Notes from company visits and AGMs

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.

50 thoughts on “Notes from company visits and AGMs”

    1. The stock has almost doubled in last 6 months. The buy recommendation was given earlier.

      Though the stock is good for long term but investors should try to buy on sharp declines.

  1. Hi Ayush,

    Read Jeremy Grantham’s last newsletter (31st July, 2012) where he has a good write up on why he is investing 30% on farms and “under the soil” stuff. Good insight on how farm produces are going to be big challenge due to various factors. He is looking at 10 to 15 years down the line based on some really good statistics. The reason I am referring to this note is that Kaveri Seeds is involved in Yield Optimization and Soil Enrichment and it is indirect beneficiary in this adversity.

    Let me know if you want me to send you that note separately.



    1. Hi Guru,

      Thanks for directing to the relevant insight. Yes, over a longer term, Kaveri Seeds is operating in a very promising area.


  2. Hi Ayush,

    Thanks for sharing your inputs/views based on your visits. Did GRP management give any feel about traction in thermoplastic business? Meanwhile, I feel Atul Auto remains one the best bets considering very reasonable valuations. Just to give small update/insight on the three wheeler cargo/pessenger market, I recently was in Pune-Mahabaleshwar area and the three wheeler cargo market was dominated by Piaggio and no other competitor was near to them. Force motors seems to have made inroads in passenger three wheeler market. They seemed distant second in cargo space. I think Atul has not yet tapped this market as apparently there is no dealer appointed.

    Best Regards
    Dhwanil Desai

    1. Hi Dhwanil,

      Yeah, GRP management was quite optimistic and bullish about the prospects of the thermoplastics division over a longer term. As its at a very small stage as of now, they said they can’t comment on the turnover, capex possibilities etc etc.

      Yeah, atul auto does has potential but on the cargo market, LCVs are catching up. So the growth should come maily from passenger side. Yes, if they continue to expand their dealer network, they can do very well.

      1. what exactly does this thermoplastic division do? Does it manufacture thermoplastics or recycle thermoplastics? My guess was contrary to the impression i got from their webpage

        1. Hi,

          As of now this segment is at a very very small stage to share concrete details. They are trying to make products by blending reclaimed rubber and plastics and would be probably first to do the same.

          1. Is Astral poly still a buy at current level? Any update on blazemaster approval from BIS n what’s holding it up?any updates on Ashirwad it’s major competitor?

          2. Vivek,

            This stock has been discussed in-depth several times at very low levels like 120, 200 and then again at 275. I hope investors must have accumulated at these levels so why to buy now at 375 levels?

            Blazemaster approvals are expected by year end only.

          3. No I already have this stock but want to load more as the demand remains very high n low marketcap even now of 800 crores n them targeting 2000 cr turnover. Did some scuttlebutt Its way ahead of competition.Blazemaster cud be a big triggera

          4. Yeah, the feedback and long term opportunity is big for them. Buying at CMP would be an individual call.

  3. Hello Pratyush/Ayush,
    Waiting for your research on Wim Plast. Have wimplast at 287/stock. Now its CMP is 350.
    Confused whether 1.To exit or 2.To hold or 3.To accumulate more at CMP.
    Willing to accumulate at CMP & hold the stock for 5years.

  4. Nice Post. A few questions:
    On GRP: The company has become quite leveraged over the last few years. Debt:Equity is now almost 1:1. Any view on when the leverage will start coming down? By the same token they have had -ve FCF over the last few years. Any view when that will turn around?

    On Atul Auto: Who are the biggest competitors of Atul in the 3-wheeler segment and what is the group’s view of how the company will do vis-a-vis the competition? Atul mentioned that they can’t succeed only on price and some of the competitors are bigger and have better technology. However, it is not clear to me who they are and how does the company compare to them?
    Lastly, what are some of the competitive advantages why the company will continue to do well in the future? I will like to get comfortable that I can get invest in it for the next 3-5 yrs and the business will keep growing.

    1. Hi Rajeev,

      Yes, debt equity ratio is high as per standards of GRP but still at comfortable levels. I think the leverage should start coming down from this year as they have done the majority of the expansion they targetted to. Now as the utilization will improve, the ratio should also improve.

      I think it will be very tough to find cos having FCF in growing stage. They do need to invest for future growth. I think a better parameter is Cash Flow from operations if one wants to judge the quality of growth.

      Atul Auto’s biggest competitors are Piaggo, Bajaj, Mahindra. Co is one of the smallest group in the industry and have still done well despite intense competition. So I think they have more focus and provide better quality and hence they are able to grow continuously.

  5. Ayush,

    Astral the capacity utilisation is only 50%. I dont know why they have incurred again capex this year whereas the full capcity is not utilised last year. and financing is done out of debts rather than equity.

