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Sunday, January 29, 2017

Value Pick Stock - GHCL - ROI @ 67% in 7 Months

Dear Reader,

We are pleased to inform you that our Value Pick stock of May 2016 - GHCL Ltd (BSE Code: 500171, NSE Code: GHCL) which was released on 26th Jun'16 has already achieved its target price and currently giving returns of 67% to our Value Picks members in period of 7 months. Our team suggested Buy on GHCL at price of Rs. 172.55 on 26 June with a target price of Rs. 245, stock has already achieved its target price in matter of 3 months and we suggested our members to continue to hold the stock. GHCL stock made its 52 week high of Rs. 299 in the month of Oct'16 and closed at Rs. 287.90 today giving absolute returns of 66.9% to our Value Picks members within period of 7 months.

We suggested our members to continue to hold the stock in our Value Picks Flash Back report released recently.

Below is the summary of GHCL Ltd shared by our team under Value Pick stock of May'16 released on 26th June 2016.

1. Company Background:

GHCL (formerly known as Gujarat Heavy Chemicals Ltd) is one of the leading soda ash manufacturers in India. The company is engaged in manufacturing of industrial chemicals, textiles and Edible salt. In addition to domestic sales, GHCL exports to Saudi Arabia, Iran, the UAE, Jordan, Bangladesh, Sri-Lanka, Indonesia, Malaysia, Thailand, Taiwan and Australia.

Chemicals (Soda Ash) Division: 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 soda ash from GHCL is preferred by detergent companies for its high solubility in hot and cold water. GHCL major competitor in this segment includes Tata Chemicals and Nirma and other smaller players like TAC and DCW.

Textiles Division: The Textiles division at GHCL is vertically integrated manufacturing facility with spinning, weaving, continuous fabric processing, and cut & sew for premium quality bed linen. GHCL spinning unit is located near Madurai in Tamil Nadu and it’s Home Textiles manufacturing unit is located near Vapi in Gujarat. Here, yarn is woven into fabric, which is then dyed, printed, and finished into final products like bed sheet. GHCL has huge product range of bed sheets, duvets, bed skirts, comforters and comforter shells, pillows, cushions etc. being supplied to its marquee clients like Bed Bath and Beyond, Walmart Canada, Sears, Tuesday Morning, JCPenney, Amazon etc

The soda ash business continues to be a key revenue driver for GHCL, contributing around ~58 percent of overall revenues. GHCL remains one of the strong players in domestic soda ash industry with a capacity share of 27% compared to 34% of Tata Chemicals and 32% of Nirma. Moreover, GHCL is also one of the largest integrated textile manufacturers in India with an installed spinning capacity of 1.75 lac spindles to produce both cotton and blended yarns.

The Company’s soda ash plants are located at Sutrapada in Gujarat, manufacturing plants for home textile is located at Vapi, Gujarat and spinning facilities are located at Madurai in Tamil Nadu. The Textiles division at GHCL is vertically integrated manufacturing facility with spinning, weaving, continuous fabric processing, and cut & sew for premium quality bed linen.

2. Recent Development: (as on 26th Jun’16)

i) Capacity addition in soda ash business to improve margins & drive revenue growth

GHCL soda ash capacity is currently operating at around 88% utilization rate, which is the highest ever utilisation achieved by the company. Company is in the process of expanding capacity to 950,000 TPA from 850,000  TPA currently to meet future demand and drive revenue growth.  Moreover, Soda ash prices are expected to remain stable over the next two to three years, helping company to sustain strong margins from Soda ash business.

GHCL plans to increase its soda ash capacity by 1 lakh TPA through a brownfield expansion with investment of Rs. 375 crores that is likely to be completed by March 2017. Considering the fact that brownfield plant will incur much lesser cost compared to Greenfield plant, new plant will help company to improve its EBITDA margins significantly. Hence, the expansion in soda ash segment will further boost the company’s profitability and return ratios​.

ii) Textile business to benefit from increasing exports and capacity utilization

GHCL entry into textile segment was late compared to other players and hence capacity utilization was low for the company initially. Company supplies its fabrics to private label brands in export markets. In this segment, GHCL competes with established players like Welspun and Indo Count. Being the late entrant, GHCL’s margins are also one of the lowest in the industry, mainly due to low utilization rates. However in FY16, the home textile segment’s revenues increased by 16% YoY, mainly led by higher utilization rate, increase in exports and improvement in customer mix. GHCL is expected to benefit from increase in export opportunities from the US and European countries.

Company’s operating margins in the textiles segment have been subdued compared to its peers which is expected to improve going forward. The company is constantly investing in improving and modernising this segment in order to improve margins. In FY16, the company invested Rs 81 crores in increasing windmill capacity and Rs 71 crores in its home textiles division, including investments in in-house stitching capacity with estimated cost of approx. Rs 25 crores, which got commissioned in quarter ending March, 2016. The company will further spend Rs. 50 crores in FY17 on modernising its textiles plant.

3. Financial Performance:

GHCL standalone net profit rises 54.49% in the March 2016 quarter

Net profit of GHCL rose 54.49% to Rs 78.96 crore in the quarter ended March 2016 as against Rs 51.11 crore during the previous quarter ended March 2015. Sales rose 1.48% to Rs 647.42 crore in the quarter ended March 2016 as against Rs 637.95 crore during the previous quarter ended March 2015.

