GRP Management Q&A: Mar, 2011

Management Q&A

1.     EXCELLENT TRACK RECORD OVER LAST 40 YEARS ALMOST. TODAY GUJARAT RECLAIM HAS EMERGED AS THE LARGEST MANUFACTURER OF RECLAIM RUBBER IN THE COUNTRY AND AMONG THE TOP 3, GLOBALLY.

Congratulations! Its going to be almost 40 years since inception in 1974. An excellent record, capacity has gone up nearly 20 times to over 40000 MT. Kindly share the key factors that contributed to this performance. Why will this be sustainable in the short & medium term.

In-house technology, control on quality and costs, productivity improvements, investments in ERP systems and processes, investments in new value added products have all played their role. We have a single minded focus on reclaim rubber business, and that has been key.

2.     TODAY GUJARAT RECLAIM HAS EMERGED AS THE LARGEST MANUFACTURER OF RECLAIM RUBBER IN THE COUNTRY AND AMONG THE TOP 3, GLOBALLY. OF TOTAL SALES OF RS.140.67 CR FOR FY10, DOMESTIC SALES COMPRISE RS. 61 CR (43.36%) AND EXPORTS COMPRISE RS.79.67 CR (56.64%).

Kindly share the sales process for export sales. Today Exports is higher than domestic sales. Who are the other 2 players in the top 3 global players, and what are their sizes? Are they listed entities? Have you been able to grow your export sales and gradually increase your market share at the expense of these 2?

We have been able to grow our export sales consistently. Usually the global majors like to source from 2-3 vendors. The other two are unlisted China based players.

3.     GRRPL HAD AN EXCELLENT GROWTH TIME DURING 2001 – 2009. CAGR OF ABOUT 30%, BUT SINCE THEN THINGS HAVE SLOWED DOWN A BIT. ALSO FOR THE LAST 3 YEARS INSTALLED CAPACITY OF GRRPL IS STAGNANT AT 41000 MT. IN FY11, THE COMPANY REPORTEDLY HAS EXPANDED CAPACITY AT ITS PANOLI PLANT BY 6000 MT AND A NEW PLANT IS BEING COMMISSIONED AT SOLAPUR.

Kindly share the circumstances behind this. Have there been any significant changes? What is the current status on Capacity expansions undertaken? Hs the Solapur plant started functioning? What are the products being manufactured here? What is the total installed capacity at FY11 end?

The recessionary trends in in 2009 on was a tough environment. We chose to cut back on our plans then, and it was a prudent move.

We had heard of another plant coming up in the South – near Chennai? What are the timeframes for this – and planned capacities?

We are expanding our capacities in phases. In 2-3 years total capacity will be doubled to about 80000 MT. In the first phase the South based plant will come up and will be ready by end FY12 with a capacity of about 10000 MTPA. Current installed capacity is about 45000 MT.  In the second phase both Solapur and Coimbatore plant capacities would be increased by additional 10,000MT each. This would be on stream in the next three years.

4.     CONSISTENT GROWTH TRACK RECORD AT AROUND 25% CAGR OVER LAST 5 YEARS. FUTURE GROWTH DRIVERS.

It is encouraging to hear the company say that GRRPL would like to keep growing at 30% rates in the medium term. What will be the main growth drivers? Has the company seen the share of reclaim rubber to total polymer in tyres go up from the Indian average of 4%? Has any individual tyre company experimented with more than 6-7% reclaim rubber to polymer ratio? Will exports remain the larger segment (57%) or is the domestic market catching up?

Capacity increases will see us maintaining the growth. Also increasing contribution will be coming in from value-added products like Butyl, EPDM and Nitride.

No tyre manufacturer will probably openly admit that they use reclaim rubber or discuss how much percentage of reclaim rubber goes into a particular tyre. The problem is there is a stigma attached to reclaim rubber suggesting inferior quality somehow. Can’t really say what ratios of reclaim rubber is being used by which manufacturer. But we are seeing increasing volumes.

5.     RAW MATERIAL PROCUREMENT. IMPACT OF UNORGANIZED SECTOR & GRRPL SUPPLIER NETWORK

Given that nearly 60% of reclaim rubber output in India is from the unorganized sector, we understand that ensuring steady raw material supply (scrap tyres) is critical for the company. Kindly share with us the impact of GRRPL’s unique supplier network model and how has it been strengthened over the years. Is this current supply model (collecting 45000 tonnes annually) scalable to support medium term requirements, or will you need to start sourcing RM from China, the largest scrap market.

Ensuring raw material supply is critical. We have a large well established procurement chain and that has been serving us well. we are constantly working on strengthening and increasing our reach. We are setting up a base in South India to help procure more efficiently in those markets. We are confident of procuring all our requirement from the Indian market in teh forseeable future.

6.     RAW MATERIAL PRICES. CHALLENGES POSED FROM THE UNORGANIZED SECTOR.

Raw material/Sales has been steadily going up over the years. From roughly 40% in FY06 this is up over 45% in FY10. The rise has however been gradual and generally been offset by improvements in sales general & administration (SG&A) costs, power & fuel costs, etc. without really affecting operating margins.

