Follow up: Gujarat reclaim & rubber products ltd

I had written about this company in 2010 here and shared a detailed analysis with the members of my paid service in early 2011.

The company has performed quite well in 2012 (Q4 results were a bit soft). The topline of the company has grown by around 25% and net profits by around 40%. The company has been able to improve its margins to around 10% levels. In addition the company has been adding capacity via new plants and should be able to grow at above average rates for the next few years.

I am including the analysis, I shared with my paid subscribers below. We are not buyers at current prices, but a 1300-1400 price range would be a good point to buy the stock (if you like the company and want to create a position)

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About

Gujarat reclaim is a 200 Cr company in the business of reclaimed rubber. The company produces re-cycled rubber sheets for the tyre and non-tyre rubber goods industry.

The company currently has a capacity of around 61000 MT and holds a 45% market share in the industry. The company is thus the largest player in the industry and has increased its production from 2400 MT to around 45000 MT over time.

The company is also exporting around 70% of its production.

Financials

The company reported a topline of around 191 Crs in 2011 and a net profit of around 17.6 Crs. The company has a net margin of around 9-11% which mainly depends on the raw material prices (recycled rubber). The company has delivered a topline and net profit growth of around 30% in the last 9 years.

The company has been able to improve the asset turn ratio from around .98 to 1.7 in the current year.The company has been able to maintain an ROE in excess of 30% and at the same time been able to reduce its debt equity ratio from around 1.6 in 2002 to 0.6 in the current year.

The company has thus been able to deliver above average growth and at the same time been able to improve its balance sheet.

Positives

The company is one the largest companies in the business of recycled rubber. Re-cycled rubber sells at around 20-25% the price of natural rubber and thus is a cost effective substitution for it. Virgin rubber (new rubber) prices have doubled in the last four years and this has provided an added incentive to use recycled rubber.

Gujarat reclaim supplies to the major tyre companies and to other rubber users in India and abroad. The continuing high price of rubber (and petroleum) has increased the demand for the company.

The company also has a wide network to source used rubber (tyres etc) and thus is able to get its raw material at competitive prices. In addition the company has been expanding capacity at a regular pace and is now adding plants in new locations to tap new sources of used rubber.

Finally the company has been able to grow rapidly and improve the quality of its balance sheet at the same time.

Risks

The company exports almost 70% of its production to foreign markets. Any slowdown in US and Europe may hurt the company’s business in the short term. In the long run, this would however work in the company’s favor as the tyre manufacturers and other users of rubber will try to reduce  raw material costs by increasing the usage of recycled rubber.

The company sources used rubber products like tyres to produce recycled rubber. Any increase in the cost of this crucial raw material (due to higher demand from other users) will impact the net margins of the company.

Management quality checklist

-          Management compensation: The management salary is around 2% of net profits which seems to be reasonable

-          Capital allocation record: The capital allocation performance has been satisfactory. The management has been re-investing the profits in the core business at reasonable rates of return.

-          Shareholder communication: Adequate. The management provides the mandated information and disclosures, but does not go beyond that

-          Accounting practice: As per norms

-          Conflict of interest ? related party transactions: None which impacts the company or the minority shareholders

-          Performance track record: Above average performance in the last 10 years

Valuation

The detailed valuation for various margin and topline scenario is provided in the analysis spreadsheet.  At a mid point margin of around 9-10% and growth of 13% or higher, the fair value can be taken as around 2500. The current price assumes a margin of 8% or lower and a topline of around 8%. This appears to be far lower than what the company has achieved in the last 10 years.

conclusion

The company operates in a niche industry (recycled rubber) and is a major player in it. The industry is currently experiencing a tailwind due to high price of virgin rubber and increasing use of recycled rubber due to cost and environmental factors.

The company exports almost 70% of its production and has added capacity recently to meet the additional demand. The company has done well in the last 10 years and should be able to repeat the performance in absence of any major macro events.

The company seems undervalued at current prices.

Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please read disclaimer towards the end of blog.