Last few days have been one of the most interesting and learning days for me. I travelled with a group of fellow investors and friends to Gujarat on company visit of few of the companies of our interest. We had some fantastic discussions day and night, and were able to do some very exciting ground work on the companies we visited. Here is a quick summary:
GRP Ltd. (formerly Gujarat Reclaim & Rubber Products Ltd): Company held its AGM at Ankleshwar, Gujarat. The plant was quite green and well kept. As we entered, we were provided a safety manual. Management explained that GRP has been taking social economic initiatives and has been recently certified by Japan for a fire safety practice. They are the second company in Gujarat to get this certification. We also met another investor form Mumbai who too had been tracking the company over the years and provided valuable insights.
GRP is the pioneer and third largest company in the world in the rubber reclaiming business. The company supplies to 6 out of top 10 tyres companies in the world and to 4 out of top 10 non-tyre rubber companies in the world. The company is a preferred supplier.
We discussed about the global markets size and Indian market size. GRP now has an approx. 9-10% global market share (excluding China). In terms of competitive advantage, GRP has been doing in-house designing of plant and machinery and hence they have lowest cost of setup plus the sourcing network and client relationships is a critical long term advantage.
Over last 2-3 years, the company has done a major geographical expansion by putting up greenfield plants at Solahpur & Tamil Nadu(the hub of auto manufacturers). With these expansions, the company has almost doubled its capacity and also become closer to the raw material source and diversified. The demand is still good and the company is confident of being able to utilize full capacities in about 2 years and thereby they should be able to maintain 25%+ growth rates. In near term the margins are under-pressure but the longer term sustainable margins should be above 18% on operating basis.
The company has been developing a new line of business – thermoplastics and though its at an early stage but it has a big potential. They have been investing and researching on it for last 4-5 years and seem to be getting traction now.
The company has revamped its website and is quite informative now. Overall, the past track record of this company is fantastic (10 Yr CAGR growth rates – sales growth of 28%, NP growth of 35%, 10 Yr aveg ROE is 35% and average dividend payout for last 5 years is 18%) and so is the quality of management.
At CMP of about 1525, we feel GRP provides a good long term steady compounding opportunity.
Atul Auto: The moment one enters Gujarat, one can’t miss noticing this brand if one is interested in the 3 wheeler space. The company has a major lead in the cargo vehicle segment and I guess almost 60-70% of the autos in this segment would be of Atul Auto! One can easily observe 2-3 Atul Auto’s plying on the road every 5-10 minutes in Gujarat.
The company has grown rapidly over the last 3 years at 36% CAGR, and the reason behind this growth was the introduction of rear engine vehicle, Atul Gem in 2009, to service new states apart from Gujarat and Rajasthan (earlier the company was limited to these two states which used front engine autos). The new vehicle, Atul Gem, has been a good success and the feedback to the company from users has been positive.
As per the inputs, the company’s vehicle is a bit expensive (a couple of thousand rupees) than the similar models in the market but it scores better in terms of mileage, lower spare parts cost, better service, higher warranty etc. With the good response the company is appointing dealers in new states and trying to expand the coverage. The opportunity is there as they have penetrated just 6-7 states till now, and need to replicate their business model in other states. Company has about 150 active dealers and targets to expand the number at the rate of 20-25% p.a.
The company is also in the process of doubling the capacity, which should happen in the next 2-3
months. As told, the CAPEX is small as they only need to put up a new paint shop and do some de-bottlenecking. Despite this they can increase the number of shifts to cater to demand. They have sufficient land at existing plant to expand operations as needed.
As of now the growth has slowed down to 20-25% against 30-35% earlier due to the slowing economy and poor monsoons.
There is a big export market also. In India about 35% of the total 3 wheeler production is exported. The company is trying to capture the export market by entering Sri Lanka and Bangladesh. Sri Lanka is a bigger market and if successful, it opens potential to other countries also.
The best thing about the company is its strong balance sheet. Company is debt free, has a very little working capital requirement and generates strong cash flows. The company has been investor friendly, announcing bonus and maintaining liberal dividend pay-outs. The company is available at just 6 times the earnings.
We did some ground work for Astral Polytechnik too and received a fantastic response. The dealers are enthusiastic about the quality and the plumbers love the product. In contrast to galvanised-iron (GI) pipes, which involve 2 days work, CPVC pipes accomplish the work in less than a day. Astral looks a good long term investing opportunity.
Among new stock ideas, we are working on Wim Plast, Kaveri Seeds and Sahyadri Industries.
Will love to have your inputs.