

→ Freight rates have gone berserk and there is a crunch in global supply chains.Company was able to fulfill all commitments to clients,all customers were very appreciative of the same.

→ Took price hikes in the CPD division but IPD price hikes are still pending.Moreover,being of export nature the time lag is larger.RM prices have continued to surge making it more and more difficult to adequately take hikes for RM pressure.

→ PPF segment and new capex is coming up in-line with estimates.Company refused to share any nos and only shared qualitative details regarding PPF.However,they are confident of achieving 300 cr revenue in FY23 from this segment.

→ Mgt feels Q2 margins are the bottom and 18-19% will be the lowest for the kind of products company is mfg.Volumes will stay stable here since company is operating at 100% utilisation,growth might come from price hikes.

→ Globally only 3 countries have banned films for automobiles: Pakistan,Uganda & India.Developed countries won’t be doing a ban anytime soon.On the contrary they are looking to promote the usage of the same(I missed the reason) India ban was due to an order by SC.

There were some questions on land bank sale and on overall corporate governance.Mgt sees nothing wrong in the kind of remuneration being given but took the advise on lower P/E multiple on-board.They will be studying how the other family company has built goodwill.

Disc.: Invested.Views are biased.

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After last cocall I think management doesn’t want to disclose too much. They haven’t given Ppf sales no. On margin front I think they reply is not satisfactory. There margins are declining yoy basis and even qoq basis. They have also not disclosed much about volume growth.

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I have written a short post on this company on my blog. I am posting the valaution section of my post here and hope that it may add value to the discussion

VALUATIONS

Prior to doing valuation one must understand the key issues here

The first issue is whether these current operating margins are sustainable or simply are due to an industry wide cyclical trend. This is because the margin profile of virtually all Indian film manufacturers (Cosmo, Uflex, Jindal Poly, Polyplex) showed an upward trend in the past 5 years (check it out!). While the company takes great pains to inform investors that it is different from other Indian manufacturers (who cater primarily to packaging industry), whether the company’s margins are part of the industry wide scenario or whether they are genuinely sustainable only time will tell. Even globally, in the new PPF business one of the company’s competitor XPEL has shown rising margins in the past 5 years. The key raw materials for the company as PTA and MEG, which the company buys from Reliance Industries. Both these products were at low prices in the past year and are now rising again. Thus, there is high degree of uncertainty in the sustainability of margins (atleast in my mind) and for me that is a big stumbling block when valuing this company based on its earnings power.

The second major issue is that these kind of margins will attract competitors in the future considering how few assets are needed to get these kind of earnings. A very large proportion of the company’s assets are non-operational in nature, which a prospective competitor does not need to reproduce. Now the company claims that it has years of experience in this field and is a name that people recognize for quality, which cannot be replicated fast. That is a fair point. Hence let us capitalize 5 years of R&D, 5 years of the (in-famous) processing charges, 5 years of large portions of the SG&A, and if we add it to the resultant reproduction value of these assets it comes to only Rs 680 crores (around Rs 300/share). Hence, even from this standpoint the sustainability of the margins is suspect.

Lastly, the promoters antecedents towards minority shareholders have not been so great to say the least. While it can be argued that processing charges, high salary, etc are already accounted for in the current margins, the lands valued at Rs 1000 crores (revalued in FY 2018) forms a big part of valuation and is NOT accounted for. When will the company dispose excess lands and whether the company will share the proceeds with the minority shareholders are also big questions.

If you believe that the company will enjoy high margins, will be fair to minority shareholders, will sell the excess land at atleast Rs 1000 crores (and share it with the minority shareholders) then a simple DCF with assuming only a 5 year ‘hi-growth’ period of 10% y-o-y and muted returns thereafter will show that you can buy this company and make money even at the current market price.