How serious a challenge is this and what are the company’s plans, how is it gearing up to tackle this issue?

Raw Material/Sales has gradually been going up over the years. But as you observed we have been able to mitigate its effects by all round improvements in productivity and cost. To counter the volatility in material prices, the company plans its production of various grades in such a way as to ensure that material is available at reasonable price at all times.  We have got the facilities to manufacture all the grades in any of the plants.

7.     IMPACT OF ACCELERATION IN NATURAL RUBBER PRICE ESCALATION IN FY11

Usually reclaim rubber prices are 25-30% of the polymer. With natural rubber prices shooting up to as high as Rs. 230-250 per kg in FY11, has there been a noticeable impact in your industry? Have you seen any accelerating trends in the uptake of reclaim rubber going up?

There has not been any dramatic spikes in usage of reclaim rubber. Certainly people are more receptive to the idea of using reclaim rubber with rubber prices ruling high. The problem is there is a stigma attached to reclaim rubber suggesting inferior quality somehow. So no manufacturer will openly admit that they use reclaim rubber or discuss how much percentage of reclaim rubber goes into a particular tyre. But the usage is slowly going up.

8.     WHILE RUBBER SCRAP PRICES HAVE GONE UP 70% SINCE 2005, THE SELLING PRICE OF RECLAIMED RUBBER HAS GONE UP ONLY 40%. ONE INTERPRETATION IS GRRPL HAS NOT BEEN ABLE TO FULLY PASS ON HIKES IN RAW MATERIAL PRICES.

Kindly share your thoughts on this? One interpretation can be lack of pricing power. Will this/Has this situation worsened as rubber prices went up drastically in FY11? (Since scrap rubber prices must have also gone up, we are guessing). Will GRRPL benefit due to increase in rubber prices or will there be an adverse effect because of the same?

You are right, the data for the past 5 years will show selling price of reclaim rubber has not been able to keep pace with rubber scrap. But our view is you wait for 2 more years and add that data in, and you might well see a different picture. In recessionary years one is not able to pass on price increases, but that is not the case now and we don’t see that as a problem in the coming years. We will be able to pass on price increases.

9.     PRODUCT SEGMENTS – SYNTHETIC RUBBER RECLAIMS REPORTEDLY COMMAND HIGHER VALUE AND REALISATION COMPARED WITH THE NATURAL RUBBER BASED RECLAIMS. GRRPL HAS BEEN A PIONEER IN THE MANUFACTURE OF RECLAIMED RUBBER FROM SYNTHETIC RUBBERS SUCH AS BUTYL, EPDM, NITRIDE, ETC.

Kindly comment on how the synthetic rubber reclaims business has grown over the last few years and what is the revenue contribution currently from this segment. Is the use of synthetic reclaim rubber only in non-tyre products as above, or it is replacing some of the synthetic rubber use in tyres, especially OTR tyres (synthetic rubber is 16% vs natural rubber 32%).

Synthetic rubber reclaims are used in non-tyre product applications -mostly for industrial packaging. This segment has been growing strongly and contributes roughly 50% to revenues. Unlike rubber reclaims these are higher value, high margin products, so they contribute not only to bottomline, but add directly to the topline as well.

10. CUSTOMER SEGMENTS – GRRPL PRODUCTS ARE APPROVED AT 7 OF THE TOP 12 TYRE COMPANIES IN THE WORLD AND 4 OF THE TOP 10 NON-TYRE RUBBER MAKERS GLOBALLY.

Kindly share recent customer successes and or deeper penetration into existing accounts. Have more marquee names been added to the list? Given the focus on synthetic reclaim rubber are we seeing more penetration in the non-tyre rubber maker segment? How much does your top 3 customers contribute to Sales? Does any one customer contribute more than 10% of Sales?

Top 3 customers constitute around 30% of the turnover.  Continental itself contributes around 10 to 12% of the sales.  Since they have plants all over the world, to that extent we are geographically de-risked.

Tyre industry customers constitute around 50 to 55% of Sales and the Tubes industry around 25 to 30% of Sales.

11. EXCELLENT MARGINS & PROFITABILTY. SUSTAINABILITY

Kindly share the main factors contributing to this excellent performance. Are current high margins in the range of 18-20% and ROCE of 35%+ sustainable over next few years?

Our control on technology, focus on quality, cost control and productivity improvements are the main factors. The product mix is also tilting towards higher value, higher margin synthetic rubber reclaims. With the increase in capacities coming on stream in the next 2-3 years, we are very confident of improving on margins and profitability front.

12. MORE AGGRESSIVE PLAY FROM GRRPL

Considering the excellent track record on growth, margins & profitability and the strong balance sheet, one would expect GRRPL to look at scaling up more aggressively. But this has not happened in the recent past. Please share some thoughts on this front.

As mentioned before we are doubling our capacity in the next 2-3 years. Capacity will be ramped up to 80000 MTPA. 2009 was a difficult year, we had to cut back on our plans and that proved the prudent thing to do. We see things have stabilised now and are more confident on moving on with our plans.

