Thanks Ayush.
Any direction from mgmt how they are tackling this capaex fiasco?
If we know for sure that mgmt has realized the mistakes and taking corrective actions [Closing new plant,shifting to new loaction, identifying new chepaer power sources etc.] and in due course they can bring it back to continuous profitability then i feel investing and just waiting could be the best strategy.
Also one more question:
In good old decade how GRP has ahandled the rubber price fluctuation? It seems to me that their demand increases when rubber prices goes up and vice versa. Or let me know if this understanding is wrong.
The management is hands on and it seems they have addressed the power issues at TN in following way 1. They got the grid connectivity and power situation has improved quite a lot 2. They have tied up with a wind power co to buy power at a fixed rate. At other location (Gujarat) they have switched from Gas to grid and are buying units from open exchange to lower the cost.
However in manufacturing unit, until you operate at an optimum capacity utilization you can’t get optimum profitability. So the demand recovery is the thing to be monitored…which I feel should happen over due course of 6 months to 1 year.
On your other query of the relation with rubber prices - personally I don’t think they are too much dependent on the same. They have had good profitability in previous years even in down cycles of rubber prices. Rising rubber prices increases the demand for their product and allows them to have pricing power…and the recent slump in industry has affected the global demand.
Regards,
Ayush
PS: Above details are based on the interaction at the AGM. My views may be biased as I’m invested.
Ayush,
Very convincing to see such a strong association with the business and its growth prospects! And very interesting thread altogather. After through it and AR’s of the last years. One major factor still seems to price of Natural rubber (which has been confirmed in their FY 13 AR) which have slumped from Rs 190/Kg to Rs 150/Kg (Please check the ICICI Sector report for the same) and a general sector update of Tyre Industry.
http://content.icicidirect.com/mailimages/IDirect_Tyre_SectorUpdate_Dec2013.pdf
You might seem to disagree? Why is that so? Could you please be more specific!
The reason I say is - this is the raw material to sales ratio
FY13 FY12 FY11 FY10 FY09 FY08 FY 07
| 47.20% | 43.93% | 45.41% | 44.99% | 43.52% | 45.86% | 43.85% |
Ayush,
I am not sure if we were discussing on the same issue. So to make my point clear, there are two aspects of natural rubber price that affect GRP. One is demand and the other is the input cost (Top and bottom line)! Right?
Firstly, the decline in the price of Rubber should decrease the input cost and hence as you mentioned stabilize the Raw Material Cost.
Secondly, it should also effect the demand for Reclaimed Rubber as such!
My question is: As it is clearly known that GRP is a cyclical business, it is important to jump on the boat when the tide is turning around. With the automotive market worldwide (also in India) still not recovering so strongly and the prices of natural rubber sinking do we have enough indication of the turning tide (from demand perspective)? In spite of the improvements mentioned before by you in operating costs (power costs ,…etc) which could have improved the quarterly results!
Regards, Vamsi
I don’t think that the demand situation is great. The auto sector worldwide is still doing badly and hence it won’t be easy for GRP to grow quickly.
Yet, I like the company and I’m invested with a long term perspective.
Regards,
Ayush
Ayush,
Whats the rational for stay invested in current situation? i guess you feel that it will trun around and rebound sooner or later or i am missing something aka big picture?
operating and net margins at 10 year lows
sales impacted by the worst auto markets in india, Europe and US
Drop in prices of natural rubber
Net, net - all that can go wrong has gone wrong at the same time. what happens when some of this stops being a headwind or maybe becomes a tailwind (auto sales in US and europe have now started recovering)
Regards,
Ayush
Having tracked the co for few years, I feel quite comfortable with the quality of business and management…don’t want to get off due to temporary problems (in my view). Yes, I feel the co has potential to do something big also down 3-5 years.
Regards,
Ayush
Hi Ayush & Others,
What is the size of Reclaim Rubber Market (if any)…Is Reclaim rubber market’s growth closely linked with tyre manufacturing growth (leaving aside movements in Rubber Prices)…
High Market Growth rates can attract competition or Is GRP having some kind of Moat ??? If any, Can you Please share with us…
Thanks in Advance…
Hi
I have only now started looking at this thread. Read through it completely…If someone can answer these questions, it would be great
1). With sales of just 300cr, this is the third largest company in its sector in the world. In most other sectors, the size of an Indian company to a western company has a huge difference. Does this tell us anything about the market size and opportunity?
2). It seems the auto sector slowdown has hit the company badly. What percent of its sales is derived from this sector? Even a rough idea will help
3). The debt/equity ratio is reaching precariously close to 1:1. Any concerns there?
Thanks
Hi Guys,
I have just started doing some work on this company. Must say, VP made my life easier helped me get to speed quickly on the company… Thanks to everyone who took the efforts for making the Stock Story, Management discussion(s).
