Gujarat Reclaim & Rubber Products: A Journey from Waste to Wealth

According to Mr.Peter Lynch, a boring business with a boring name is likely to be a great investment! Gujarat Reclaim Rubber Products Limited (GRRPL) is definitely one such prospect available in Indian market. 

GRRPL is engaged in business of recycling tyre and rubber scrap through thermo-chemical process which will convert scrap into reusable rubber for making tyres and other rubber products. GRRPL is one of the pioneers in this field in India and largest player in the country. GRRPL is also the third largest reclaim rubber manufacturers in the world.

Reclaim rubber is fast emerging as third source of rubber material apart from natural and synthetic rubber due to 

• persistent high volatility of natural rubber and crude (raw material for synthetic rubber) 
•  "green" nature of the product(It saves significant amount of natural resources by reusing scrap rubber which otherwise would have gone to the landfills). 
• Significant less price compared to natural rubber/synthetic rubber (almost 1/3rd that of other two rubber sources)

All tyre manufacturers use certain percentage of reclaim rubber in tyre making. Even though reclaim rubber percentage varies from 1%(high performance tyres) to 35%(bicycle tyres), typically tyre will use 5% reclaim rubber. The most interesting part is that reclaim rubber percentage in tyre making has steadily increased from 2% to 5% and is likely to grow to 8-10% in years to come. Reclaim rubber also finds application in making conveyor belts, hoses, automotive profiles, tubes etc.

Reclaim rubber industry, world over, operates in unorganized fashion and hence there are very few large players in the industry. Large players like GRRPL enjoys significant advantage due to consistent and superior product quality and strict adherence to environmental norms (which are flouted by most of smaller players). GRRPL has developed its own equipment and machinery that has ability to process wide variety of scrap material such as natural rubber, synthetic rubber, nitrile rubber and latex. This flexibility gives GRRPL and edge over smaller players who mainly process only natural rubber scrap. GRRPL derives roughly 70% of its revenue from exports and is an approved vendor for 7 out of 10 largest tyre manufacturers in the world and 4 out of 10 non tyre rubber consumers in the world. 

Identifying a Great Business: Typical Characterization

Almost all great investors have made serious money by making investment in great businesses at reasonable price or dirt-cheap price and staying invested in those businesses for long period of time. Warren Buffet has created enormous wealth through his investments in Coca Cola, Gillette and Washington Post  while Peter Lynch made billions by owing Fannie Mae. Rakesh Jhunjhunwala has made tons of money through his investment in Titan. Now the question is how do we identify great businesses? Is there any framework that will help us in identifying great businesses? 

Even though there is no definitive framework or quantitative ratios that separate great businesses from mediocre businesses, I have tried to put together certain characteristics of great businesses. One should look for these traits in a business to understand the quality of business. Even though,   a high quality business may not possess all the traits, it will have many of the characteristics outlined below.

Safety of Capital: Most Understated Yet Most Rewarding Element of Investing

Warren Buffet has attributed his success to two golden rules. 

Rule 1: Never Lose Money 

Rule 2: Never forget Rule 1. 

This is the most simplistic and yet most fundamental idea behind value investing. According to Ben Graham,  "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." This is one of the most succinct and effective definition of investment. Hence the most important task while following value investing approach is to assess the safety of principal. 

How does one go about ensuring safety of capital while making investment decision in stocks? the answer lies in the framework provided by Ben Graham called Margin of Safety. According to Warren Buffet, "Margin of Safety" are the three most important words ever written about investing. The idea behind margin of safety stems from the belief that it is almost impossible to predict future of an enterprise, its profitability and cash flow over long horizon. Hence after all the rigorous analysis of business, financials and management quality, intrinsic value of business is still, an approximation, at best. Moreover even this approximation of inherent value of an enterprise may not materialize due to number of negative unforeseen events and intrinsic value of an enterprise may be lower than the estimated. 

Mr. Graham suggested that to account for "unforeseen negative future events"     one must apply discount to the approximation of intrinsic value derived based on conservative assumptions. Even though he has left the decision for quantum of discount to investors, most successful value investors suggest it to be at least 25%. Hence if one decides that based on very conservative assumptions of growth rates, profit margins and capital investment needs, the intrinsic value of business is 100, one shall buy interest in such enterprise if the market values such enterprise below 75 (25%  discount to conservatively estimated intrinsic value).

Now one may start thinking that since this frame work is based on low risk approach, returns shall commensurately be lower.

My First Tryst With Scuttlebutt: Cera Sanitaryware

After reading the title of my blog, many of you would have been perplexed by this relatively unknown word called "scuttlebutt". What does this word mean and how is it relevant to a value investor? I will first summarize the concept of scuttlebutt and then talk about my findings for Cera while I applied this method. 

Scuttlebutt term was first phrased in investing by legendary investor Mr.Philip Fisher in his seminal book "Common Stocks, Uncommon Profits". Scuttlebutt simply means finding out from the real, "Main Street" sources if the business/firm is good or bad. The central idea here is that, customers,dealers, suppliers, competitors and employees of the firm do possess some very useful and authentic information about the operations of the company and management. This information can help investor gauge certain business traits, company's position in competitive landscape and overall impression of the company with its various stakeholders. He suggested that such information is far more authentic  than the assumptions and inferences drawn by Wall Street analysts who,many a times, have no connections with various stakeholders in business operations.He suggests that "business grapevine" is a very powerful tool for investors if applied intelligently. 

So, After reading about this fairly common-sensical approach, I decided to venture into it and try it for one of my portfolio companies and see how accurately I have been able to judge the position of the company. I picked Cera Sanitary ware for several reasons. First, Cera has a well established dealer networks and retail presence hence I can get the information relatively easily by visiting nearby dealers/retailers. Secondly, it offers products which is used by all my relatives,friends and acquaintances hence seeking and opinion on Cera's products and gauging their preference may be easier. Lastly, Cera has manufacturing set up located near Ahmedabad and hence, if required, I can go and visit the company to get a sense of the operations. Once I zeroed in on the company, I located dealers, retailers of the company. I also found that some of my relatives/friends have bought new sanitary wares and I tried to understand from them the decision making process while they bought sanitary ware. Following are my observations from this   small little investigative journey.