Nitta Gelatin India Ltd | A turnaround story

Starting a new thread about this stock because previous thread was mistakenly flagged and administrator/ moderator was unable to fix because of some technical issue. Moderator may feel free to delete the previous topic

Nitta Gelatin India Ltd (NGIL) is a joint venture of Kerala State Industrial Development Corporation and Nitta Gelatin Inc (Japan).

Stock looks undervalued to me and below are some interesting numbers:-
Annual Revenue 330 cr
Market Cap 182 cr
OPM 11%
Reserves 147 cr
Loans 49 cr
CMP Rs 201
Face Value 10
PE 10

Products:
Gelatin for pharmaceutical & food applications, Wellnex Collagen Peptides for joint health & skin beauty, Di-Calcium Phosphate as poultry feed ingredient, NutriGold as agricultural growth promoter, Ossein and Chitosan for agri and industrial application.

Market
More than 60% of NGIL’s products are exported to over 35 countries including Japan, USA, Canada and the European Union countries.

Gelatin Uses
Gelatin is a vital ingredient in the most popular drug delivery systems in the world such as two piece hard capsules, soft capsules, tablets, coated tablets, mini, micro capsules etc. Gelatin’s versatility makes it the ultimate food ingredient, finding application in confectionery, desserts, beverages, dairy and meat products. Hydrolyzed gelatin (Collagen Peptide)

Parent Company (Nitta Gelatin, Inc)
Consolidated revenue was around 21209 million Rupees or 330 million USD
As per their website, there are total 20 affiliates of the parent company. Out of which 3 are India based and subsidiaries of NGIL.
Nitta Gelatin NA Inc. (U.S.A.)
Nitta Gelatin Canada, Inc. (Canada)
Nitta Gelatin USA, Inc. (U.S.A)
Vyse Gelatin, LLC (U.S.A)
Nitta Casings Inc. (U.S.A)
Nitta Casings (CANADA) Inc. (Canada)
Nitta Gelatin Holding, Inc. (U.S.A)
Nitta Gelatin India Ltd. (India)
Bamni Proteins Ltd. (India)
Reva Proteins Ltd. (India)
Shanghai Nitta Gelatin Co., Ltd. (China)
Nitta Hong Kong Ltd. (China)
Nitta Gelatin Vietnam Co., Ltd. (Vietnam)
Nitta Gelatin Foods Inc.
Nitta Biolab Inc.
Hikone Gelatin Inc.
Bostik-Nitta Co., Ltd.
Guangdong Baiwei Bio Material Co., Ltd. (China)
Beijing Qiushi Collagen Casing Co., Ltd. (China)
Shinju Service Co., Ltd.

Total Employees of Parent Company (Nitta Gelatin Inc):
There are total 1222 employees across of the globe.
Parent company will complete its 100 years in 2018.

But why are the quarterly numbers going down ?
This is a question that every person would want to ask. As per my research in the past few quarters, this is because of 3 main factors that I am aware of and are confirmed by the MD of NGIL himself -

  1. Water drawl restrictions - Restrictions from chalakudy river have been removed from 1 June 2017 after monsoon arrival

  2. Capacity under utilization at a subsidiary named Reva proteins Ltd - This was due to pending approval for effluent pipeline for discharge. Company has got the approval from Gujarat Pollution Control Board (GPCB). Reva Proteins Ltd has been a culprit subsidiary and causing cash loss but management is repeatedly stating confidently that it will start bringing positive cash flows in near future. It is expected that this subsidiary can achieve a turnaround in operations within a short time once the pipeline is made available for usage.

  3. Plant closure due to maintenance - This was only for 19 days and plant is operational again

Risk
Cow Slaughter
Management has said this in annual report

recent restriction on cow slaughter and related political noices may affect the raw material availability in short run but it is expected that control on illegal slaughter houses can help consolidate the supply chain through more organised operations in long run

There have also been numerous protests by citizens because of environmental issues against NGIL but I feel it is difficult to move the agenda of government. Company has taken many preventive measures to control pollution and constantly participating in CSRs.

My opinion Overall I am bullish on this stock and expecting a decent turnaround in coming quarters and current fall in numbers looks temporary.

Source of information - My personal research and conversation with the MD.

Please write about your opinion on this stock.

Disclosure - i have vested interests in this stock as i am holding it for the past several months.

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The reasons you provided for disappointing quarterly results says that they are not able to meet the demand because of lack of water and other reasons, is there a orderbook/anything like that helps us understand the demand situation.

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I’d actually looked into this when it came up in a Screener search.

  • Government is a major stakeholder (good or bad depending on the investor’s perspective - My personal investment philosophy is to avoid any business where the Government is involved.)
  • Sourcing of raw materials is a major challenge. My father used to work in an industry where gelatin is a major raw material and according to him, over 70% of the raw material comes from the unorganised sector. With the clampdown on unauthorized slaughterhouses, there will be a reduction in supply and the authorized slaughterhouses will have increased pricing power. With the current government in place, we can confidently expect that the number of authorized slaughterhouse is not likely to increase with demand.
  • Japanese parent is an old and well-established company.
  • Gelatin is a commodity product which does not lend itself to branding or other ways to establish a moat.

These were some of the factors that led me to pass on buying this.

Disclosure: Not invested.

Menon says, “The company has invested Rs 20 crore to enhance its environment-management systems.” NGIL has also invited people, prominent personalities and others interested on a tour of the company’s premises.

“Even the Church and the parishioners were up in arms against us. But, now, after their visit to our plant, they are satisfied about our systems,” he says.

Studies by independent agencies, has concluded that the steps taken by the company to treat effluents and other residues have yielded results and comply with the applicable regulations.

Source:- Indian Express Newspaper 30 july 2017

Nitta India is a subsidiary of a large collagen peptide manufacturer in Japan called Nitta Inc. They have benefited greatly over the last two years from the rise in prices of collagen peptides.

Secular demand growth in collagen peptides driven by health and beauty benefits
Global Collagen Peptide production has increased from 30,000 tons in 2015 to 90,000 ton in 2021. Expected to grow 10-12% per annum for the next several years. This growth is driven by the acceptance of nutraceutical benefits of collagen peptide in health and beauty. Collagen peptides are proteins extracted from the skin or bones of cows and pigs. They can also be extracted from fish.

Chinese market is the next big frontier

Chinese market has still not fully accepted the benefits of collagen peptides. Might take few more years for adoption. Next big wave of growth should come from here.

Prices driven up by shortage of raw materials
COVID followed by the Ukraine invasion has driven up the prices of raw materials by upto 60%. Availability is going to be an issue since cattle herds which shrunk in size during COVID due to skyrocketing prices of grains. Replenishing a herd of cows takes about 4 years while pigs can be replenished in 2 years. So there is likely to be a 2-4 year (at least) shortage of raw material for the collagen peptide manufacturing industry.

Consolidated supply side with considerable pricing power
The industry is fairly consolidated with top 5 players accounting for 70% of manufacturing capacity. These manufacturers brand their collagen peptides by conducting studies to prove various benefits for health and beauty. They further sell to nutraceutical brands (largest by far in US for collagen peptides is Vital) who sell to the end consumer.

Risks:

-Not sure if they can/will be able to do capex to cater to the increasing demand
-Access to raw materials is repeatedly mentioned as a challenge in their annual reports
-Have had environmental issues in the past at their Kerala plant
-Gujarat plant is running sub-optimally and also faces environmental issues

Disc: Invested

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