For the full year,net profit rose 39.86% to Rs 257.78 crore in the year ended March 2016 as against Rs 184.31 crore during the previous year ended March 2015. Sales rose 7.71% to Rs 2545.84 crore in the year ended March 2016 as against Rs 2363.64 crore during the previous year ended March 2015.

GHCL standalone net profit rises 58.33% in the December 2015 quarter

Net profit of GHCL rose 58.33% to Rs 66.31 crore in the quarter ended December 2015 as against Rs 41.88 crore during the previous quarter ended December 2014. Sales rose 14.09% to Rs 661.72 crore in the quarter ended December 2015 as against Rs 580.02 crore during the previous quarter ended December 2014.

4. Investment Rationale: (as on 26th Jun’16)

i) Soda ash is the basic raw material used to manufacture soaps and detergents, glass and other sodium salts. GHCL is the preferred supplier for companies like HUL, P & G, HNG, Ghari, Videocon Industries, L&T, Phillips, Haldyn Glass, Piramal Glass Limited, St Gobain Glass to meet their requirement. Demand for soda ash is likely to grow at a steady pace of 5% CAGR over the next few years and GHCL is one of the largest manufacturers of Soda Ash, with an installed production capacity of 850,000 TPA. The company has market share of of 27% in term of domestic soda ash capacity compared to 34% of Nirma Ltd and 32% of Tata Chemicals Ltd, these two companies are closest competitors of GHCL.

ii) GHCL enjoys higher operating margins compared to other players as it owns 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. Availabilty of mines and manaufacturing unit in same location at Sutrpada in Gujarat also help company to save logistic cost. Therefore company is having high margins in this business against other players.

iii) GHCL has brown-field capex plan to increase its soda ash capacity by 1 lakh mtpa to 9.5 lac mtpa by FY17E with investment of Rs 375 cr. This brownfield plant expansion will incur 25% less capital cost against greenfield plant which will further boost company’s profitability and return ratios. The company has planned a further expansion of 1.5 lac MT in Phase II with an estimated cost of Rs. 575 crores, which is likely to be completed by FY19E. All these will result in expansion of margins and better return ratios going forward.

iv) In textiles business, the company’s margin are low around 11% compared to 25% margins of its peers. This is mainly due to the higher power cost, lower outsourcing and lower capacity utilization compared to peers. However, GHCL has improved its capacity ulilization by offer value added products and acquiring quality customer’s over last couple of years which is expected to augur well for the company going forward.

v) GHCL derives ~10% of its textiles business revenue from domestic market and largely depends on export markets. Now, company is planning to expand its domestic reach by brand and network building and company is planning to spend about Rs 150 crores over the next two years towards expansion of its textile business which will add the capacity in home textiles segment.

vi) In exports, company will continue to focus in US market, also target to expand in other geographies like Australia and Europe. Company plans to realign customer mix and introduce value added products. The company currently supplies to marquee customers which includes Bed Bath and Beyond, Walmart Canada, Sears, Tuesday Morning, JCPenney,​Amazon etc and expects to add more esteemed customers from new geographies.

vii) As far as debt is concern, company has managed to significantly reduce its debt in past with strong cash flows from both the divisions. As of March 31st 2016, company’s debt to equity ratio is decreased to 0.7x from 3x in FY12. Debt in control with ongoing expansion with help the company to boost its operating margin and improve return ratios in coming years.

viii) Dividend payout is low compared to good profits (FY16 payout ratio at 14%). However, we expect company to review its dividend policy and make it more liberal by increasing dividend payout going forward.

ix) The company has delivered profit and sales CAGR of 21.9% and 6.4% respectively over last 3 years. Return on equity (ROE) in last 3 years is at 23.3% which is expected to improve going forward. Promoter’s shareholding in the company as on Mar’16 is 18.47% whereas institutional and non-institutional shareholding in the company is 23.29% and 58.24% respectively.

5. Key Concerns & Risks:

i) GHCL promoters own 18.47% holding in the company and they are not adding further stake aggressively. Lower stake holding and pledging shares in past by promoters could impact investor’s confidence toward the company and its promoters.

ii) China is the largest producer and consumer of soda ash. Due to slowdown in its domestic market, the country is dumping its excess production in the global market. Weak domestic consumption in China may push exports to various nearby countries like Middle East and some other Asian countries which may put pressure on pricing.

iii) Rupee fluctuation against the USD could impact GHCL’s profitability. Company exports its textile to US and Canada, therefore Rupee appreciation against the US dollar would be adverse for the company.

iv) Though the debt equity ratio of the company is below 1, the absolute debt for the company will still be high during next 2 years due to ongoing capex in both businesses.

6. Saral Gyan Recommendation: (as on 26th Jun’16)

As per our estimates, company can deliver PAT of 305 crores for full financial year 2018, annualized EPS of Rs. 30.5 with forward P/E ratio of 5.7X for FY18 which makes it attractively valued compared to other companies operating in chemical as well as textile sector.

Considering significant scope of revenue growth with new capacity additions and steady margins in soda ash business, continuous improvement in margins from textile business over next couple of years and attractive valuations compared to peer companies, Saral Gyan team recommends “Buy” on GHCL Ltd at current market price of Rs. 172.55 for target of 245 over a period of 12 to 24 months.

Buying Strategy:
  • 60% at current market price of 172.55
  • 40% at price range of 145-150 (in case of correction in stock price in near term)
Portfolio Allocation: 3% of your equity portfolio.

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