GHCL Ltd. 19 th September, 2016 BUY

Company Report BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY GHCL Ltd. 19 th September, 2016 BUY CMP (BSE) Rs.253.00 Target Price Rs.310.00 BSE Code 500171 Market Cap (Rs Cr.) 2530.49 52 Week High/Low 269.60/95.00 Industry Chemicals Face Value Rs.10.00 Shares O/S 10 Cr. EPS(TTM) 29.92 Book Value 98.55 P/E 8.46 P/B 2.57 Shareholding Pattern GHCL has established itself as a well-diversified group with an ascertained footprint in Chemicals, Textiles and Consumer Products segment. The company has registered decent results for the quarter ending June 2016. The standalone revenues grew by 17.56% to Rs.684.82 crores vs. Rs.582.52 cr. in the year ago quarter. Operating profit grew at Rs.193.34 crores as against Rs.150.75 crores in the corresponding quarter last year; representing growth of 28.25%. The adjusted net profit surged sharply at Rs.102.83 crore as against Rs.75.13 crore, depicting a sharp growth of ~37% y-o-y. The inorganic chemical segment revenue grew from Rs.384 crores to Rs. 421 crores which is mainly due to higher Soda Ash volume of 23300 tonnes. The margin improvement in the quarter is on account of increased productivity, strong focus on operational efficiency and lower utility cost. The textile segment reported a 30% surge in the revenue at Rs.313 crores from Rs.241 crores during the last year same quarter and the EBITDA has increased significantly by 47% that is to 50 Crores from 34 Crores in Q1 FY2016. This improved performance is contributed by capacity optimization to 81% compared to 76% in the last year quarter. The per meter realization from home textile business has improved from Rs.254 per meter last year same quarter to Rs.293 per meter in Q1FY17. The volume too has increased from 64 lakh meter last year same quarter to 76 lakh meter in Q1FY17. Valuation Research Analyst: Vineeta Mahnot research@hemsecurities.com With cost leadership with stable volumes in the soda ash business, capacity expansion, focus on improving margins of textile business, entry in new markets and adding new products; GHCL growth prospects looks promising. We believe the company is trading at an attractive valuation at 7.93x and 6.86x of consolidated FY17EPS of Rs.31.9 and FY18EPS of Rs.36.90. We initiate a BUY on the stock with a target price of Rs.310 (appreciation of about 23%) with the medium to long term investment horizon. For Private Circulation Only 1 Hem Research

Business overview GHCL Limited was incorporated in 1983. The company has established itself as a well-diversified group with an ascertained footprint in Chemicals, Textiles and Consumer Products segment. In addition to domestic sales, GHCL exports to Saudi Arabia, Iran, the UAE, Jordan, Bangladesh, Sri-Lanka, Indonesia, Malaysia, Thailand, Taiwan and Australia. In Chemicals, the company mainly manufactures Soda Ash (Anhydrous Sodium Carbonate) that is a major raw material for Detergents & Glass industries and Sodium Bicarbonate (baking soda). The manufacturing facility of Soda Ash plant is located at Sutrapada, in the state of Gujarat, India. The region is famously known as the Saurashtra coastal belt and is ideal for the manufacturing of Soda Ash in India. GHCL Limited, being one of the leading manufacturers of Soda Ash in India, has an annual production capacity of 8,50,000 metric tons, which contributes to almost 23% of the annual domestic requirement. GHCL s Soda Ash product line consists of Light grade, Dense grade and Sodium Bicarbonate (Baking Soda). Its Soda Ash is available across the Indian market under the brand name LION. Its Textiles operations is an integrated vertical set up which commences right from spinning of fiber (yarn), weaving, dyeing, printing till the finished products, like sheets & duvets, take shape which are primarily exported worldwide. Spinning facilities of the company is located near Madurai in the state of Tamil Nadu, India. Here they produce 100% cotton compact yarn, cotton blend yarn, 100% polyester yarn, viscose blends yarn and other fancy yarn. Some quantity of yarn is also sold in the domestic market as well as exported to international markets. Currently the total spinning capacity is ~175000 spindles annually. GHCL s Home Textiles facility is located in Vapi in the state of Gujarat, India. This facility oversees the production process right from weaving to finished processed fabric, which is then converted into products like duvet sets, sheet sets, comforter sets to name a few. As one of the leading manufacturers of Home Textiles in India, the plant boasts of an annual production capacity of 36 million metres of finished fabric per annum. GHCL s Home Textiles products are predominantly exported worldwide to countries like United Kingdom, United States of America, Australia, Canada, Germany and other European Union countries as well. Consumer Products operation is another business for GHCL where it is a leader in manufacturing and selling Edible salt, Industrial grade salt and Honey in the country. The company has Salt Works located at Vedaranayam and the refinery plant at Tiruporur, near Chennai, Tamil Nadu. GHCL s premium quality Edible Salt is made available to the consumers in India under the brand name of iflo and Sapan, both of which symbolize unparalleled quality. For Private Circulation Only 2 Hem Research

