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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Hi Friends,

I was looking at Nitta Gelatin Inc (Japanese promoter of the JV), they have come up with their 10 year plan (basically to grow faster and increase the mix of value added products like food-grade collagen peptides, etc.).

Link - https://www.nitta-gelatin.co.jp/en/ir/library/presentation/main/05/teaserItems1/0/linkList/0/link/Business_Strategy.pdf

Nitta Gelatin India supplies a good part of exports through their parents connect, wondering how does this renewed focus of Nitta Gelatin Inc helps the India JV. Does it mean that they will also increase the mix of food-grade gelatin, etc.? Does it help in improving margins?

Also, in their AR they have mentioned that they are now operating at near 100% capacity utilization. How should we look at revenue growth for them in coming years - current run rate is Rs500-530 crore, should we just expect pricing led growth? Has the management guided for any new capex?

Wondering that with growth there in space (steady demand for beauty products & from pharma industry), which player is more likely to capture the demand (Nitta, Narmada, India gelatin, etc.)?

Disc - Not yet invested, but looking at the space

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Hi where did you find the annexure - i couldnt see it in their results disclosure. Thanks.

Was uploaded today on exchanges. Not part of result update

Hi with regards to their expansion - few questions for management (if anyone has access) -

  1. Their current gross block of plant & machinery (ex-Land & building) is Rs 135 crore, that is for 450k capacity, if they plan to expand by 1000k, how are they estimating the capex at only Rs 100 cr.

  2. Is this to meet primarily export demand (likely as Nitta Inc Japan has aggressive growth plans)? Any timeline by which they will be able to reach full utilization. Going by current run rate, can one expect 1500 cr revenue run rate at full scale? Or will incremental products developed will have lower realization (note that their realizations are at a peak right now)?

  3. How should we look at margins for expanded base - difference between export & domestic margins? Their margins have been volatile, and they have regularly mentioned in ARs that supply of crushed cow bones is a challenge, how do they plan to meet the RM need for increased capacity?

  4. Stage of completion for expansion - land clearance, ordering of equipment, etc.?

Regards,
Harshit

Discl - Invested, but only tracking amount

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Hi Harshit,

Pls find below reply based on AR report reading i did few days back, main issue is whether margins will hold or not. Rest all is okay. PE is low inspite of run up because market doesn’t know if margins can hold up. If we buy and if margins maintain, we can make good money and if margins fall, we get screwed

  1. The current expansion is only for gelatin peptides but capex you have mentioned is for all the three plants. So the current cost of capex for gelatin peptide should be much lesser than 135cr
    2.Seeing the AR of fy22, growth has come from domestic sales snd not from exports. Gelatin peptide is a retail product so realisation should be higher (pls check price in Amazon), i estimated a additional sales of 1000 cr roughly.
  2. As per AR fy22, they are importing CBs from France and also planning from Canada. Margins and product wise sale is not known, demand was higher due to covid demand and i think margins also expanded because of demand only. So we are not sure if the margins can hold up but i believe demand can hold up.
  3. They are starting the expansion in 1st Jan 2023 and completing by 2024.
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Nitta Gelatin has been reporting great numbers over the last two qtrs. (Q3 & Q4.) Q4 had quite a few one time expenses, which optically made the numbers seem not as good as they actually are. Some of these one time expenses/ provisions will possibly be reversed going forward. It’s not uncommon for mgts to clean up the balance sheet during good times!

Gelatin Co.'s have been showing good numbers with bulk of the Gelatin demand coming from the pharmaceutical industry. This demand is unlikely to see any slowdown in the foreseeable future. Besides, the main raw material for industry are crushed animal bones/ skin, the supply of which can only increase gradually, if at all. There have been recent articles suggesting that in the EU, the costs of running/ maintenance of pig/ animal farms has gone up meaningfully, further adding to the strain in RM pricing.

However, the big trigger for the Gelatin industry in the increasing popularity of Collagen, a nutraceutical product which is gaining popularity with each passing day as it has many health & beauty benefits, some of which are outlined on the website below:

Collagen, (which uses similar RM as Gelatin, though the the manufacturing process is different) produced in India is both Halal & Kosher compliant, opening up huge export opportunities. Domestic demand too is potentially very big as Collagen is only recently being discovered by Indians.

Unlike Gelatin, Collagen is a B to C product selling in grams at pharmacies, so a re-rating of the sector as a whole is on the cards going forward. Currently, collagen constitutes about 15-20% of Nitta’s volumes, which going forward is likely to see a progressive increase. Nitta is tripling its Collagen peptide capacity from 450 MT to 1,450 MT in anticipation of this increased demand.

The current market cap of the Co. is only about 750 crs. Looking at the high RoCE of about 33% that the business generates, given the pedigree of the promoter, Nitta Gelatin of Japan holds about 43% with the total promoter holding being close to the maximum permissible limit of 75%, the stock looks under valued. The multiple is probably single digit, if one factors in the one time expenses/ provisions of Q4.

Attaching a business strategy presentation of the parent Co. that explains the investment thesis in greater detail.

