Narmada Gelatine

Narmada Gelatine is a 50 year old company manufacturing pharma and food grade gelatine.Company started its operations as Leiner-Knit Gelatin Co in 1961 and now controlled by M R Chhabria led Jumbo group.Company is manufacturing Gelatine ,ossein and di-calcium phospate.In pharma sector , a major portion of gelatine is used for manufacturing the outer cover of capsules. Food and pharma grade gelatine consists about 60 % of the total gelatine consumption of the world .The main raw material of gelatine is the bone of animals.Because of pollution control concerns and difficulty to obtain raw materials capacity addition is very slow in this sector . On the other side demand is rapidly increasing from pharma and food sector.Narmada having a good client list and showing steady growth over the past few years. Company is a low debt one with too. It is expected to improve the cash flow in the coming years.For the FY 2011 , company posted a turnover of Rs.91 Cr and a net profit close to Rs.10 Cr .Full year EPS is Rs.23.50.Promoters holding in this company is 75 % and company is hiking the dividend payout every year in last four years.Earlier Jumbo group have some plans to sell this company when it was in trouble.But there is no updates in this matter in recent times. Even if it happens ,considering the strong position of the company big foreign players may also interested and may fetch better valuation .Currently it is trading around Rs.95/- at a P/E multiple of just 4 which is really a valuepick

This could be a good buy even at current levels If there is more clarity on future growth prospects.

I think Narmada gelatine is a good value pick at this level due to steady and predictable business (main consumers pharma and food which is not impacted by recession), very attractive valuation, strong balance sheet, high promoter holding, good dividend yield and possibility of margin expansion.

Company has investment + cash equivalent of 18 crores out of total market cap of 48 crores. So net of cash + investment, company is available at P/E of 3 (FY 12 NP is around 11.06 crores). Now this is a business which is oligopoly world over. There are only 25 odd companies across the globe which manufacture gelatine. Raw material availability, quality norms and environmental clearance are major entry barriers for new entrants. there is demand supply gap in gelatine market and prices are rising very fast which is leading to margin expansion for manufacturers. (;

Narmada gelatine’s profit has grown 21% CAGR in last 5 years mainly led by margin expansion. Company, after a long time, is in the process of expanding capacity which will give philip to volume based growth. Considering the fact that gelatines prices are going to remain firm for short-medium term, narmada gelatine’s FY 12 margin shall be above 10% (Q4 margin were 11.7%). Company has excess of 25% ROCE (excluding cash and investment) indicating strong business fundamentals. It has dividend yield of 3.85%.

My hunch is that Narmada gelatine is due for rerating in medium term which combined with increase in EPS shall give good returns with very little downside. If management decides to exit this business (as they have tried this twice earlier), it will be a multibagger as private value for such company will be 4-5X considering very limited operating businesses in this segment (precisely 9) in India. I understand, many of the MNC (biggies in gelatine market) are eying to enter into Indian market and hence Narmada gelatine will be a good candidate for buy out for them considering location near RM availability, adherence to international quality standards and possibility of completer control over the company.

So Naramda gelatine isan opportunity where downside is limited with possibility of good returns in medium term while best case scenario is stock turning multibagger! So Heads I win big, Tails I don’t lose much!

Best Regards

Dhwanil Desai

Good summary, Dhwanil. I agree there seems to be a good medium term opportunity here.

Earlier i used to dislike this sector as it gets low PE and earnings are volatile but in the case of Narmada, this are very much stable and consistently growing. Where did you get the details of expansion?

Stirling biotech of sandesria group I same segments. Why has it gone bankrupt n there is 1 more Kerala based co nitty gelatine.but why is this sector a perennially low pe sector?

How doesit fare in terms of

  1. size of opportunity- I think quite large

  2. promoters background,fire in belly n execution capability

  3. pricing it a commoditised sector?

Hi Ayush,

It is mentioned in page 9 of AR 2010-11. New capacity was likely to be commissioned by December 2011. However there is no detail about expanded capacity.

Best Regards

Dhwanil Desai

Hi Vivek,

Yes, opportuity is large but market is dominated by 3-4 large players internationally. Rousselot is market leader with 30% market share. In India demand for pharma and food grade gelatine is going to increase with increasing disposable income (for food) and higher healthcare access to people.So I see considerable room for growth in gelatine market. Also, now Indian manufacturers can export gelatine to EU countries (post Dec 2011) which will help them tap a large market with higher price realization.

Promoters: Jumbo group is a conglomerate promoted by Manu chhabaria with large presence in middle east. They are big in retail and electronics and per se Narmada gelatine is a non-core and very small business and hence is probably neglected in terms of scale up. My take is that at some point of time Jumbo will move out of this business by selling off to one of the 3-4 majors who are eying entry in Indian market.

Pricing: It is a typical oligopolistic market. Market leaders set the price and customers are price takers. Rest of the players follow pricing set by market leaders. Rousselot sets price at least for European market. IT increased price twice in last 4 months indicating pricing power it carries.