13.  COMPETITIVE EDGE –SUSTAINABILITY

Please share some thoughts on the main factors behind GRRPL’s competitive edge. Is it the sourcing of raw material (scrap rubber) or is it in-house machinery, manufacturing process, etc or is it say, your first mover advantage?

Our competitive edge is certainly the technology and the focus on quality. In house automation, ERP processes all play their part in keeping us on top of information flow, gives us a bird’s eye view on operations, and allow us to cut costs and improve productivity where we can. Sourcing of raw material is important for our business, but we think it is the other factors that are key.

14. NEW PRODUCTS. VALUE ADDED PRODUCT INTRODUCTIONS.

Are there any new products, value added products in the pipeline? We heard mention of rubber compounds, rubber sheets. Appreciate if you can share some plans on this front. An article on JK tyres mentioned their plans on coming up with shoes from reclaimed rubber. Please comment.

Synthetic rubber reclaims as mentioned before are the value added products we are working on. Apart from that there are no immediate plans on rubbers sheets or rubber compounds. You see rubber compounds is an entirely different business. It probably cannot be carried out under GRRPL. Rubber compound business implies supplying the compounds to different tyre manufacturers based on their proprietary mix. Each manufacturer will be cagey about their mix details getting leaked -handling issues like that is complex. As is the complexity in managing so many varieties of mixes.

Reclaim rubber has always been used in shoe soles, nothing new in that. we also supply to shoe manufacturers.

15.  SMALL EQUITY BASE. LOW LIQUIDITY

At 1.33 cr the equity base is pretty low and average liquidity/volumes traded (1000) is also low. Does the company plan to do something on this front to allow more investors to participate in GRRPL’s stock story – splits/bonuses, etc. Any plans on listing in NSE?

We are aware of this situation and many requests do come to us to do something. However given our current operations, the company has no plans of any corporate action on this front in the near future. We believe we first need to grow to a certain size.

16.  THERMOPLASTICS SUBSIDIARY

GRRPL’s subsidiary had ventured into rubber thermoplastics. Reportedly, this is a very exciting space and has huge potential. Kindly share the developments in this space?

It is not a separate subsidiary. This is a division within GRRPL itself. Thermoplastics is an exciting growth area and there are several players already in that space. We are trying to create our own niche – Thermoplastics from reclaimed rubber. We have had some initial successes. It is at a nascent seed manufacturing, seed marketing stage. Too early to comment on what kind of sales potential this will translate too. But we should see good results in 2 years timeframes.

17. PROMOTER GROUP. BOARD REPRESENTATION.

Kindly tell us more about the core Promoter group which has MRF group. There are representatives from MRF board notably K. Philip on GRRPL board. Does it help to have a board member common with MRF? Or is the role purely from an investment angle?

Mr K Philip from MRF has been closely associated with us, and a source of our inspiration. Infact it was he who pointed us towards the opportunity in Reclaim rubber and egged us on. We continue to benefit from his guidance. Other than that its is business as usual with MRF.

18. DIVIDEND POLICY

GRRPL has always paid a good dividend. 5yr DPS CAGR is ~19%. Payout ratios have however been coming down from the usual 20-25% -actually under 19% for last few years. Is there a dividend policy followed by then company that you may like to share with us?

We are still very much a company in its early growth stages. There is no fixed dividend policy that we adhere too. However as you have noted, we try to see that we keep increasing dividends at a steady rate.

19. COMPETITION FROM ORGANIZED SECTOR – THREATS.

How is the competition scenario currently? Any emerging threats? We have heard some news of Elgi rubber getting into this business. Will the emergence of a domestic player of some size potentially disrupt your RM procurement chain, or is that an entry barrier for others?

There is competition notably from Balaji rubber and Elgi rubber. Balaji with all their companies/units put together has 50% of our current capacities, and Elgi rubber some 25% of our current capacities.

Raw material procurement is always a challenge. We have some advantage with our established procurement chain. The others can also set up equally strong network. End of the day everyone is market/price savvy these days. The scrap dealers know the price points very well. If we are able to meet the price points, we see no reason that our procurement chain will face any disruptions. Having said that, we are working on strengthening the chain and increasing our reach on a regular basis.

20. MAJOR OPPORTUNITIES & CHALLENGES

Where does Gujarat Reclaim see itself in the next 5 years? What is the size of the opportunity in its niche? Will it improve its position among the top 3 global suppliers of reclaim rubber? Can we see GRRPL reach 500 Cr Sales, by when? What are the major challenges before the company and where are the big opportunities?

In the next 5-6 years we see us as a company crossing Rs. 1000 Cr in sales. We see us as leaders not only in reclaim rubber but other reclaim businesses as well – there are quite a few end-of-life products that can be persued. As mentioned before our capacities are slated to get doubled in the next 2-3 years, that will contribute roughly 500 Cr in Sales. The other 500 Cr in Sales will have to come form the promising new lines of business that we are exploring. Thermoplastics from reclaim rubber is one, and there are some more initiatives. As mentioned these are still at seed manufacturing, seed marketing stages and will take a couple of years to bear any fruit, but are very promising for us to persue.

Disclosure(s)

Nagabrahma: No Holdings in the Company; ;
Donald Francis: No Holdings in the Company; ;
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