Of the many ARs I have read, I think GRP’s AR is right up there. They have tried to very succinctly explained their business and have been very transparent. One of the best ARs I have read.
I think much has been said about the business already, and it is clearly facing some tough times with EBITDA margins now reaching single digits.
The company has been a bit unlucky with both supply side pressures with RM prices increasing due to alternate usage of end of life tyres and on the demand side, NR & SR prices going down, making it difficult for RR mfg to increase prices. The general slowdown in the economy has further increased the woes.
Adding to this, I think they are well below their peak utilization (GFA down from 2 to 1.5 in FY14) which also is putting pressure on the margins with fixed costs not getting absorbed.
The revival of the auto sector in the domestic market may be a silver lining for the company, but the biggest issue is RM price increase. which has led to poor margins. Its anybody’s guess as to how the RM issue will be resolved.
The AR also mentions another risk, which if plays out, may further prolong the cycle. This is the China slowdown risk - which may lead to increase in supply of RR globally, as local players there export their output owing to a slowdown in the Chinese economy, leading to a glut in the global market, putting further pressure on prices.
So far Chinese RR players have mostly supplied within their domestic economy.
Net net, I think GRP is still not out of the woods…and many unknowns are still there to be answered.
Hi Guys,
I have just started doing some work on this company. Must say, VP made my life easier helped me get to speed quickly on the company… Thanks to everyone who took the efforts for making the Stock Story, Management discussion(s).
Of the many ARs I have read, I think GRP’s AR is right up there. They have tried to very succinctly explained their business and have been very transparent. One of the best ARs I have read.
I think much has been said about the business already, and it is clearly facing some tough times with EBITDA margins now reaching single digits.
The company has been a bit unlucky with both supply side pressures with RM prices increasing due to alternate usage of end of life tyres and on the demand side, NR & SR prices going down, making it difficult for RR mfg to increase prices. The general slowdown in the economy has further increased the woes.
Adding to this, I think they are well below their peak utilization (GFA down from 2 to 1.5 in FY14) which also is putting pressure on the margins with fixed costs not getting absorbed.
The revival of the auto sector in the domestic market may be a silver lining for the company, but the biggest issue is RM price increase. which has led to poor margins. Its anybody’s guess as to how the RM issue will be resolved.
The AR also mentions another risk, which if plays out, may further prolong the cycle. This is the China slowdown risk - which may lead to increase in supply of RR globally, as local players there export their output owing to a slowdown in the Chinese economy, leading to a glut in the global market, putting further pressure on prices.
So far Chinese RR players have mostly supplied within their domestic economy.
Net net, I think GRP is still not out of the woods…and many unknowns are still there to be answered.
Having said that, I think the management @ GRP is good. Their reporting is an example. Also they have been focusing on cutting costs which is evident in the last 2-3 years. For a cyclical company the B/S is slightly leveraged, though the debt has come down in the recent quarter.
I think for someone like me it is difficult to predict the revival in the cycle, given so many variables at play, Its best to enter at a price where you think all negatives have been priced in and then wait for the cycle to revive.
Views invited…
I think it’s better to avoid this stock unless there is an uptrend in NR/SR prices and performance or it’s available at screaming valuations. As your rightly pointed out, there are just too many variables at play against the business at the moment.
This is a goodarticleon reclaimed rubber industry as a whole. Sharing the key points and its implications on GRP
A very interesting development happened in China’s RR industry as per the article below…
There are a lot of RR players in china but most of them operate at a very low capacity utilization, plus there is pricing war and lot of environmental concerns. To tackle all this- the Chinese authorities have put up a condition which restricts old players to have a capacity of Min 10,000 MT and new players to have ~ 20000 MT. As per this article ~ 90% of the players won’t be able to meet this regulation. And only 23 players have been able to meet it…
The implication of this would mean that entry barriers would increase in this industry which could mean good for scaled up players like GRP
We can check the same with the company…and how does it view this regulation affecting the potential competition in the export markets from Chinese players…
http://www.tirereview.com/china-watch-reclaimed-rubber-policy-retread-factory-patents/
The risk of China flooding the global market with their excess supply still looms large-
See the link below- China is planning to double their share of exports from the current level over the next few years.
http://webcache.googleusercontent.com/search?q=cache:u2iPlYWUULkJ:www.european-rubber-journal.com/2015/08/12/chinas-rubber-recyclers-aim-double-level-exports/+&cd=1&hl=en&ct=clnk&gl=in
Q2 is out, continues to impress with very good set of nos. lately. Early signs of revival?
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/2634300D_9668_47CF_9E34_8A6CF16E45F2_151002.pdf
Disc: Accumulating
