gujrat reclaim has come up with mixed results fro Q2Fy13. revenues have gone up 20.4% yoy, operating profit down 23.8% while net profit is down 29.71%. revenues have slowly started to pick up but the pressure on profitability continues.
ayush- would like your expert comments on that.
In my opinion, GRP is a good example of weak moat ( i am not saying no moat) as there are barriers to entry for newer players but competitive landscape is vibrant enough not to allow players to have pricing power. Full benefits on expansion is yet to kick in and hence things will improve in time to come, but ideally, I would have liked GRP maintaining margins as top contributor to lower margins are increase in RM cost and energy cost both of which shall be passed on to consumer. Apparently. thisdoes not seem to have happened.
That said, it remains a strong business in my opinion as scale/clientpenetration and high end R &D combined with strong management surely looks good on longer term. Personally, I am holding on to the business as I see good long term story here.
Best Regards
Dhwanil Desai
Hi,
The good thing is the strong growth in revenues. With this rate, they should be able to comfortably cross 300 Cr this year (which seemed quite tough till now). The co had already mentioned during the AGM that the margins would be under pressure for next couple of qtrs but things should come back to normalcy over a period.
Yes, drop in margins is concerning but I think we should watch out the things over a cpl of qtrs. Many often such unfavourable things do happen to good businesses too. If they can maintain the growth rates and come back to the margins, the stock should go a long way.
Ayush
Near term upsides look capped but long term story seems promising.
RM cost as % of sales continue to be at 44-45% which has been the case for the last 3-4 years. The margin drop is mainly due to higher manpower, overheads (power and water etc) and depreciation. On the face of it, all these factor point to startup costs of new capacity and not to pricing pressure. Also net margins are at a 10 year low (even below 2008) …all these factor point to higher initial costs in starting a new plant
rgds
rohit
Hi Rohit,
Thanks for your perspective about the new plant’s contribution to increase in manpower and overhead costs.
Regarding RM, cost as % sales is at 50% for this quarter. isn’t it ?
Should we consider that change as a significant increase from the 44-45% ? or just a small change ?
Regards
Raja
Hi raja
i think its around 46% for the quarter - 36/ 78 crs revenue. My point is that the RM as % of sales seems to be holding steady over the last few years although natural rubber (which reclaim rubber is a substitute) has fluctuated by more than +/-50%. So clearly natural rubber pricing does not impact the margins for the company substantially (on RM side or selling price).
In terms of competition, GRP has a 40%+ market share, so i cannot see how competition would be impacting the margins (cant think of any new organized player getting into this business).
If you look at the above factors and the recent numbers (and what ayush is saying 
), then the conclusion seems to be that startup costs, higher depreciation and interest are hurting the margins. As the capacity gets utilized, we should see some normalization of the depreciation and interest costs
As scrap of rubber is there main raw material, rubber prices changes are not likely to affect them much. When output prices changes, it is also reflected in input (rubber scrap) prices. The company is constantly trying to increase efficiency through power generation by waste heat, increase in scale etc., i see then maintaining their margin. And they do something nobody wants to do- scrap treatment. In this business, raw materials are something people throw in garbage. There is no business better than this- you just need a patient management keep on doing this business. I think we have one in GRP.
Hi,
I think the margin pressure looks severe as the co had fantastic margins of about 22-23% in some qtrs last yr against normal margins of 18-19% in past years. So a fall in margins to 15-16% looks severe.
Also, lets even consider the drop in margins to be an actual drop (rather than due to start up costs etc) but still I think as the mgmt was clear about weak margins during AGM and at the same time they were confident of coming back to normal margins over a period of time, I think we should be patient and give them more time. These variations are normal in any business.
Ayush
GRP has come out with another set of bad result. There is a decline in rubber market and Tyre & Auto industry causing the pressure here.
But the Raw Material Cost hurting the numbers is not a good sign.
Need to look at )
How the margin can be improved?
Why is Raw Material Cost not passed on?
What is the bargain power of the company?
A Management meet will be great.They have been excellent management,i hope they come out with concall with guidance forward.
ValuePickr Portfolio had advised a Reduce/Exit from Gujarat Reclaim in its Dec’12 update. But that was more on account of slowing demand vs recently enhanced Capacity available, and its attendant ills. And we did not see demand revival before a good 3-4 quarters.
Q3 has reported drastically lower operating margins at 11.6% vs Q1 (17.6%) or Q2 (15.38%). RM/Sales is up by 3.5% points over Q1, but that’s really not the concern (this is more or less within historical 44-47% range)
The main culprit is Power & Fuel Charges. In Q3 this is at 17% of Sales. (Q1 14%, Q2 13.5%). Before FY13 power costs used to be in the range of 11-12% historically. Management did mention concerns about power costs rising - with Govt of Gujarat revising upwards the prices of natural gas.
That’s a huge jump of 5-6% in operating costs. This is a real concern going forward. we should establish a base level for this - which might alter the economics of this business.
