Discussion Transcript provided by ValuePickr member who traveled to AGM and met the Management. Prefers anonymity, doing the quiet work! Minor edits after talking with the member for some details and better readability. Please note the free-flowing discussion meant some specifics/details could not be asked in exactly the same flow. We will try and get the missed ones answered as soon as we can – Editor
1. WHAT WOULD YOU SAY IS GUJARAT RUBBER RECLAIM’S CORE COMPETENCY?
It would be wrong to assume any one thing as our core competency. We have the best technology and machines (in-house manufacture). Also our quality and our processes. We are approved vendors for 6 of top 10 tyre manufacturers in the world. We have a strong sourcing network with more than 190 active suppliers. Some of them are exclusive suppliers of scrap. Also we have 100% yield of our products which makes us one of the most efficient players. The last non-working day in the company was 4 years back which is a record for our industry!
2. WHAT ARE YOUR KEY RAW MATERIALS? ANY RISK TO THE SAME?
There are 3 types of scrap. Whole tyre scrap, Side tyre scrap & Tube scrap. Each has different proportions of raw materials. There is no shortage of raw material as more than 75% of demand in tyre industry is from replacement market. Indian tyre industry has an annual demand of 10-11 lakh tonnes. That’s a replacement market of 7-8 lakh tonnes. All that scrap is available to players from the Reclaims industry. This is about 4-5x the total production of reclaim rubber industry in India.
There are alternate uses of scrap tyres – in the cement industry (for generating heat for clinker)- and is a risk, as that can increases scrap prices. But this is dangerous for environment as this releases sulphur in the environment and is legally, not above board.
3. WHAT ARE THE GENERAL USES OF RECLAIM RUBBER?
Reclaim rubber can be used in any kind of rubber application except high speed tyres. Higher the vehicle speed, lesser the use of reclaim rubber in the vehicle’s tyres. Reclaim rubber finds highest use ~35% in bicycle tyres. In CVs and passenger tyres the usage is ~4%. And ~8% in OTR’s (Off-the-Road like Earthmoving Equipement, etc.) due to lesser speed. Usage varies in conveyer belts. Since Reclaim rubber is black in colour, it is not used in gloves & condoms. Overall Reclaim rubber usage is roughly 8% of the Indian rubber industry.
4. PRODUCT SEGMENTS & CONTRIBUTION. NATURAL RUBBER RECLAIM AND SYNTHETIC RUBBER RECLAIMS ARE GRRPL’S TWO MAIN SEGMENTS. IN SYNTHETIC RUBBER RECLAIMS YOU HAVE BUTYL, EPDM, NITRILE, LATEX.
Kindly throw some light on the end-user industry for synthetic rubber reclaims and the demand-supply situation -both domestic and exports. Who are your customers? What kind of margins are prevalent in synthetic rubber reclaims? What kind of revenue contribution is coming from synthetic rubber reclaims today? Is Butyl reclaims contributing the most within synthetic rubber reclaims? Which is the most promising, and why?
How is the RM procurement situation in synthetic rubber reclaims? How have you secured your RM supplies on this front?
5. DOES RADIALISATION HAVE ANY EFFECT ON YOUR PROCESSES?
Yes, it does affect us as there is more steel in radial tyres which needs to be extracted. We have been working on our processes over time and we are now able to process the radial tyres efficiently, as well. This infact should work in our favour as small scale companies will take some time to catch up on this aspect.
6. HOW ARE THE PRICES OF RECLAIM RUBBER, SCRAP RUBBER & NATURAL RUBBER CONNECTED?
Reclaim rubber prices are not linked to natural rubber prices. They usually used to trade between 35% to 40% of natural rubber prices but that correlation no longer exists due to tremendous increase in the natural rubber prices. But the increase in the natural rubber prices has given us tremendous boost in terms of growth as more and more industries are trying to increase the reclaim percentage in the usage.
7. EXPORTS – GEOGRAPHIES AND CONTRIBUTION
What is the exports sales contribution currently? Kindly provide the Geographical spread – how much from Europe, US and other markets. How much of export sales is booked in Euros and how much in US$? Do you have higher margins from Export sales?
Most of our Export Sales (80%) are from Europe. We do not engage in hedging as we do not have any competency there.
8. COMPETITION –DOMESTIC AND EXPORT MARKETS. IN THE DOMESTIC MARKET YOU HAVE BALAJI RUBBER (36000 MTPA) AND ELGI RUBBER AS THE MAIN COMPETITORS. ELGI RUBBER WITH ACQUISITION OF NETHERLANDS BASED RUBBER RESOURCES (42000 MTPA). BOTH COMPANIES ALSO SEEM TO HAVE COMPETENCIES IN BUTYL RUBBER RECLAIMS.
Both the companies are good. But the market is big for everybody as Indian market itself is growing by 15% every year. Also regarding the company ELGI rubber recently acquired, we had looked at the same company 2 years back. But we were not satisfied with South Africa plant and decided not to go ahead with the purchase after the due diligence. The expense of 2 Cr in 2009 AR was written off for the same.
