Gujarat Reclaim Rubber (now GRP Ltd)

Stock Opportunities Not-so-Hidden Gems
21

Cash flow analysis

(Rs.in Crs.)
Year end Mar 10 Mar 09 Mar 08 Mar 07 Mar 06
NOPAT 15.01 14.69 10.15 10.49 6.43
Operating cash flow 14.33 18.11 7.25 8.51 9.05
Free cash flow 34.99 26.86 17.75 26.02 18.71

22

The question was on Free cash flow. Op Cash Flow minus Capex.

Cash from Operating Activities (Rs. Cr.) 9.05 8.51 7.25 18.11 14.33
Operating Cash Flow to Sales 15.18 9.93 6.57 13.87 10.10
Capital Expenditure 14.96 8.57 8.91 17.20
Free Cash Flow -6.45 -1.32 9.20 -2.87
Free Cash Flow to Sales -7.52 -1.20 7.05 -2.02
We will have to wait for Capex data for FY11 (in AR) to know the free cash flow record this year. For a company growing at 30%+ like Gujarat reclaim, it probably needs all the cash it can invest in growth and more.

Its very rare to find manufacturing companies of this size with consistent free cash flow. Mayur Uniquoters is one rare company.

23

Hi Guys,

Gujarat Reclaim is one solid performer quietly chugging away. It has managed a 28% growth in Sales and a 27% growth in EPS for FY11. The management is confident of a 30%+ growth in the coming years and a return to higher margins & profitability, on the back of increased capacities and value-added products that are adding directly to topline and bottomline.

We managed to meet and speak to Ganesh Ghangurde, VP and Company Secretary to understand the company its prospects and challenges better.

Gujarat Reclaim Management Q&A uploaded for your perusal.

Please continue the discussion. Why wouldn’t you invest in a company with a track record like Gujarat Reclaims -a 30% grower with an almost 30% RoCE available at less than 7x FY12. What are the risks??

-Donald

1 Like
24

Having gone through the stock story and the management talk, I find the company interesting.

Some observations:

1). Currently the turnover is around 182 crores and management expects to ramp it up to more than 1000 crores within a few years. If it manages to do so there is definitely money to be made here. But the question is whether is there such a big market for reclaim rubber so as to target sales of 1000 crores? Where would the demand come from?

2). FY 11 results have been impressive with around 30% growth after two stagnant years. To their credit they did not stumble badly during the crisis years of 08-09 and managed to remain in the green.

3). Most important factor is regarding market fancy. With very low floating stock and low equity float I doubt whether major players influencing stock price like Mutual Funds, FIIs and other big ticket investors would be keen to get into the stock. Hence unless the fancy builds up there would be very few chances of the stock getting re rated inspite of churning out good results.

4). At cmp, dividend yield works out to around 2% or so which though good is not extremely attractive.

5). Downside risk looks low but upside also seems capped unless there is some serious re rating.

**All in all this could be a stock which might give steady returns unless there are some extraordinary triggers in forms of explosive sales/profit growth etc. **

**
**

25

Thanks Hitesh.

We should think about this stock 2-3 years from now.Remember the 1000 Cr is a vision and shared only when asked a leading question (for guaging how aggressive the Mgmt is).

What is the visibility 2-3 years from now:

1). Capacities doubled. Turnover doubling. The Management has been stressing with this doubled capacity they will deliver 500 Cr because the product mix is changing in favour of higher value synthetic rubber reclaims.

2). The Mgmt has also been stressing that they will return to higher margins and profitability, due to the better product mix and all round productivity and cost improvements.

3). Keep growing at 30% for the next few years. AlsoDPS has been growing at 19% CAGR for last 5 years, which is a good record

I agree with you this is probably not a blockbuster growth story.

However it may be good to have Gujarat Reclaim in your portfolio as a stable defensive stock that will keep growing nicely. They are very focused on the reclaim niche …and some of the emerging products like Thermoplastics from reclaim may just surprise on the upsides. The visit to the company re-inforced our belief that it is a solidly managed company with good systems and processes in place. They were very clear in the response to each query, short measured and to the point. I really liked that!

1 Like
26

You might have noticed that Promotors holding has come down slightly in last quarter from 47.07% to 46.91%.

27

Hi,

I think its a very small change and usually happens due to t/f between one entity to other. Over the last several qtrs, the promoter holding has been increasing consistently.

