GRP Management Q&A: Aug 2011

Management Q&A

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?

Synthetic Rubber reclaims find application in Inner Tubes, Tyre Inner liner, Adhesives, sound dampners, molded parts.

How is the RM procurement situation in synthetic rubber reclaims? How have you secured your RM supplies on this front?

We produce synthetic reclaim from synthetic scrap and natural rubber reclaim from natural rubber scrap.The sourcing for butyl and other synthetic reclaims is through the same scrap-supply chain.

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.

N.A.

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?

N.A.

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.


Disclosure(s)

Donald Francis: No Holdings in the Company; ;
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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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GRP

Background

Gujarat Reclaim and Rubber Products Ltd. (GRRPL) produces reclaim rubber from scrap of whole tyres, tread peelings, natural rubber tubes, butyl tubes, moulded rubber products for different applications in both tyre and non-tyre rubber products.

Established in the year 1974, Gujarat Reclaim started production with a modest capacity of only 2400 MT. After years of steady growth, it has increased its capacity by many folds (40,000 MT in FY10), and has widened its geographical presence in India and abroad (supplies across 45 countries). GRRPL operates from three locations in India’s north-west (Ankleshwar, Panoli) and south-west (Solapur).

Gujarat Reclaim has acquired a 3.6 MW windmill in the last quarter of FY10 in Gujarat. For the power units generated by windmill, the company gets credit in the electricity bill of its Panoli plant in Gujarat.


Main Products/Segments

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%).


Main Markets/Customers

Major user industries are Automotive tyres & tubes, belts, automotive & industrial hoses, adhesives & sealants, civil construction applications.

Overall growth projected by the Rubber Board for the reclaim rubber industry for the next 4-5 years is at 8-10% year-on-year. If prices of virgin rubbers escalate at the current rates, this growth could easily be higher. Reclaim rubber is preferred for industrial use to the traditional virgin polymer because of its several advantages. Reclaim rubber is readily available in the country, is energy saving & the price of reclaim rubber today is around 25-30% of the polymer prices.

Exports contributed 57% of Sales in FY10.


Bullish Viewpoints

  • Good Industry prospects – Reclaim rubber is an eco friendly industry and with the rising prices of natural rubber, demand for reclaim rubber should increase going forward.
  • Consistent Margins and Profitability – Gujarat Reclaim has a neat track record of consistent growth and profitability. 5 Yr CAGR has been about 24% and 10 Yr CAGR has been at about 28%. Operating Profit Margins have generally been in the range of 16-19% and Net Profit Margins in the range of 9-11%.
  • Good Dividend record – Gujarat Reclaim is shareholder friendly and has a track record of continuously increasing dividends. 5yr DPS CAGR is 19% wheras 3yr DPS CAGR is almost 22%. Dividend payout ratio currently is about 19%.
  • High Returns – The business model is strong and the co generates high ROCEs. While it used to enjoy 40%+ returns, the last 2 years has seen returns 30%+ which is pretty good given the prevailing economic scenario.
  • Steady Growth – The company maintains that the new challenge before GRRPL is to maintain annual growth in excess of 30% and at the same time not waver from its path of building and consolidating trust among its growing number of stakeholders.
  • Recent Financial performance – For 9m FY11 Gujarat Reclaim has done Net Sales of 139 Cr (104 Cr 9m FY10) and PAT of 13.69 Cr (10.83 Cr 9m FY10). The company looks set to register a healthy 25-30% growth in FY11
  • Decent Valuations – at 915 CMP, the stock is available at ~7x FY11 EPS and 1.9x BV

Bearish Viewpoints

  • Capacity constraints – For the last 3 years installed capacity of reclaim rubber 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.
  • Expanded capacity utilisation – Increased capacity that is reportedly coming onstream by FY12 may lead to underutilisation and impact near-term profitability.
  • Raw material prices – 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.

Barriers to entry

  • In FY10 the installed capacity of reclaim rubber in India is estimated to be 150,000 tonnes, of which nearly 60% is manufactured by small scale industrial units, many of them maybe having obsolete machinery and processes.
  • Gujarat reclaim with an installed capacity of 41000 MT is the largest manufacturer and exporter of reclaim rubber in the country. Exports contributed 57% of Sales in FY10
  • 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 in India, the United States, Australia, France, Japan, Korea, Spain, and United Kingdom, among others.
  • One of the key strengths of GRRPL is that it has developed a wide network for raw material procurement and built an extensive chain of raw material suppliers. They are supported in procuring waste tyres from various state transport companies and other local collection sources. The suppliers act as agents of the company in reaching out across cities they operate in, to district and village level centres gathering the 45,000 tones of materials required at GRRPL factories.

Interesting Viewpoints

  • Gujarat Reclaim is focusing on sales of synthetic rubber reclaims which 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. With increasing emphasis in the use of virgin synthetic rubbers for rubber compounds the world over, the future holds immense potential for the consumption of synthetic reclaim rubber, mainly in the non-tyre rubber goods manufacturing. The synthetic rubber reclaims business has grown significantly over the last few years and contributes approximately 45% of GRRPL’s total revenues.
  • Depending on the tyre type, reclaim rubber in a tyre can be as low as 0.5% to total polymer (in case of high performance PCRs) to as high as 12% to total polymer (in case of OTRs) and a further high of 35% (in case of cycle tyres). The Indian tyre industry as a whole consumes 4% reclaim rubber of total polymer. But individually, certain companies are also experimenting at levels of 6-7%.
  • The generation of scrap tyres and other waste tyres is a global phenomenon. Whichever country or region that has sufficient volumes of such scrap generation has an opportunity to have a reclaim industry. However, the consumption and market for reclaim rubber will depend upon where the production of reclaim rubber is. The global reclaim rubber industry has grown from being 2% of total polymer consumption in early part of last decade to close to 5% currently. China leads the way with the largest base for reclaim rubber manufacturing and also the highest consumption as proportion to virgin polymers.

Disclosure(s)

Donald Francis: No Holdings in the Company;