Gujarat Heavy Chemicals Ltd.

Transcription

1 Company Update Chemicals & Textiles India Research NVS Wealth Managers Gujarat Heavy Chemicals Ltd. CMP: 99 Nifty 8585 Sensex Nifty PE 23.7 Sensex PE 22.7 Stock Data Sector Chemicals & Textiles BSE Code NSE Code GHCL FV 10.0 Market Cap (INR cr) 981 Market Cap (US$ mn) 154 Equity Share Cap. 100 Stock Performance (%) 52-week high/low Rs. 99.0/55 1M 6M 12M Absolute (%) Shareholding Pattern (%) Sensex & Stock Movement Not Rated Gujarat Heavy Chemicals Ltd (GHCL), a company of Sanjay Dalmia group, is one of the leading soda ash manufacturers in India - second only to Tata Chemicals. The company also manufactures integrated home textiles, having presence in spinning, wide width weaving, continuous fabric processing and cut & sew for premium bed linen. GHCL, with a production capacity of 8.5 lac MT is the lowest cost producer of synthetic soda ash, since it is the only company to own lignite mines with significant command on captive salt and limestone, thereby exercising firm control on the cost of soda ash. Soda ash is a key raw material used mainly in the manufacture of Glass and Detergents. Global soda ash capacity is ~67 mn MT and production is ~56 mn MT. India has a soda ash production capacity of ~3.1 mn MT, with a deficit of ~0.7 mn MT which is currently met through imports, thus offering a huge potential for soda ash manufacturing companies. The company s textile division (~40% of the total revenue) has spinning capability of 1.75 lac spindles and 30 mn metres of stitching capability. The company caters to renowned brands such as Hindustan Unilever, Gujarat Guardian, Gujarat Borosil, L&T, Ghari, P&G, HNG, Videocon, Piramal Glass, Saint Gobain, Phillips, Bed Bath & Beyond, Target, CES, Kmart, House of Fraser, Sears, JCPenney, Kohls, Walmart etc. GHCL posted an excellent Q1FY16 financial performance with revenues of Rs. 588 Crs. (Rs. 562 Crs), EBITDA of Rs. 153 Crs (Rs. 136 Crs), EBITDA margin at 26% (24%) and PAT remained flat at Rs. 61 Crs, after providing for VRS (exceptional expense) of Rs. 14 Crs and also absorbing loss of revenue due to an annual maintenance shutdown in soda ash plant (81% utilization vs 87% YoY). But for this, the PAT for Q1FY16 would have been much better and the same should be reflected in the remaining three quarters of the year. The company has embarked upon expansion of Soda Ash capacity by 1 lac MT with an estimated cost of Rs. 375 Crs which will be implemented by FY17 and has also invested in in-house stitching capability at an estimated cost of Rs. 21 Crs, to be completed by December At the CMP of Rs. 99 the stock trades at a meager 5.4x EPS of Rs and even much lower multiple on current year expected EPS. NVS had earlier recommended the stock at Rs. 42 in June Financials INR Crs Q1FY16 Q4FY15 Q1FY15 QoQ (%) YoY (%) FY15 FY14 Total Income % 5% 2,385 2,253 EBITDA % 12% PBT & Excep. Items % 19% PAT 61* % 1% EPS Share Capital Reserves *Before exceptional items of VRS of Rs.14 Crs, the PAT would be Rs.75 Crs. Source: Published Result, BSE 6 th August 2015

2 GHCL Business Profile GHCL, a company of Sanjay Dalmia group, is one of the leading soda ash manufacturers in India - second only to Tata Chemicals. Soda ash is a key raw material used mainly in the manufacture of Glass and Detergents. GHCL, incorporated in the year 1983, is a well diversified group with an ascertained footprint in inorganic chemicals and home textiles segment. The company manufactures integrated home textiles with presence across spinning, wide width weaving, continuous fabric processing and cut & sew for premium quality bed linen. GHCL operates in two major segments: Inorganic Chemicals and Textiles. The following chart shows the major products of GHCL. GHCL Soda Ash Division GHCL has an annual production capacity of 8.5 lac MT having a capacity utilization of ~87% - which is highest in the industry. In Q1FY16, the company produced 1.72 lac MT soda ash (1.85 lac MT). In Q1FY16, GHCL s inorganic chemicals business reported revenue of Rs. 347 Crs (Rs. 343 Crs) with improved EBITDA margins at 34.1% (32.3%). The company produces dense soda ash for the glass industry and light soda ash for the manufacturing of detergents. While the glass industry is the largest consumer of soda ash, the demand for soda ash from GHCL, is preferred by detergent companies for its high solubility in hot and cold water. GHCL competes with major players including Tata Chemicals, Nirma and two other small players like TAC, DCW.