Regards,

Ayush

28

Went through Ar-2011.

-Company has consistently pursued its growth strategy during fy 2010-11 and achieved growth in sales by 31 per and PAT increased by 28 per.

-The export presence of company continues to grow with exports contributing a record 69 per of total sales.

-Revenue InIndia-59 cr /61 cr Exports -125 cr/ 80 cr Total -184 cr/ 141 cr

-The company is expanding its operations by setting up plants at new locations and by balancing of machineries at exciting locations.

)- Capacity

Installed capacity Actual production

a.Reclaim rubber 61000/41000 45941/41574

b.Thermo plastic elastomer 1200/896 102/10

-In spite of increased borrowings for new project company maintained interest cost at 1 per of turnover.

-Borrowings increased by 16 cr and gross block increased by 32 cr.

-Almost 2.8 cr administrative and professional fees paid for compliance of REACH norms laid down by European union and made compulsory for export of goods to European countries.

I think company is on the path to achieved its target of 80000 MT capacity and double its turnover.With prudent debt management company is enhancing capacities.Thermoplasticelastomer’scapacity enhanced and sales are gaining momentem.

1 Like
29

Very True! I think Gujarat Reclaim is very well placed and should see consistent growth of 20-25% for next 3-4 years.

Their target to be a 400-500 Cr turnover co in next 3 years from existing business seems quite realistic :slight_smile:

Thanks & Regards,

Ayush

30

Hi,

1QFY12 results look good. Qtrly EPS touched Rs.50. EBITDA margins touched 22%. Gujarat Reclaim looks pretty interesting to me, as a sure bet for next 2 years, as it becomes cheaper. Management seems to be walking the talk!

Pls pick holes and point towards downsides.Attached is also my qtrly tracker & projections sheet, should any of you want to tinker around.

Reasons for the bullishness:
1. The coy had mostly stagnant production last 3 years, but still managed operating margins 18-20%
2. Installed capacity has gone up to 60000 MT from 41000 MT in FY11. Scheduled to go upto 80000 MT in 2 phases of 10000 MT expansion each
3. Product Mix has changed/changing towards higher-value, higher margin Synthetic rubber -adding directly to topline and bottomline; Synthetic rubber is 50% of Sales today
4. Company expects to generate 500 Cr from 80000 MT capacity in 2-3 years
5. Company is very confident of margin expansions a) higher Value product Mix b) large jump in volumes
6. 1QFY12 results seem to vindicate Management's confidence of things turning for the better
You have to read the latestManagement Q&Ato question above, and correlate with projections below. The Gujarat Reclaim stock storyis a useful starting point for those new to Gujarat Reclaim, but it needs updation to reflect above visible changes.
Risks:
1. Exports comprise ~57% of Sales.
2. Top3 customers contribute 30% of Sales. Continental itself contributes 12%, but plants are all over the world, so geographically de-risked
Disclosure: No positions in Gujarat Reclaim currently, but am actively considering entry as overall market weakens