Who are your major competitors in the Export markets? How big is the overall Reclaim rubber market, and what is the Industry rate of growth? How is Gujarat Reclaim competitively placed today – Is GRRPL growing faster than the Industry growth and grabbing market share from Competitors. If yes, why? What are your competitive advantages?
Overall the reclaim rubber market would be growing at ~15% for next few years as there is sudden rise in the natural rubber prices leading to increased demand. But only the existing approved vendors can take advantage of the same as there is 3 years period before you can get approval as a vendor with major customers like Bridgestone, Michelin. We are growing faster than competitors because of our quality & approvals with 6 of the top 10 tyre manufacturers worldwide.
How strong is Chinese competition? In terms of capacities, how much bigger are they compared to GRRPL? Does GRRPL have any advantages in terms of the Product mix today vis-à-vis Chinese competition? What is the price differential, if any, between Chinese and GRRPL products to OEMs.
How is the demand supply situation generally? If you had the full 80,000 MTPA capacities today, would you be able to sell comfortably? Are you aware of competitors expanding capacities aggressively? Is it likely that the demand-supply situation will get skewed with volatility in European and US economy?
The demand is extremely robust due to increase in the natural rubber prices. Yes, if we had 80,000 MTPA capacity available for production today, we should be able to sell that. Competition is always there, but our quality and customer relationship is superior.
9. GROWTH – OUTLOOK. YOU HAVE RECENTLY EXPANDED CAPACITY TO 60000 MTPA AFTER 3 YEARS OF CONSOLIDATION. THERE IS ALSO EXPANSION WORK OF 10000 MTPA ONGOING FOR THE ERODE FACILITY, WHICH MIGHT TAKE CAPACITIES TO 70000 MTPA BY FY12. 1QFY12 SALES GREW AT A HEALTHY 31% AND PAT GREW AT 47% OVER THE LAST YEAR QUARTER. YOU HAD GUIDED FOR A 30% GROWTH CAGR FOR NEXT FEW YEARS.
Kindly comment on the current outlook and plans. What is the sense that you have got from your customers, especially Exports? What is your order book size at the moment? Have you noticed any slowdown in orderbook in Q2? If Export demand sees a decline, what are the plans to counter this risk? Can domestic market absorb additional sales? How do you see margins playing out for the rest of the yearFY12?
Our capacity expansion plans are 70,000 MTPA by FY12E & 80,000 MTPA by FY13E. We generally are able to use the full capacity in the year following the capacity enhancement. We don’t work on orderbook basis as it is continuous supply. Till now we are seeing robust demand in exports markets. We should be able to touch 420 Cr at full capacity. Steady state operating margins will be ~18% . 1QFY12 margins were exceptional, there will be wage revision impact in current quarter.
10. ERODE –MANUFACTURING PLANT ON 12.5 ACRES. MOTT MACDONALD, THE GLOBAL ENGINEERING AND DEVELOPMENT CONSULTANCY HAS BEEN APPOINTED AS EPCM CONSULTANTS FOR THIS PLANT.
The stakes seem to be very high for this plant! Kindly tell us a little more on what is planned and what kind of sophistication/productivity efficiencies is this likely to bring? What kind of capacities are planned at this facility in total? What is the timeline for the first phase of expansion? Is this facility going to be dedicated for Butyl reclaims as reported in the press, or this will be multi-product?
This is our first foray outside of West, our home region. Mott MacDonald would help us keep a tight control over execution. Our machines can be interchangeably used for both types of reclaims. All our plants have that facility. After this expansion we should be hitting 80,000 MTPA by Dec 2012. It generally takes 12 months to build up the capacity. Currently utilities work is going on at the Erode plant.
11. THERMOPLASTICS FORAY. REPORTEDLY, THIS IS A VERY EXCITING SPACE AND HAS HUGE POTENTIAL. KINDLY SHARE THE DEVELOPMENTS IN THIS SPACE? ANY MAJOR SUCCESSES? HOW MUCH DOES THIS CONTRIBUTE TO REVENUES TODAY?
This is a part of our process only. This is not a new segment. We get the thermoplastic straps from the scrap only as impurities and are trying to sell the same. So it is mentioned as different segment.
12. 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 that segment? Who are your top customers in this segment?
How much does your top 3 customers contribute to Sales? Does any one customer contribute more than 10% of Sales?
13. INVESTOR RELATIONS –COMMUNICATION. GRRPL NEEDS TO IMPROVE COMMUNICATION WITH THE INVESTOR COMMUNITY AT LARGE. THE WEBSITE DOES NOT PROVIDE EVEN THE ANNUAL REPORTS.
With the company growing in size and stature, are we going to see a more proactive IR at GRRPL. Can we expect regular Analyst Calls & Presentations form the company updating investors on its successes, opportunities and challenges ahead?
We have been very busy catering to the expansions underway. We will try to update our website and revive the newsletters.
Donald Francis: No Holdings in the Company; ;
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