Wednesday, 29 February 2012

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. 

GRRPL was established in 1978 by Mr. Rajendra Gandhi, a rubber technologist from IIT. GRRPL believes that "trust among all stakeholders" is the cornerstone of their success and sustained growth. GRRPL's growth in last 10 years has been phenomenal. It's top line grew by 25% CAGR and bottom line by CAGR 38% (due to margin improvement). What is remarkable is the consistency in the growth. GRRPL's top line and bottom line has displayed positive growth in all the years except 2009 (where bottom line degrew slightly). However, this growth has been attained through prudent capital allocation policy and deft balance sheet management. GRRPL has maintained its long term debt to equity ratio in very manageable range of 0.2 to 0.4 in most of these years.

As mentioned in some of my earlier posts, I consider ROE/ROCE as critical indicators to judge the quality of business as most of times pricing power and/or superior attributes of business compared to industry peers are reflected in these quantitative ratios. GRRPL comes out with flying colors in this aspect as well. GRRPL improved its ROCE and ROE from 15% in 2001 to excess of 30%. GRRPL has consistently achieved ROCE of more than 30%  and ROE in excess of 25%. This clearly reflects the improvement in quality of business. GRRPL has consistently maintained its net profit margin around 10% signifying its ability to pass on price to its customers.GRRPL has consistently increased dividend to shareholders commensurate with its growth in earnings. GRRPL increased its dividend from 15% to 230% in last 10 years 

In the nine months ended year 2011-2012, GRRPL's revenue has grown by 33% compared to last year while its net profit has grown by 67%. This is partly result of its expanded capacity from 40,000 TPA to 60,000 TPA which has come on stream. GRRPL is further expanding the capacity to 80,000 TPA by end of FY 2012-13. 

However, there are couple of areas of concern in GRRPL that has come to my attention. 

  • GRRPL's 2010-2011 AR states that it has written off loans of 51 lakhs given to it's associate Alphanso net secure pvt. ltd.
  • GRRPL's long term investment in Alphanso net secure equity shares is 20,05,600. According to management, intrinsic value of equity share is 0. However because it is a strategic investment, the dimunition of values is not provided for.
  • Availability of investor information is another negative aspect as there is not enough information made available on its website by the company making it difficult for small investor to get hold of information necessary to make appropriate investment decision.

On the positive aspect, GRRPL has started a company called GRIP Polymers which offers cost effective thermoplastic solution and custom compounds from scrap material. Thermoplastic has wide range of applications and substantially larger market. Moreover, this is relatively unexplored area and if company is able to make progress on product development and leverage its relationship with existing customers, it will open up new vistas of opportunities for the company.

GRRPL is currently trading at trailing 12 month P/E of 7 and P/B value of 2.78. Current market cap of the company is 187 crores. Thus a high growth company   with strong fundamentals and predictable business is available at very decent valuation. In my opinion there is substantial margin of safety (around 50%) even after considering  conservative FCF growth rate of 10%, discount rate of 12% and terminal cash flow growth rate of 3%.

Disclosure: I have position in the company and investors shall do their own due diligence before making investment decision.


  1. Nice presentation Dhwanil

    I have been following many value based investor blog. Many recommend very good business and at same time never say about exit criteria.

    You talk about the MOAT and Risk. But when should one stop holding the company ie to sell it. Yeah i know there are stock forever but should the decision be made.

    Also is it fine to buy the scrip on monthly basis as people like me with fixed salary income cant take a leap in portfolio into a scrip.By this i mean how wide can the purchase be + or - 20 %?

  2. Hi Prabeesh,

    You are so very right! There is so much of material in value investing on what to buy and when to buy however very little is discussed about when to sell. As you rightly suggested, one school of thought is to buy and hold forever. Though it sounds simple and elegant, adopting this approach blindly may expose you to risk unless you have invested in a great business like Titan/Asian Paints/ Exide etc.

    I can conceive three situation in which you shall exit an investment.

    1) When the price does not offer margin of safety: The most important aspect of value investing is margin of safety i.e. discount compared to intrinsic value. Any securities/stock that does not offer margin of safety, one should exit. Now this may happen due to appreciation in price whereby the gap between value and price is bridged or intrinsic value of the company has decreased. In order to arrive at this conclusion, one has to reassess the reasoning for investing in the stock (i.e.drivers for investment) and valuation of intrinsic value periodically may be bi-annually or annually and see if any substantial change has taken place to warrant change in position.

    2)When one come across an opportunity which is far more attractive than current stocks in portfolio: This is a tricky situation and one has to be very cautious in adopting this. However there are certain situations when bargain is so compelling and risk rewards are far superior than some of your existing holdings. However even in this case which stock in your portfolio should firs go out? Instead of picking and choosing, one can take a far more systematic approach as to determine relative attractiveness of each stock within one's portfolio. You can find a very interesting discussion on this at In my experience, such opportunities will not be very many if initial selection of stocks has been done carefully by applying value investing principles diligently. Hence most of the times adding position in existing stocks may turn out to be most rational approach.

    3) when one realizes that he/she has made mistake: Even though this sounds very simple, it is very difficult emotionally to accept and act decisively. I have faced this emotional trauma many a times. However, one must resist clinging onto such mistakes as opportunity cost of such clinging on is very high.

    Again, this is based on my limited understanding and grasp of the investing philosophy and my experience.

    If I understand you correctly, you are suggesting that instead committing large sum of money at once, if one can build position my investing on periodical basis. I think it is doable and sensible. However, it is always prudent to keep sum portion of portfolio as deployable cash (15-20%) to take utmost advantage of excellent opportunity arising (may be once in a decade like 2008 crash. This way you do not miss out on no-brainers.

    I hope this has partly answered your query.

  3. Hi Dhwanil,

    Excellent flow of write-up! I have been tracking this co for several years and I feel that its one of the best stock idea. This year may be great in terms of growth for them.

    Would be great to interact with you and touchbase.

    Thanks & Regards,
    Ayush Mittal

  4. Hi Ayush,

    It is indeed a great pleasure to receive compliments from you. I have been tracking your blogs very closely and have been very impressed with your analysis like that of Indag Rubber. I would be very glad to interact and share ideas for sure.

    Best Regards
    Dhwanil Desai

  5. Hello Dhwanil,

    Nice write up in simple language. I am contemplating a position but have few hesitations, Let me know your views:

    1) In general volume looks very low so it means its difficult to make a large position due to poor liquidity.

    2) Whats the growth triggers for FY13 or FY14. It looks GRP needs to increase the manufacturing capacity continuously to grow the prfit. Is it sustainable for next 10 years, i mean does opportunity looks so big?

    3) If we assume that capacity expansion is moderate then whether GRP has pricing power to grow the profit YoY?

    4) What is the moat? Why cheap chinease competitor threaten it and make the business commoditized and reduce any pricing power? I do not think a great technology is involved which other players cant replicate. It looks though GRP has good collection n/w which could be difficult for other players to match.

    Thanks in advance for your opinion on above.


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  7. hello !

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