Cost effective soda ash business-strongest edge of GHCL GHCL is a leading producer of soda ash with capacity of 0.85 mn tpa and with market share of about 23% and is well poised to tap the opportunities in both the Detergents & the Glass industries. The company has a significant advantage in maintaining tight control on cost of soda ash due to major captive source on some of the raw materials Salt, Limestone & Lignite which helps it to maintain high margins and return ratios. The chemical business contributes a large chunk of revenues at 58% with EBIDTA contribution of 78% to the total income of the company. GHCL has achieved a record production of 1.93 lakh metric tonne in the inorganic chemical segment in the June 2016 quarter and sales of 1.88 lakh tonne setting a benchmark productivity of 91% against 86%(excluding the annual shutdown effect) last year same quarter. This has led to both higher production and sales. This segment is the strongest edge of the company with cost leadership, high margins and stable volumes. The capacity addition of another 1 lac ton of Soda Ash is well on track and is expected to be completed by March 2017. The other product which the company produces is Sodium Bicarbonate whose realization is almost the same as the soda ash. GHCL enjoys more than 10% market share of this product. Focus on margin improvement in textile division GHCL is one of the largest integrated textile manufacturers in India with presence in both spinning and home textiles business. GHCL is vertically integrated home textile player with presence across the value chain from spinning to processing. The company has increased capacity utilization rate from 70% in FY15 to 83% in FY16 owing to focus on increase in exports. It has marquee customers like Bed Bath & Beyond, JC Penny and TARGET. The company has major export market is USA while Europe, Australia and Canada comprise the remaining markets. The company is aggressively focused on improving margin in the textile division which has resulted in a margin improvement from 14% in Q1FY2016 to 16% in Q1FY17 mainly led by higher volumes and lower utility cost. Changing customer profile, capacity optimization via debottlenecking, increase in exports and thrust on improving product mix is expected to add volumes and higher margins in the home textile business. The Company has installed 12.6 MW windmill, taking the total capacity to around 25 MW which meets around 50% of power needs in spinning segment. Investment made in the windmill last year has also benefited the company in rationalizing UPC cost and contributing to the bottomline. The margin improvement contribution from windmill stands at 1% during the quarter and incremental amount stood at Rs.4 crores. For Private Circulation Only 3 Hem Research

Capacity expansion to drive growth The capacity addition of another 1 lac ton of Soda Ash through a brownfield expansion with an investment of Rs.3.75 bn is well on track and is expected to be completed by March 2017. This expansion will help GHCL to boost its profitability and return ratios as fixed costs would remain same. Investment made in the windmill last year has also benefited the company in rationalizing our UPC cost and contributing to the bottomline. The company has spent about Rs.63 crores for the capex in the quarter ended June 2016. Further, the current capacity of edible salt plant stands at 70000 MT which is planned to be increased to 100000 MT by end of January 2017. GHCL has been producing approximately around 80 tonnes of sodium bicarbonate a day while the total market for sodium bicarbonate is around 170000 tonnes in yearn which leads to lot of imports. In order to ride this opportunity the company is making investment to increase sodium bicarbonate capacity from 80 tonnes to 180 tonnes. The company has recently approved an additional capex of Rs.79.50 crores for Soda Ash division which will be used towards expansion of Bicarbonate capacity by 100 TPD, soda ash capacity expansion by 25000 TPA and RO plant for water availability at Soda Ash plant taking into account the scarcity of water being faced by the industry. Entry in new markets and new products GHCL has a small business set up of FMCG business and they are present in edible salt. Its FMCG brand iflo has the greatest reach among salt variants- from basic refined iodised salt and crystal salt to specialized variants like Mild, Herbal & double fortified salt. Now they have launched two new variants- honey in the southern market and spices which they are taking to Maharashtra and Goa market. The company is gradually moving into the other parts of India. For Private Circulation Only 4 Hem Research