However, for me, there is too much uncertainty in the issues detailed above and hence I am not confident with projecting earnings. In such a case one way to think about valuation would be what would a new entrant need to enter this business. As mentioned earlier, the core operating assets are very less which need to be valued. Here, in regards to the non-current assets the book value of core assets is likely to be representative of the market value as the company revalued and wrote-off many non-current assets in FY 18 (see FY18 AR Pg 108). The current core assets need very little adjustment and can also be taken at book value. Thereafter, since the company has a brand name and technology I capitalized Rs 50 crores/year (IMHO I am being fairly indulgent here) for 5 years of operational costs and added to the above total. The resultant valuation of the core assets is only Rs 680 crores. When we add this to the non-core assets, the total valuation comes 1745 crores (Rs 751/share). This breakup of core and non-core assets also reveals how dependent you to have on the management acting fairly in regards to the non-core assets. See the excel file detailing these calculations HERE

Furthermore even if I capitalize 10 years, the resultant valuation is Rs 807/share. Thus, from a valuations perspective there is not enough margin of safety, atleast for me. If the stock shows large correction it can become interesting to enter. On the other hand, you can have a view that these margins are sustainable, the land will be sold at a fair value and management will not revert to their old ways then this company is worth investing.

Note: While calculating the asset values I have assumed that the accountants valued the land and non-current assets “fairly” at the time of doing the “fair” market value as at 2018.

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Departure of Mr.Pathak does not augur well for the company. Though promoters have a good grip, losing such a key hands on person may affect the roadmap. New situation needs to be monitored.

Disc: invested.

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Just came across an article on business and management re-shuffle/consolidation update on Garware Hi-tech films besides the Q3 numbers:

Business Updates:

On February 3, 2022, the Company also listed on the National Stock Exchange (NSE) to provide an additional platform for new investors to participate in GHFL’s growth journey, increase investor participation and enhance value for all shareholders. The Company’s shares are already listed and traded on the Bombay Stock Exchange (BSE).
The Erection work for new Lamination line has commenced and the Company expects production by Q1 FY23.
Company was awarded the “British Retail Consortium Global Standard For Packaging Materials (BRCGS)” – Grade “A” Certificate from Intertek Team (UK) for its Waluj facility.

Other Updates:

In line with the current trend of having a smaller-sized board to enable greater participation, quicker decision making and diversity, Company has thought it prudent to reduce its board size which till recently had 13 members.
The said board size rationalization plan has been in action since early 2021, and it included portfolio allocation, succession planning, increasing bench strength, skill sets, enabling the Company to navigate towards a dynamic and exciting future.
The Company has in last few years, identified successors of Mr. C. J. Pathak, and Mr. B. D. Doshi, and had them share responsibility enabling a smooth transition.
Consequent to a succession transition, Mr. B. D. Doshi, Non-Independent Director (77 years), reiterated his long-standing request to step-down from the Board of the Company to enjoy a retired life.
Simultaneously, Mrs. Sarita Garware Ramsay, Joint Managing Director, desired to step-down from her duties to the Company, to pursue an entrepreneurial venture, which is unrelated to Company’s business.
The Board took note of their resignations, acknowledged their contributions to the Company, and wished them success in their future endeavors.
• The Board also took the opportunity to acknowledge contributions, and wish success to the former directors, Mr. C. J. Pathak, (68 years) resigned on January 13, 2022, and Mr. B. Moradian (72 years) resigned on February 4, 2022.

Source:

Disclosure : Invested

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There has been no investor presentation for Q1 result, concall or Annual Report? Any link for Q1FY23 concall?

