Link: mailto:rohitc99@yahoo.com
Rohit - share the book
Hi Tony and Anil Bhai,
Pls share the respective book/letters with me too - getvinodmsATgmail
Thank You
Vinod
Hi,
Yes, the results of GRP are quite poor. The reasons seem to be - 1. Very slow demand - if one looks at any of the tyre related cos having business from Europe (GRP, OCCL, BKT etc) all of them have had a poor quarter and the reason is common - weak demand
2). The expansion done at TN hasn’t gone well and due to the power problems in the area, the current power costs are very high for the co as they are running on DG sets as of now.
Sorry, I got this one wrong as I was banking on the good past track record of the company and didn’t really pick-up the current problems which have come up.
As I’ll continue to have my bias for the co, so one should ignore my positive thoughts going forward till they actually start happening.
Few things for which I don’t think this is a typical cyclical co and current problem is more of many things going against at the same time:
Over last more than 10 years, the company has been able to maintain OPM at more than 17-18% and grow at good rates despite cycles in the rubber industry.
Yes, the end user is cyclical and hence the demand issues can come up from time to time.And for any manufacturing unit, until and unless one operates at above a specific utilization rate, its tough to get profits.
This time it seems the co has got its timing wrong (infact many things wrong) on the expansion done. Just few months back everyone in the industry was already operating at highutilizationand was confident on being able to use new capacity but for now things seem to havesuddenlychanged and expected demand is not there.
I think we will have to give time for the things to stabilize and see how the management handles the current tough time. The pain can be there for atleast 1-2 quarters. In the meanwhile - investors should go through their quarterly newsletters on website -http://www.grpweb.com/downloads.html to get an update on the progress in the company.
Regards,
Ayush
PS: One more thing - this is the reason why we prefer to have a bit diversified portfolio. Things can change quickly for small/mid caps resulting into wide variation in prices.
thanks ayush. would really appreciate your input on poly medicure and caplin also pls.
Thanks Ayush for your inputs.
I would agree with you, if one looks at the sales/profits/margins of the company, one cant paint it with a typical “cyclical” brush. It has always managed to grow consistently. And that is a tribute to its prudent Management.
Having said that, they have had over-capacity problems in the past too, in the face of weakening demand. I think last time round was in 2009 and 2010 when they operated at a stagnant level for more than 2 years.
This time round along with over-capacity they have major issues of escalating power & fuel charges. Did you have a discussion with Management and are you able to throw any more light on this aspect - solutions to the power issues & possible timeframes.
1 or 2 quarters of pain is too optimistic in my view. In my view this is going to take more than a year to sort things out. Demand weakening to reverse itself is a big call - given the current economy. For GRP to endure the pain, fix things and come back to growth situation may well take 2 years - just like last time round.
You have been in GRP for a long time, so you will know better. Any comments to highlight flaws in above thinking will be helpful for me to form my views.
As Hitesh says, we need that clarity in our minds that we need to ride GRP, BKT, Suprajit in a different way, be wary whenever there are large scale capacity additions, notwithstanding the excellent Management at the helm. This is a different ride than the one you can take on a Mayur and an Astral for e.g. I will be studying this further and revert.
-Donald
natural rubber prices have corrected sharply from about 190 rs a kg to 157rs a kg in kerala,there was increase in nr imports from south east asian countries thus pushing prices down.predictions are that nr prices will increase this year again with increased economic activity.Ayush with most of the capacity in Gujarat(ankleshwar & panoli) it maynot be that the plant in erode is the problem.Gas prices have gone up due to non availabilty of domestic gas and maybe they use gas in their furnaces .Im not sure of the process that goes into recycling rubber but gas prices are predicted to remain high.There were a lot of textile plants in surat who had gone for gas when it was cheap are now finding the whole thing unviable.
Donald maybe you can tweak the capital allocation framework and have part of the portfolio dedicated to steady compounders like itc,hdfc bank etc .Events like these are highly unpredictable and this could happen to the present round of favorites like astral,cera ,amarraja etc.Maybe increase the no of stocks in the midcap/smallcap portfolio.
Dear Ayush thank you for your views. Was watching it. Since it spiked up in a flash last year, didn’t enter.
Every 2-3 yrs we must get a new pair of tyres. Demand for tyres will be there.
(In future due to metro trains in every major city, demand for tyres in domestic market may get affected.If quality of our pathetic roads improve, i guess there will be less wear and tear. Demand may get affected more). My general views****may be wrong.
Are GRP into retreading business as well. Why haven’t they thought about it.
Civilian Airlines/Military, Truck tyres and many other avenues will open up for growth, if they get into retreading.
Regards
Mallikarjun
@Donald: By atleast 1-2 qtrs, my sense is about the pain/drag the new facility is having on the business of GRP as a whole. The cost increase at other places is about 10% while at TN, due to drastic power cuts, one has to use DG sets which costs more than 2.5 times the normal power rates.
Carefully look at Sept & Dec results - the power cost in absolute terms are not very different. The profitability has been really affected due to lower sales and hence coverage of fixed costs. So in Sept, it seemed that the co is steadily increasing its utilization and as it improves further things would be ok. But demand really collapsed since.
Predicting demand is very tough for me - so yeah, it may take much longer if the economic activity is not to improve over next few months or so and if so, the stock may slump more from here as in short term market is driven by EPS.
Talking about the strategy going forward, it would depend on individual’s allocation to the stock and investing horizon.
@Subash: What you are saying is right - one could had exited and jumped to better growth options. I used to do it earlier, but now find difficult to change too many ideas as our selection process of cos has become quite strict and its not easy to get good ideas.
