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; ;
: ; ;
: ; ;
: ; ;

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;