A disclosure first – This is a completely borrowed idea. I originally saw this idea on Ayush’s blog and started investigating it on my own. I had some discussions with him on the phone and liked the story behind the company.
The idea is a borrowed one, though hopefully the thinking is not (Ofcourse if the idea succeeds it would become my original idea as i would conveniently forget the source in due time :) ). I personally have no qualms of borrowing ideas from other smart investors like ayush (would highly recommend following his blog), though I will provide due to attribution to the original idea if I post about it.
I will not repeat some of the analysis here as ayush has done a great job of it. You can find the analysis here. Let me add some additional thoughts to the analysis
The Company has been able to sustain a fairly high growth and profitability for the last 8-10 years. The company currently enjoys a 35%+ market share in its business niche which is characterized by a large number of players from the unorganized sector.
The company has been expanding rapidly and is now enjoying the benefits of scale in production and sales. The Working capital turns have been going up steadily over the years which is an indication of the operating leverage (Fixed asset turns have not increased as much due to constant capacity addition). The company is now one of the largest company in its sector and is now exporting almost 57% of its total turnover. An effective sales and marketing organization is required to develop and sustain an export business as it requires a close relationships with the OEMs (tyre manufacturers and other users of rubber)
The competitive intensity from any large players is likely to low as this is not a big and attractive segment for any big player. The company enjoys a substantial competitive advantage over smaller player due to economies of scale, customer relationships, strong sourcing network (for waste rubber) and ability to invest in research.
The main threat is low cost import of tyres from china which can hurt the OEMs directly and Gujarat reclaim indirectly. In addition this is a very competitive industry with a lot of competitors and it is unlikely the company can earn very high profits for a long time.
The price of rubber also plays an important part in the profitability. As the price of virgin rubber has increased, the substitution by reclaimed rubber has gone up too. The substitution effect may slow down once the price of rubber starts dropping.
The company does not seem to have any major listed competitors, though there seem to be a lot of smaller competitors. A company like Indag rubber is not really a direct competitor even though they operate in the tyre industry. Gujarat reclaim provides cheap substitution of a raw material used in tyres, whereas indag provides a substitute for the end product – tyres itself (via re-treading).
The fair value of the company can be estimated to be between 1700-2000 with an assumption of 8-9% net margins and growth in the range of 10-11 %. The company is selling at a decent discount to fair value and would be quite attractive if the price drops below 800.
Disclosure: I have a position in the stock. Please read disclaimer at end of the blog.