Firm growth outlook GHCL has started to focus on domestic market and working with major retail brands for domestic markets. It has highly successful client relationships and is the preferred supplier to all major soda ash consumers with esteemed clients like Hindustan unilever Limited, Ghari Group, P&G, Fena Group, HNG Group, Gujarat Guardian Limited, Gujarat Borosil Limited, Piramal Glass Limited, St Gobain Glass, Gold Plus Glass, Phillips and Patanjali Ayurveda Limited. The textile business topline growth is expected to be around 10-12% in the year ahead. In continuation of focus on improving margins in the textile division; the company expects to maintain 15-16% margin driving by higher volumes or higher revenues in the times ahead. GHCL believes that it is well covered up to March 2017 and do not see any cost pressures till then. The capacity expansion for the inorganic chemical segment is expected to be completed by March 2017 driving volume growth in times ahead. Further, another expansion of 30000 by the debottlenecking will add more volumes to the business next year along with improved profitability. GHCL is targeting 20-25% growth on the overall bottomline for the entire business next year. The company after shutting its loss-making overseas subsidiaries is now focusing on reducing its debt levels. It intends to bring down its debt-equity ratio under one by this year-end. The company has allocated Rs.68 crores towards debt reduction during the quarter ended June 2016. For Private Circulation Only 5 Hem Research

Consolidated Profit & Loss Account Rs. Crore Particulars FY14 FY15 FY16 FY17E FY18E Net sales 2247.64 2373.61 2558.99 2763.71 2990.33 Growth 5.60% 7.81% 8.00% 8.20% Expenditure 1814.23 1845.30 1925.62 2072.78 2227.80 EBITDA 433.41 528.31 633.37 690.93 762.54 Growth 21.90% 19.89% 9.09% 10.36% EBITDA margin 19.28% 22.26% 24.75% 25.00% 25.50% Other income 5.01 11.26 5.39 8.29 8.97 Depreciation & Amortisation 81.74 84.92 81.74 93.28 102.11 EBIT 356.68 454.65 557.02 605.94 669.40 EBIT margin 15.87% 19.15% 21.77% 21.92% 22.39% Interest 183.19 170.42 164.40 143.50 134.57 PBT 173.49 284.23 392.62 462.44 534.83 Tax 34.00 74.93 122.64 143.36 165.80 PAT 139.49 209.30 269.98 319.08 369.03 Share of Associates 0.00 0.00 0.00 0.00 0.00 Minority Interest 0.00 0.00 0.00 0.00 0.00 Adjusted PAT 139.49 209.30 269.98 319.08 369.03 Growth 50.04 28.99 18.19 15.65 Net Profit margins 6.21 8.82 10.55 11.55 12.34 Exceptional item 30.97 27.40 13.50 0.00 0.00 Reported PAT 108.52 181.90 256.48 319.08 369.03 Equity Capital 100.02 100.02 100.02 100.02 100.02 Res. & Surplus 487.26 670.14 885.65 1,164.73 1,483.76 Equity Shares 10.00 10.00 10.00 10.00 10.00 Adjusted EPS 13.95 20.93 26.99 31.90 36.90 For Private Circulation Only 6 Hem Research