GujaratReclaim

2007

2008

2009

2010

2011

5yr CAGR

1QFY12

2012E

2013E

Growth

27.73%

18.43%

11.47%

28.38%

21.30%

30.00%

30.00%

Net Sales

85.48

109.18

129.30

144.13

185.04

53.84

240.55

312.72

EBITDA

19.35

19.13

26.66

27.57

33.19

14.44%

11.93

48.11

65.67

EBITDA Margins

22.64%

17.52%

20.62%

19.13%

17.94%

22.15%

20.00%

21.00%

Depreciation

2.43

3.45

3.96

4.36

5.13

1.55

7.00

9.10

Depreciation/Sales

2.84%

3.16%

3.06%

3.03%

2.77%

2.88%

2.91%

2.91%

EBIT

16.93

15.67

22.70

23.21

28.06

10.38

41.11

56.57

Interest

1.01

1.59

1.78

1.85

2.30

0.94

4.50

5.85

Interest/Sales

1.18%

1.45%

1.38%

1.28%

1.24%

1.75%

1.87%

1.87%

PBT

15.92

14.09

20.92

21.36

25.76

12.79%

9.44

36.61

50.72

Taxes

6.06

4.97

7.38

7.55

8.14

2.84

11.57

16.03

Tax rate

38.04%

35.28%

35.26%

35.36%

31.61%

30.06%

31.61%

31.61%

PAT

9.86

9.12

13.54

13.81

17.62

15.61%

6.60

25.04

34.69

Net Margins

11.54%

8.35%

10.47%

9.58%

9.52%

12.26%

10.41%

11.09%

# of Shares

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

EPS

73.97

68.37

101.55

103.56

132.16

49.50

187.80

260.17

EPS growth

-7.57%

48.54%

1.98%

27.61%

47.04%

42.10%

38.54%

P/E

8.13

5.72

4.13

P/Sales

0.77

0.60

0.46

Operating Cash flow

8.51

7.25

18.11

14.33

21.24

Capex

15.99

8.72

6.97

18.35

30.00

20.00

20.00

Gross Block

46.98

54.74

59.56

74.30

99.30

114.30

129.30

Installed Capacity (MT)

35200

41000

41000

41000

61000

70000

80000

Production (MT)

30671

37783

38206

41574

45941

55000

65000

Capacity Utilisation

87.13%

92.15%

93.19%

101.40%

75.31%

78.57%

81.25%

Sales (MT)

29887

37752

38126

42040

45000

55000

65000

Realisation

28.60

28.92

33.91

34.28

41.12

43.74

48.11

Total Assets

49.52

63.13

68.89

86.54

117.80

142.80

167.80

Asset Turns

1.73

1.73

1.88

1.67

1.57

1.68

1.86

Total Debt

19.29

23.76

17.79

24.35

40.42

60.42

82.42

Shareholders Equity

23.87

31.21

42.56

54.59

67.30

29.59%

86.34

114.03

Financial Leverage

2.07

2.02

1.62

1.59

1.75

1.65

1.47

Debt-to-Equity

0.81

0.76

0.42

0.45

0.60

0.70

0.72

Return-on-Equity

41.32%

29.21%

31.81%

25.29%

26.18%

29.00%

30.42%

Return-on-Capital Emp

39.22%

28.51%

37.61%

29.40%

26.05%

28.01%

28.80%
Gujarat-Reclaim-results-tracker.xls (78 KB)
31

Hi Donald,

Thanks for bringing it up and increasing my confidence in this company.

Its seems to be a very well managed co with one of the best ratios and now might be on good growth path going forward.

Regards,

Ayush

32

Hi Ayush

Thanks are due to you… to keep nudging me to take closer look.

This indeed is a very well managed company. What had impressed me on our visit to this company was the direct way in which the Management answered all our questions.

Usually they would give us the big picture first, before coming to specifics, and always precise to the point answers. They seemed to be on top of the business, which is showing!

We need to consider the export/currency risks, though. May be talk to the company again on what is their sense, have they seen any weakening. How many months order booking is there, etc. What percentage of Exports is from Europe, and how much of that is booked in Euro & US$.??

33

Hi,

Have not taken a look at the company specifically but some questions from my knowledge on the rubber sector -

Is any synthetic rubber present in India? What would be the impact once Reliance starts this - http://www.livemint.com/2010/05/16225959/RIL-to-set-up-synthetic-rubber.html?

Would there be any technical changes needed to derive from synthetic rubber if that is possible?

What is the typical impact of a good or bad natural rubber plantation season? Last year there had been not so good production from Kerala.

34

I think it could be interesting if it comes down to levels of around 850-900. Or am I getting too greedy?

**Another problem I see is very poor liquidity. **

**
**

35

Even though the company is managed well and has shown good growth numbers, i see two issues with it.

1). To be able to scale to 1000cr, how would it procure the RM ? For all recycling companies, be it waste management or biomass, the biggest challenge is availability of RM.

2). Secondly, by the mgmt’s own admission, tyre companies do not want to admit they use reclaimed rubber. So, not sure, where the demand for its products would come from?

36

Re: RM availability

Please read the Management Q&A to check Mgmt’s answers to a pointed query on this. They have the best scrap procurement network, and arecontinuouslyexpanding it and do not see that as a big challenge. Indian Auto OEM/Replacement market ensures enough scrap!!

Also, Synthetic reclaim rubber (50% in value terms) RM is synthetic rubber and crude derivatives, not tyres.

Tyre companies do not want to admit, BUT THEY USE 4-5% reclaim rubber, everyone of them.

Having said all these, we have to admit there is a higher risk in companies with heavy export dependence vs those that depend completely on domestic market, everything else being equal.