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# Q4FY23 Concall Notes
1.Garware Hi-Tech Films Limited is a high quality, high margin producing specialty films Company.
2. Products overview - They are mainly sun-control films, paint protection films, shrinkable films and low oligomer films.
3. Export oriented business with with 33% being North America, almost 33% in India and 20% in Asia 11% to Europe and other countries.
4. Transition of the Company from 2017 to 2023, in 2017, company was mainly into polyester film manufacturing like their most years in industry.
In ‘23 now,they are highly value-added specialty film manufacturer. Earlier revenue from operation used to be Rs. 874 crore in 2017, which is now Rs. 1,438 crore. And their EBITDA margins were 9% in ’17, which is now double to 18.7%.
5. Global is their primary brand which is one of the most reputed brands in sun control and PPF in America market and European market.They have 23 trademarks registered, in many countries and exporting to more than 90 plus countries.
6. It is India’s first Company to produce PCR grade shrink films and APR, which is American Plastic Recycler certified for ecofriendly shrink films.
7. They have been Rank 1 in Tint Off last year in USA. They have the second largest global capacity of sun control
films. And since last 34 years, they have been winner of Top Exporters Award from Flex Council of India.
8. In consumer product division(CPD), they have automotive sun control films, paint protection films, safety films and architectural films.
In In industrial product division. They have shrinkable films and low oligomer films for electrical and electronic applications and company have released liners, PRU widely
used in various applications of similar products. And company have some commodity products which
are called thermal lamination, plain film, packaging and lidding films and metallizers.
9. Company is fully backward integrated: That means whatever product company produce, that’s raw material and its components are produced in house, starting from petrochemicals of PTA and MEG, company produce their own pet resins. Then company produce their own metallized film, their own dye
films and their own lamination. Similarly, these films are also used to produce all components of
paint protection film.
10. only manufacturer of paint protection film in India and probably only one of the few producers who have the dedicated paint protection line,with 50% capacity utilization.
11. Currently they have 300 lakh square feet per annum capacity, which is currently being utilized at 50%. But that was for the last year and they are seeing continuous
growth in that business. So, that is growing. If we see the penetration rate in USA, so it is 10%.
So, for every 100 cars sold, 10 cars are wrapped with PPF. We see the same volume in China. The estimates are 12% to 13%, whereas in India, it is less than 0.5%.
12. In order to increase the sales of paint protection film in India, company had a unique concept called Garware Application Studio, it had an aim to open 200 studios in 2 years.
So,they have already done 65 plus studios in India. And they are on the course to meet the target of 200 in in 2 years’ time. And company have currently OEM brands like dealers who sell their product directly at their dealership. They have 100 as of now and in 2 years they have the target to reach to 500 such players.
Note: PPF was insignificant befor GHTF entered into manufacturing.
13. Now manufacturing footprints. As I said, company have 2 fully vertically integrated manufacturing locations which makes polyester chips plant for polyester lines, extrusion coating lines, thermal line, metalizers, sun control film plans for automobile, architectural, safety films and paint protection.
14. Garware is committed for high R&D, they are working for many new products, which includes already produced PPF. They have recently developed the matte PPF,
then recently developed the shrinkable pearl float that is floatable shrink film. Then they have recently launched decorative and designer films and some windshield protection films, so which are the examples of innovation by our R&D team.
15. They have engaged Boston Consulting Group, BCG for sales and branding services to drive the CPD business, that is sun control and PPF business in domestic market.
And they have started initiative to reduce cost and increasing productivity through major initiatives. And in terms of PPF, we have tied up with 2 major car manufacturers and in advanced talks of some more.
16. For PPF, growth in USA and europe has been stagnant from last 2 years but company is focussing more for architectural usages and more products are in pipeline.
17. Competitors don’t have in-house effeciency as compared to Garware Hi tech films.
18. As 70% of the revenue is from export from USA and UK, both were in slow down,it impacted the SCF business reveune.

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If you are interested in Indian PPF market pricing and where Garware stands - Their pricing is generally value-for-money, with good quality at reasonable prices.

PPF pricing - Indian market
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Full thread on PPF here. Worth a read. Similar thread on Sunfilms here

There are 41 pages in the PPF thread. The thread is started in 2010 and we get to 2020 by page 6. That should tell you more about the trend.

It is being equated to an insurance policy - while the insurance covers major damage, the PPF protects from minor scratches and swirls which are a lot more prevalent and frequent. This wasn’t the trend back in 2010 or even in 2015 when I had bought my cars. There was lot of skepticism on dullness and yellowing which seems to have gone away as benefits of PPF installations are making their way to the public from early adopters.

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PPT AUG 23 GHFL.pdf (4.3 MB)

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There’s probably a significant development around this. Entrotech has formed a JV with PPG and has entered this space themselves bypassing XPEL. That could probably explain why XPEL is now importing from Garware (cant be a coincidence since timelines coincide nicely). It could mean that the opportunity size here for Garware in its business with XPEL can be quite huge.

On the flip side, looks like XPEL might be understating its revenues from TSLA. XPEL claims Tesla revenue is just 5% of their sales while it is probably 25-35% as per this short-seller report (XPEL has fallen considerably of late). Tesla has recently introduced wraps from the factory which directly competes with PPF from the likes of XPEL. So XPEL could be expected to take a hit to its revenues if lot of people choose this option.

What it could mean for Garware - The new opportunity with XPEL could be bigger than I thought since they have lost their biggest supplier. XPEL however could face headwinds with its Tesla business but since Garware is starting from zero in this business with XPEL, it should still be a big positive.

Disc: Invested

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