Ayush - if you can get us an update on this front, please?
-Donald
what a market reaction…
Stock is down to 2011 levels…
Waiting for hearing from Ayush / Rohit & other experts.
regards,
Shanid V H
Stock is very illiquid hence small volume can drag the stock down easily.
I still hold conviction with this management,will wait for a update from them before any knee jerk reaction.
GRP is a high quality cyclical company with very capable honest management.
But as Buffett mentioned, Even good management will not be able to take care of businesses with poor prospects.
As with most cyclicals this company should also have an up cycle. When is the moot question.
One thing an investor needs to do is to decide beforehand whether a business is cyclical or not without getting influenced by management/balance sheet/return ratios etc. A cyclical at the end of the day remains a cyclical and has to be played that way.
Sorry for my limited knowledge, but isn’t almost everything cyclical, Hit Ji except maybe FMCG & Pharma?
Our current Valuepickr’s favourites Atul Auto, Cera are also cyclical afterall.
What do you say?
i agree with the statement that almost every business has its cycles. FMCG is being touted as non-cyclical by most investors for the simple reason that almost everyone is looking at the last 5-7 years. if you go back more than that, companies like HUL, asian paints etc have undergone bad times too ( i personally lived through those in sales). companies like marico sold at 5 times earnings in 2003 as their growth had stagnated then
ofcourse a statement like the above is blasphemy these days
another question which i have in mind is this - how does one know ex-ante that the cycle is turning ? i have played this game in the past with the current favorities (like asian paints, marico etc) where i sold when i thought the cycle was turning and have regretted it as the stock recovered later and i never got back in. the opportunity loss has been far greater than what i gained from avoiding a temporary loss.
not preaching to anyone - just sharing my thoughts
Economic activity itself is a cyclical thing ? isn’t it ?
But having said that, there are industries within a economy which have their own different cycles and as investor’s we have to deal with them in addition to economic cycles.
@Rohit, It’s really sobering to read about your experiences with Marico and Asian Paints etc…
Hi Rohit,
There are ways and means of knowing how a cycle changes. I have been following Point and Figure Charting by Tom Dorsy where the author says that after completing the fundamental analysis of a company the next thing to do is check the Markets. There after Sector analysis. If you are interested in this then I can give you a copy of the book. However, there are no short cuts, but if you apply yourself then you too can do a Market and Sector analysis. I am presently doing the same and trying to learn from it.
Hi tony
I dont deny that one cannot figure where we stand in the business cycle. On the contrary there is an army of analysts and professionals who spend the entire day doing this. Is the game not to figure out the change in the cycle before everyone else in the market and then jump in or out of the stock ?
I am only speaking for myself - As a part time investor, i am not smart and dont have the time to really be able to predict these turning points with a lot of accuracy. As a result i have decided not to play a game where i am at a disadvantage and bound to loose
Getting the long term direction right and then doing nothing may result sometimes in losing out when there is a short term dip, but overall it has worked out much better for me in the long term
please do send me a copy of the book - i definitely would like to learn how to figure out turning points in biz cycles. no point making a virtue of my weakness.my email is rohitc99@yahoo.com - thanks in advance
almost
When the market itself runs in cycles what can one say about sectors and stocks?
What I imply is one has to look at sectors and companies in current context-- the way the markets look at these currently – and thats what matters in making returns.
I think even fmcg and cyclicals may be considered cyclical by some but that will have any bearing on stock returns only when markets start believing that. One cant keep looking at rear view mirrors and base our investing methods on that.
Even investment philosophies need some applied methods from our sides. One cant stick to only Graham/Buffett/Lynch style of investments and hope to win all the time. Different situations will call for different strategies. The only thing constant is change.
**
**
I know I might be deviating from the main topic of this thread. But as there is discussion going on cycles, cannot stop myself from quoting some extract from Howard Mark [who has written unlimited times in his shareholders letters about importance of understanding cycles (NOT PREDICTING BUT UNDERSTANDING, AS Howard thinks its impossible to predict turn of cycles]. He often repeats that itâs IMPOSSIBLE TO PREDICT CYCLES BUT YOU SHOULD KNOW WHAT THE CURRENT CYCLE IMPLIES.
âCycles always prevail eventually. Nothing goes in one direction forever. Trees don’t grow to the sky. Few things go to zero. In my opinion**, the key to dealing with the future lies in knowing where you are, even if you can’t know precisely where you’re going**. Knowing where you are in a cycle and what that implies for the future is very different from predicting the timing, extent and shape of the next cyclical move. And so we’d better understand all we can about cycles and their behavior.
Forecasts are unlikely to help us foresee the movements of the economic cycle. Nevertheless, we must be aware that it exists and repeats. The greatest mistakes with regard to the economic cycle result from a willingness to believe that it will not recur. But it always does â and those gullible enough to believe it won’t tend to lose money.
I am not disputing that itâs not possible to predict cycles, but ONE SHOULD READ HIS LETTERS to get a different perspective.