    1. The capacity utilization looks low as the co expands during the last qtr every year. They have been intentionally doing this for quite sometime for following benefits – 1. To cater the seasonal high demand at Q4 2. To get tax benefits

      At 6 times EBITDA, the stock is not expensive if one looks at the kind of growth they are doing and slowly they are establishing a brand.

  6. Dear Ayush,
    Thanks a lot for the reply. May I know how you say Astral is not expensive at 6 times . Is there any benchmark? I could not find a similar company to compare. Please revert.

    1. Hi,

      I have been looking at valuations of Astral on PE basis and after removing the forex losses (as I think they are one time). So this co is available at about 12times FY13 expected EPS, which though not cheap but seams reasonable for a company having a business moat and growing at 30%+CAGR.

  7. Hi Ayush , Whats your view on Indian markets which are trading at P/E of 13 – 14 x whereas other BRIC countries are trading at 30 -40 % discount even when India is struggling with inflation, policy logjam, etc.
    Can you give your view on Grauer & Weil listed on bse , it has a huge mall in kandivali so it would be indirect beneficiary of FDI in retail.

    1. Hi,

      We are not much into Macros but yet we think that the Indian markets are trading at say 40-50% premium to other BRIC countries. Please share the data at your end. Second, Indian markets provide a great opportunity in terms of growth for small/mid sized cos which have a niche area and are doing well. So we are concentrating on this area.

      Haven’t tracked Grauer & Weil, but yes, have heard about their mall. If they are transparent and will show up the profits then the stock can do well. So try to check if they are honest and sharing the nos in the listed co. Do share the feedback.

      1. Can you give some tips how to check whether they are honest or not ? as they have already done merger of bombay paints with grauer and promoters stake went up from 50 to 69 % . They have a mall of 750000 sq ft which can be valued around 750 crs and mcap is around 130 crs. I generally see ratios such as P/E and P/B with reasonable promoters running good brands which can survive slowdown.. How to find they are honest or transparent or sharing correct numbers ? Some tips on that please ?

        1. 🙂 Yeah, this is a very subjective term and many often very tough to point out.

          I think the merger done earlier was one negative move from the promoters, in terms of interest of minority shareholders.

          Another way to check could be – check how much of the project is let out by now and what kind of incomes are being booked in the listed co. If its matching then its a good thing.

  8. Hi Ayush,

    Thanks for the mail. I have discontinued using DCF as it is a difficult exercise for us as there are so many unknown things on which i dont have a grip. Over the years, I have developed my own system based on EBITDA ( I chose ebidta for simplicity as again tax,capex will be different for companies. As per the system, i update the value every qtr based on the results. I thought i will give you the values for some of your stocks. I hope it is useful for you.

    Astral June Price 223.65 Fair Price 431 disc 55%
    APCOTEX 151.20 221
    Gujrat gas 309.50 363

    as of now, Swaraj engine and Enginerindia are other stocks available at good discount ( moat). I personally feel this works well from my experience. I picked up Nesco based on this and is doing well now.

    1. Hi Ram,

      This is also interesting but I think one needs to adopt a mix of valuation parameters to arrive at a fair value. Different methods work for different stocks as the quality of earnings and prospects are different for each.


  9. Hi Ayush,

    Whats your view on Mold tek packaging? 20% growth every year since 5 years, hefty divident payouts. Looks like potential multibagger. ARs are also very detailed. Please let me know your thoughts on this.


    1. Hi Ravi,

      It does look interesting esp due to the high dividend pay-out. I do have a few concerns on the competition and growth prospects going forward. Please share if you have some pointers on that.

  10. This will be a tough yr for GRP with Euro slowdown & low natural rubber prices putting a cap on synthetic rubber prices. At 9x+ forward earning GRP is not cheap by any means & there could be better entry points in the future.

    1. Hi,

      Though its a tough environment and hence margins are impacted but the positive thing is that the major CAPEX has been done. With incremental utilization of capacities, they should start coming back on track. I’m expecting second half of this year to be much better for the company.

      1. Yes I guess growth will rebound once things have stabilized in the euro zone. GRP is on my watchlist. Would take a call after I look at next 1-2 quarters. Do you think it has enough room to grow at 20-30% for next 2-3 yrs ? It’s pretty big now (no. 3 in world ?) so will it not be growing at the same rate as the industry ?

        1. Yes, they are very much expected to maintain growth of 20-25% for next 2-3 years. They are also trying to build a new are – thermoplastics and if they are able to scale up, it will be a growth driver going forward.

  11. Ayush,
    See the run in Gujarat Gas and APCOTEX after my post that they are undervalued. The same thing will happen in other stock also.


  12. Dear CA Ayush.Good afternoon, I have registerd in Screener. Unfortunately I am unable to login because of wrong password. Is it possible to retrieve the forgotton apssword? Regards,

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