Balance Sheet Rs. Crore Particulars FY14 FY15 FY16 FY17E FY18E Equity Share Capital 100.02 100.02 100.02 100.02 100.02 Reserves & Surplus 487.26 670.14 885.65 1,164.73 1,483.76 Shareholders funds 587.28 770.16 985.67 1264.75 1583.78 Borrowings 1485.85 1323.54 1247.96 1062.97 996.78 Deferred tax liability 162.02 172.73 195.12 195.12 195.12 Minority Interest 0.00 0.00 0.00 0.00 0.00 Sources of funds 2235.15 2266.43 2428.75 2522.84 2775.68 Gross block 2,918.03 3,062.51 3,257.18 3454.64 3646.75 Accumulated Depreciation 1,048.66 1,128.63 1,208.00 1,301.28 1,403.39 Net block 1869.37 1933.88 2049.18 2153.36 2243.36 Capital WIP 12.46 7.01 36.89 38.00 83.88 Investments 7.49 1.54 1.55 1.73 3.10 Inventories 543.87 487.39 503.31 538.99 655.69 Sundry debtors 381.21 244.35 192.42 204.45 248.71 Cash and bank balance 41.72 33.91 42.66 50.18 61.05 Other current assets 0.55 0.47 0.41 0.93 1.13 Loans and advances 157.39 142.87 124.24 134.75 163.92 Total current assets 1124.74 908.99 863.04 929.30 1130.49 Current liabilities 778.91 584.99 521.91 599.55 685.15 Net current assets 345.83 324.00 341.13 329.75 445.35 Uses of funds 2,235.15 2,266.43 2,428.75 2,522.84 2,775.68 Ratios Particulars FY14 FY15 FY16 FY17E FY18E Return on Equity 23.75 27.18 27.39 25.23 23.30 Return on Capital employed 17.20 21.72 24.94 26.03 25.94 Debt/Equity 2.53 1.72 1.27 0.84 0.63 Asset turnover 0.75 0.83 0.87 0.89 0.86 Current Ratio 1.44 1.55 1.65 1.55 1.65 Book value per share 58.72 77.00 98.55 126.45 158.35 Interest coverage 1.95 2.67 3.39 4.22 4.97 For Private Circulation Only 7 Hem Research

Standalone Quarterly Financial Highlights Rs. Crore Particulars Q1FY17 Q1FY16 Q4FY16 YoY% QoQ% Revenues 684.82 582.52 650.40 17.56 5.29 Expenditures 491.48 431.77 475.56 13.83 3.35 Operating Profit 193.34 150.75 174.84 28.25 28.25 Adjusted Net Profit 102.83 75.13 78.96 36.87 30.23 Exceptional item ---- (13.51) ---- ---- ---- Reported Net Profit 102.83 61.62 78.96 66.88 30.23 OPM% 28.23 25.88 26.88 235bps 135bps NPM % 15.01 12.90 12.14 211bps 287bps Adjusted EPS 10.28 7.51 7.89 36.88 30.29 Past Price movement of the stock 290 280 270 260 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 GHCL (252.8500, 269.8000, 237.1000, 253.9500, +1.8500) 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 290 280 270 260 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 For Private Circulation Only 8 Hem Research

www.hemsecurities.com research@hemsecurities.com HEM SECURITIES LIMITED MEMBER-BSE,CDSL, SEBI REGISTERED CATEGORY I MERCHANT BANKER Sebi Registration No For Research Analyst: INH100002250 MUMBAI OFFICE: 14/15, KHATAU BLDG., IST FLOOR, 40, BANK STREET, FORT, MUMBAI-400001 PHONE- 0091 22 2267 1000 FAX- 0091 22 2262 5991 JAIPUR OFFICE: 203-204, JAIPUR TOWERS, M I ROAD, JAIPUR-302001 PHONE- 0091 141 405 1000 FAX- 0091 141 510 1757 GROUP COMPANIES HEM FINLEASE PRIVATE LIMITED MEMBER-NSE HEM MULTI COMMODITIES PRIVATE LIMITED MEMBER-NCDEX, MCX HEM FINANCIAL SERVICES LIMITED NBFC REGISTERED WITH RBI For Private Circulation Only 9 Hem Research

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