Low P/E: I think low P/E is attributable to fluctuating earnings of the players in the industry. As you mentioned both Sterling and Nitta have shown volatile earning profile. Probably that is the reason whole sector has been undervalued. But Narmada gelatine’s earnings are steadily rising due to conservative business style (no expansion for long) and better raw material availability/management.

came across this,

adds up to what Dhwanil has already stated,

Also, the shortage seems to have compelled the Indian pharma industry into agitation

this run up in gelatin stocks reminds me of the sharp run up in the polyfilm stocks some time back. there might be a lot of steam left but I guess one needs to be on the look out for the music to weaken/stop and make a timely exit.

am too thinking on that lines.Below given links conforming this. Link:

With the rising global prices, domestic gelatine manufacturers are working to maximise the export orders. Now with the depreciating rupee they will be able to earn substantial increase in revenue by exporting the same. This is further aggravating the problem of availability of gelatine in domestic market. The gelatine users are facing high import duty of 20 per cent compared to 7.5 per cent on most of the raw materials, and this makes it unviable to import gelatine. These factors have led to gelatine prices to shoot up by almost 25 per cent in last two months alone. For instance hard capsule grade of gelatine, which was available at aboutRs.280/- per kg in month of October, 2011, is now being sold atRs.350-360/- per kg, stated industry souces. Link:

The European Commission has recently announced new norms for countries coming under the World Organization for Animal Health’s (OIE), reporting the least threat categories for bovine spongiform encephalopathy (BSE).

As India is now categorized as a safe source from the point of view of BSE (bovine spongiform encephalopathy), this has resulted in an increase in the exports of crushed bones or Ossein. Link:

Hi Hitesh,

I agree with you that narmada gelatine is not a company which one can buy and forget. but I feel that even at current levels, it still is “heads I win, tails I don’t lose much” bet.

After going through 2011-12 AR of narmada gelatine, I have made following observations.

)- Average annual capacity of the company was 2550 tons. They operated at 2400 tons capacity in first nine months and in last 3 months, 600 tons of additional capacity was added through completed expansion. Capacity utilization was 97%. If we assume similar capacity utilization due to large demand supply gap, 2012-13 gelatine production is going to be higher by 20%. DCP, second largest value contributor for the company,is an intermediate product in gelatine manufacturing process and hence its production is alsolikely to go up proportionately.

)- Average price realization for gelatine in 2010-11 was Rs 286/kg. If we factor in current prices andassume it toprevail for next 2 quarters, a very likely scenario, average price realization is going to be atleast 15% higher. If operating cost increases by 15% (after adjusting for additional capacity), possible EPS of 35-40 can be achieved.

)- even if we do not assume majorP/E re-rating and assume P/E of 5-6. We are talking about price in the range of 185-240. I feel, on fundamental basis, even without considering re-rating potential, I see significant upside from current levels.

)- I admit that the scenario is heavily dependent on two variables gelatine price realization and new capacity utilization. Hence one should closely monitor those variables. However, I do not see significant downside from current levels at least.

Best Regards

Dhwanil Desai

one more take on the Gelatine business

the angle is different though

The good thing about Narmada Gelatine is that the earnings of this co have been quite stable over the years as compared to peers. The co has been raising earnings and dividends consistently.

While other cos in this sector have very volatile earnings.

Narmada Gelatine has posted very strong result for Q2 led by increase in sales and margin expansion. Top line increased by 23% yoy while net profit increased 62%. NPM increased from 9.17% to 12.1% yoy. I presume it is due to better realization due to increased gelatine prices world over.

Here are the detailed results

Regarding gelatine price trend please read following.

World leader roussselot has increased price almost every quarter for last four quarters. They expect price to further rise due to limited availability of RM in 2013and new regulations being implemented in europe.

It augurs well for Indian gelatine manufacturers as theymay not face increased pressure on RM price. Also, one thing I noticed that company’s balance sheet shows 1.46 crores as capital work in progress which may mean further capacity expansion.

Now forcash + current investment roughly accounts for 18.22 crores and there isno debt. So net of cash/investment narmada gelatine is available at juicy valuation. Close to debt capacity bargain on NP basis.

Strong possibility of re-rating.

Best Regards

Dhwanil Desai

Yes, good set of nos. I agree with Dhwanil that the stock looks quite undervalued and due for re-rating.


CFO is much less than PAT…

Are the working capital requirements so high? If I look at P/CFO, the stock stops looking dirt cheap…

What say?


Hi jatin,

you are right. It is one of the worrying points. But even on CFO basis, and after 10% increase in price (market cap 56 crores), net of cash and current investment , company is available at 38 crores which is 6-7 times last year’s CFO, not dirt cheap but not hugely expensive either.

Another thing that I have noticed is that component which resulted in drain on cash flow changed for last 3 years. Last year it was increase in stock in process, in FY 11 it was increase in RM (which management claimed they did to guard against tightness in RM market) and in FY 10 it was due to increase in receivables. So there is no trend here that is alarming. However, that said, it does not take away the fact that CFO are lower than NP.

Another thing to be noticed is that there is only marginal cash flow requirement from capital investment which means that even after lower CFO, there is FCF available.

Best Regards

Dhwanil Desai

Is the co due for rerating due to superb growth, cheap valuations,entry barriers,pricing power,international shortage?

So wud nt it be a huge wealth creator?

See the market cap of 50 Cr, div yield of 4%,PE of 4, huge demad for its product,entry barrier due to license issuance,75% promoter stake,zero debt,

Also as its catering to booming sector of pharma n food shouldn’t the PE be rerated from a commodity play to a non cyclical play?

Can’t it be rerated ala Mayur Uniquoters n Liberty phosphate like the top performing cos in an unfancied sector?

Views Invited

Hi Vivek,

Cant compare with Mayur as Narmada cannot increase its capacity due to raw material constraints. PEre ratingwill happen only if there is earnings growth visibility which is not visible here. If the management can come out the issues and take some measures for capacity addition as there is no demand slackness here then we can see some fireworks happening here.

Key triggers

1). Capacity addition without much balance-sheet stress

2). Dividend growth

Hi Donald/Ayush,

Would be glad if you start analysing the feasibility for Management Q&A.