3 Captive Mines GHCL s soda ash plant is located at Sutrapada, Gujarat. GHCL is the only company to own lignite mines with significant command on captive salt and limestone, thereby exercising firm control on the cost of soda ash, making it the lowest cost producer of synthetic soda ash. GHCL innovatively replaced Met Coke with in-house developed briquette coke thereby obtaining cost optimization. Capacity Expansion GHCL has embarked upon expansion of soda ash capacity by 1 lac MT with an estimated cost of Rs. 375 Crs, which will be implemented by FY17. The company has planned a further expansion of 1.5 lac MT in Phase II with an estimated cost of Rs. 575 Crs, which is likely to be completed by FY19. Clinetele for Soda Ash The company caters to the following renowned brands such as: Hindustan Unilever Gujarat Guardian Saint Gobain Ghari Gujarat Borosil Philips Piramal Glass P&G L&T HNG Videocon Haldyn Glass Global Soda Ash Scenario The global soda ash capacity is ~67 mn MT and production is ~56 mn MT (~80% utilization). The soda ash industry is growing at a rate of ~3-4% p.a. China is the largest producer of soda ash with a total capacity of ~32 mn MT. The current domestic demand for soda ash is 3.3 mn MT while the domestic industry caters to 2.6 mn MT of this demand. Thus currently, India has a soda ash production capacity of ~3.1 mn MT, with a deficit of ~0.7 mn MT which is currently met through imports, thus offering a huge growth potential for soda ash manufacturing companies. The demand for domestic soda ash is expected to increase to 4.1 mn MT by FY19, leading to a deficit of 1.5 mn MT. Housing for All, Smart Cities and increase in per capita income for semi urban and rural masses A Boon for Glass & Detergent Industry The government s vision of Housing for All by 2022 to build 2 Crs urban houses and 4 Crs rural houses will lead to fresh development and redevelopment of residential properties thereby increasing the requirement of glass for construction of the facades and interiors of building developments. This is expected to offer tremendous opportunities to the glass industry.

4 The NDA government s initiatives on infrastructure development like airports, railways, roadways, smart cities, SEZ etc. will further boost the demand for glass and resultant demand for soda ash. Thus, thrust on rural and semi urban development will create employment opportunities and boost the income of rural and semi urban masses, resulting in increased per capita income giving a good boost to the FMCG industry, benefitting the manufacturers of detergents, soaps, personal care products etc. like Hindustan Unilever, P&G, Godrej Consumer etc. The growth in detergent industry will boost the demand for soda ash - the major raw material, benefitting the players like Tata Chemicals, GHCL, etc. GHCL Textiles Division GHCL s textile division (~40% of the total revenues) has a spinning capability of 1.75 lac spindles in Madurai, Tamil Nadu and 30 mn meters of stitching capability in Vapi, Gujarat. In Q1FY16, the company produced 5706 MT of yarn (4842 MT) and finished cloth production was at 72 lac meters (66 lac meters), with increased capacity utilization by 7%. In Q1FY16, GHCL s textile business grew by 10.5% YoY to Rs. 240 Crs (Rs. 217 Crs) with EBITDA margins at 13.8% (10.5%) on the back of improved production processes. In the textiles arena, GHCL competes with Indo Count, Welspun and Himatsingka. Capacity Expansion GHCL has invested in in-house stitching capability at an estimated cost of Rs. 21 Crs, which is expected to be completed by December The company has further planned a capital expenditure of Rs. 100 Crs. over the next two years in the textiles segment. Clinetele for Textiles The company rationalised their customer base and has succesfuly made deep inroads with large global retailers for their replenishment programs. The company s clientele consists of renowned brands such as: Bed Bath & Beyond House of Fraser Kohls Kmart Sears Walmart Target JCPenney CES Global Textiles Scenario The company foresees a huge opportunity in the textiles business globally in the years to come as the industry is likely to grow from USD 60 bn to around USD 140 bn by 2020.

5 GHCL Historical Performance Rs. In Crs Particulars FY10 FY11 FY12 FY13 FY14 FY15 Total Income 1,388 1,611 1,984 2,278 2,253 2,385 EBITDA PAT 80 (10) EBITDA Margin (%) 20% 19% 18% 18% 21% 23% PAT Margin (%) 6% -1% 2% 3% 5% 8% Share Capital (FV - Rs.10) EPS 8.0 (1.0) GHCL has performed exceedingly well in the last five years with Total Income, EBITDA & PAT increasing at a CAGR of 11%, 15% and 18% respectively on the back of better utilization, continous quality improvement and higher realization. GHCL s MCAP/Revenue is merely 0.40x and P/BV at 1.41x with a 70% YoY increase in PAT in FY15. At a CMP of Rs. 99 the stock trades at a meager 5.4x EPS of Rs and even much lower multiple on current year expected EPS. GHCL has posted excellent results in Q1FY16 and based on management guidance, the revenues are expected to boost by ~Rs Crs with Phase I expansion of soda ash manufacturing. The textile division revenues are expected in the range of Rs Crs (margin of 15-18%) without considering any capacity expansion. The Company is undervalued at a PE of over 4.5x, having a strong potential for appreciation and growth.

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