What are views on the external environment getting murkier? Can we remain sanguine about that. Last time round companies like BKT, Gujarat Reclaim had to suffer pain.

-Donald

1).

37

RM as a % of sales has increased from 38% in 2005 to around 47% in 2011. Apparently, the company doesn’t seem to have much pricing power.

38

@Nidhi - 1. As of now the plans are to reach 500 Cr turnover and for the same the co has taken up two greenfield expansions. First new plant has already come up at Sohlapur and the second new plant should come up by early next year in Erode. Mot Macdonald has been appointed for the same. With these two plants the capacity should reach to 80,000 MT in 2 years from 41,000 MT in 2010. As per FY 2011 AR, capacity is now expanded to 61,000 MT.

During the FY 2008-09 sort of dull period for the co, when I interacted with them and used to ask as to why are they not expanding - they were very clear that we need to consolidate first and get our raw material sourcing and linkages right to take on expansion.

They had been growing almost 25-30% every year for last 6-7 yrs before that. Now that the mgmt has firmed up plans and the way the expansions are lined up, I think this co can delivery good growth rates for next 3-5 yrs. Butof course, expansions do bring in risks also especially in aturbulentglobal economy like today.

Regarding RM issue - I think the mgmt is really good and they must have factored in the same. I think this is the reason why they are putting up new plant at totally new locations.

2.Usageof reclaimed rubber has been increasing at a very good pace globally. Have a look at the newsletters on the website of Guj Reclaim. As per one of them,usageof reclaimed rubber was just 3-4% of industry needs about 5-7 yrs back but now the same is at about 7-8%. With India and China having usage at about 8-11%. With better technologies and cost saving initiatives, the usage has to increase going forward.

Do have a look at their annual reports, they have discussed about the industry, leadership of the co and potential. Here is an extract from FY 10 AR:

“The usage of reclaim rubber by tyre companies is increasing due to inherent process benefits andthe price effectiveness. As European & US regulations require tyre companies to start using higher percentageof recycled content in manufacture of tyres, reclaim rubber remains a logical choice for manufacturers.”

Another point to note is - Natural Rubber prices have risen a lot and are almost triple from 2007-08 levels while reclaimed rubber prices must have not risen by more than 20-30% so it is becoming much more beneficial for cos to use more of reclaimed rubber.

Views Invited

Regards,

Ayush

1 Like
39

@Sandeep This discussion does keeps coming up on the rising raw material cost for the co. My thoughts - For manufacturing cos, I don’t think majority of them have pricing power. Pricing power comes from having a brand, patented product etc. For a normal manufacturing co - the competition will keep increasing and the way the co handles the same differentiates between a good and a weak mgmt.

In the case of Gujarat Reclaim for last 3 years the raw material costs are stable at 44-46% of sales. Yes they did rose between 2005 to 2008 but still the co was able to maintain good margins all those years. Here is a quick calculation : (may not be exact)

FY 2005 2006 2007 2008 2009 2010 2011

Raw Mat/Sale 38.45% 40.80% 42.19% 45.58% 43.52% 44.99% 45.41%

OPM % 18.01% 18.94% 22.51% 17.41% 20.03% 19.13% 17.55%

So one can observe that co has been able to maintain good margins for last 10 yrs (have data since 2002). In 2008 the dip was more due to appreciation of dollar at that time. Similarly in 2011, there were certain one time expenditures also for Reach requirement, expansion etc. As per Q1 FY 2012, the margins are back sharply to above 20%.

So the has done well all these years and that why I think its an excellent co.

Views Invited

Regards,

Ayush

PS: All this analysis is based on past only. Nobody knows future and there will be risks…caveatemptor

40

hi guys,

Thanks for the story. But the focus has been more on the supply side (i.e. company expanding) rather than demand side. If a significant portion of sales is through exports to Europe - and Europe’s economies are in pretty crap state now.

Moreover, I believe automotive sales in Europe will start slowing down as the double dip starts.

Secondly rubber prices in India have corrected significantly. So there is the risk that domestic companies might prefer using natural rubber more than reclaimed rubber.

Does anyone have any idea about the expansion plans of Guj. Reclaim and other m ajor players in the industry. An age old problem has been that all major players increase capacity at the same time and demand drops (squeezing margins). Therefore I think its quite important to know what this Company’s peers are planning and if the whole industry can support such levels of expansion in the current economic scenario?

cheers,

Subbu