NG.Business_Strategy.pdf (2.4 MB)

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Hi…Does anyone know if the recent MD resignation is linked to the employee fraud ?

Investment Thesis for Nitta Gelatin India Ltd:

Nitta Gelatin India Ltd is a company engaged in the manufacturing and sale of gelatin and collagen peptide products.

Thesis:

  1. Market Leadership: Nitta Gelatin India Ltd is a subsidiary of Nitta Gelatin Inc., Japan, a global leader in gelatin production. The company benefits from the expertise and established market presence of its parent company, giving it a competitive advantage.
  2. Strong Growth Potential: The gelatin and collagen peptide market is projected to experience significant growth due to increasing demand from industries such as food and beverage, pharmaceuticals, and cosmetics. Nitta Gelatin India Ltd is well-positioned to capitalize on this growth opportunity.
  3. Diversified Product Portfolio: The company offers a diverse range of gelatin and collagen peptide products, catering to various industries and applications. This diversification helps mitigate risks associated with relying on a single product or market segment.
  4. Quality and Technology: Nitta Gelatin India Ltd focuses on maintaining high-quality standards and invests in advanced technologies to enhance production efficiency and product quality. This commitment to quality and innovation can lead to customer loyalty and market differentiation.

Anti-Thesis:

  1. Dependency on Raw Materials: The availability and cost of raw materials, primarily derived from animal sources, can impact the company’s profitability. Any disruptions or price fluctuations in the raw material supply chain could pose a challenge.
  2. Regulatory Compliance: The gelatin industry is subject to various regulations related to quality standards, safety, and environmental impact. Compliance with these regulations can be complex and costly, potentially affecting the company’s operations and profitability.
  3. Competitive Landscape: The gelatin and collagen peptide market is competitive, with the presence of both domestic and international players. Nitta Gelatin India Ltd faces competition from established companies, which may impact its market share and pricing power.
  4. Economic Factors: Economic conditions, both domestically and globally, can influence the demand for gelatin and collagen peptide products. Fluctuations in economic growth, consumer spending, or currency exchange rates could impact the company’s financial performance.

Entry barriers in the gelatin and collagen peptide business that can make it challenging for new competitors to enter the market. Some of the key entry barriers include:

  1. Capital Intensive: Establishing a gelatin and collagen peptide manufacturing facility requires significant capital investment in production equipment, processing facilities, and quality control measures. The high initial investment acts as a barrier for new entrants with limited financial resources.
  2. Research and Development: Developing efficient manufacturing processes and high-quality products in the gelatin and collagen peptide industry requires substantial research and development (R&D) efforts. Existing companies with established R&D capabilities have a competitive advantage over new entrants.
  3. Regulatory Compliance: The gelatin industry is subject to various regulations and quality standards imposed by regulatory bodies. Meeting these regulatory requirements can be time-consuming and costly for new entrants, making it difficult to establish compliance systems from scratch.
  4. Supply Chain and Raw Materials: The procurement of raw materials, primarily derived from animal sources, can be complex. Existing companies typically have established relationships and supply chains with suppliers, ensuring a consistent and reliable raw material source. New entrants may face challenges in building these relationships and securing a stable supply.
  5. Brand Recognition and Customer Loyalty: Established gelatin and collagen peptide companies often have strong brand recognition and customer loyalty built over years of operation. It can be difficult for new entrants to gain market share and compete against well-known brands.
  6. Distribution Networks: Existing companies have well-established distribution networks and customer relationships, allowing them to efficiently reach their target markets. New entrants would need to invest time and resources to establish a distribution network, which can be a barrier to entry.

Overall, the combination of high capital requirements, complex regulatory compliance, established supply chains, brand recognition, and distribution networks create significant entry barriers for new competitors in the gelatin and collagen peptide business.

Source: ChatGPT

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All their products seem to have good ratings!

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the one off expenses seem to be the following
1- impairment of 5.31 cr of the assets in the Gujarat plant.
2- 6.49 cr is for the slow moving inventory of fish protein and 1.21 cr is for slow moving finished goods.
so from my understanding a total of 13 cr seems to be one off expenses from PBT.
Is this correct?
Also what do you think about the margins- this rise in margins seems to have been due to rise in gross margins. do you think it will be sustainable? What are the respective margins of gelatin vs collagen peptides?

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@Shikhar
Yes, if we add back the one time items, the numbers look very different. The last two qtrs have seen huge increase in margins. While we will have to wait n see how the pricing scenario unfolds in the coming qtrs, the important thing is to see the trend towards higher value added products is there to stay. The link to the business strategy of the parent Co. is again attached below.

While it is always possible for the Geletin prices to be volatile in the short run, the long term trend looks promising.

It would certainly help if we have someone from the community track Gelatin prices. Has there been any significant recent price correction?

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Available in screener (paid version at
image

Alternative source here - https://eaindustry.nic.in/

Although there is probably more to story besides gelatin, there is OSSEIN, CALCIUM PHOSPHATE and joker in the pack Collagen peptide - each needs tracking as first two are commodity as well and lot depends on china supplies.

Value add share in mix and Parent strategically positioning India as global supply hub is a key driver and factor.

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