@Mallikarjun: Tyre re-treading is a very competitive business. I’m will be happy if GRP continues to concentrate in the area they are the leaders and know it the best.
Regards,
Ayush
Hi Ayush,
Many thx for your inputs (esp for the 10 year chart…that spoke volumes!). Any manufacturing co will go through slightly lumpy periods around the time when new capacity is launched (not to mention in a new geography and greenfield plant) esp in a an environment like this. GRP’s assets have gone up almost 50% y/y so in hindsight no doubt about the likelihood of a few rough patches.
It was also interesting to see the comparison with BKT, where the demand destruction seems to be even more pronounced and leverage much higher. BKT though did mention in the conf call that they have already seen some amount of recovery in demand for the current quarter.
One thing i still dont understand is the sensitivity of GRP’s product prices to natural rubber prices. In the management Q&A, it was mentioned that reclaimed rubber prices was 40%-45% of natural rubber prices but that correlation no longer exists after natural rubber prices shot up. Now in a scenario of price decline in natural rubber, how would the price of reclaim rubber perform? any ideas? also any idea of the current price levels of reclaimed rubber?
regards
1). GRP has captive power plants at ankleshwar and panoli and these run on gas and it is prohibitively expensive at present.all gas based power plants in gujarat are running at very low plf.The reclamation process is an enery intensive process.Maybe they have to device a way to run their power plants on coal.
2.reclaim rubber has limitations that it cannot be used for high speed applications like car tyres,more suitable for cycle tyres/tubes and non auto applications.
3). not sure of the veracity but in 2011 ,but found on the net that GRP was selling reclaim rubber at 40 rs a kg when nr prices were 220.However if you go to the rubber board site it says scrap rubber at 85 rs a kg,whereas nr is around 155.
With Due Respect ,
I guess its time to block Mr. Vivek Bhauka from the forum. His continous habit of posting low quality/irrelevant posts might just turn up this forum into a mess.
He has already been given warnings by the Admin and other people
WSJ reported that European new car sales fell almost 9% y/y in Jan 13 to reach the **lowest **level ever since 1990 when the data began to be tracked. May explain part of the sales weakness at GRP
Hi Madyam,
Yes, there has been considerable slowdown in the auto sector worldwide + with the fall in natural rubber prices, de-stocking at distributors channels etc, the demand situation is bad. And like Donald says, if it continues longer, one may have to see more pain.
Lets see how things shape up here.
Ayush
This fall has now put GRP on my watchlist. Best time to buy cyclicals is when they are well into a downcycle & GRP seems to qualify. I’m looking for prices around 800-850 to start accumulating very gradually.
Into 970 Now… Substantially down after the results.
Yes the slowdown is there, yes near term is not good.
But its a good long term story & since market looks at EPS growth, Mar 13 results will becompared with Dec 12 & Mar 12 numbers… both of which were depressed.
Sothe question is when will you pick this up?
At some price (say 900 or 800) or after the recovery is visible as reported in the results (say at 1200 then)??
What say?
Jatin,
Classic case of Opportunity cost Vs higher return! I am in the same boat…was guessing that the Dec results will be bad and will enter if the stock corrects to 1000-1200, but the results were worse than expected and lead to more worry and requirement for better margin of safety.
Since their main customers are 6 of the top 10 tyre manufacturers in the world it could be a good idea to track the tyre sales growth of the customers first and decide on this. Exports were 67% of sales in 2012. Is anyone already tracking this?
Cheers
Vinod
Hi,
Below link is for con-call transcript of Goodyear for Q1, which gives an indication of Tyre industry worldwide.
Broad Points:
-
North America market has started rebounding, but Europe in major mess
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China, Latin America to drive fresh growth
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Company is lauching new products, and also trying to cut down RM costs
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They belive that this slowdown is a passing phase, and they want to be geared up when demand revives.
regards,
saurabh
Q4 Results out.
GRP is now into losses… Reasons- Low demand, higher costs (raw material & power).
Last time was in loss in March 2002 quarter (as per moneycontrol data).
Even Moat isn’t enough for you to succeed; if there is no decent demand for your product.
Hi Ayush,
GRP has unprecedented bull run as evident form MC from 2002 to 2012 i.e. for 10 years. Money has grown from 15/- to 2020/- i.e. 135 times! Very few stocks have delivered something like this.
I am really intrigued how the strength of 10 years can be shaken out so easily? I guess GRP must have faced current problems in those 10 years multiple times so really not sure how the strength could get so weakened, any insight from you will help. Its more to understand the dynamics than to make any buy call on GRP.
Thnx.
Hi Manish,
Yes, if you look at the nos and performance of GRP till 2012, it had been spectacular. This co has had one of the best ratios, growth, business model & leadership. Having been following this co since 2004 or so, I feel its a very good co.
Over last 2 years, almost everything that could go wrong went wrong - they had undertaken a major capex and the timing went wrong. The new plant at TN had severe power cut problem…the power cut was for about 14-15 hrs vs 2-3 hours when the plant was being set up…and power being a material cost, this capex has been a problem for them. Also, the rubber industry went through a lot of slowdown (while at the time of capex they had demand more than the capacity) and hence they couldn’t pass on the price increases like they used to do it in past.
The increase in energy prices has been sharp at their other plant locations also.
Coming to the positives -I’m happy with the way they handled these problems and are recovering quickly. As per the FY13 annual report, they say they continue to retain their leadership position and excellent relationship with top MNCs.
As of now they would be running at low capacity utilization of about 70-75% but as and when demand comes back, I expect the co to do very well.
Regards,
Ayush
Disc: Invested