GHCL: Robust Growth leads to 184% increase in Share Prices since last 2 Quarters

Exactly 1 week ago, I received few script suggestions from a friend of mine who is a technical analyst.

All of his suggestions were filtered out by technical indicators but I was quite afraid to put my money by just relying on charts, numbers, graphs, volumes or whatever they use for technical analysis.

His script suggestions are as follows:

  • Adani Port
  • Zee Entertainment
  • Bliss GVS
  • Gujarat Heavy Chemicals Limited
  • Gujarat Alkalies & Chemicals
  • UCFA fuel
  • Sybly industries

Assuming that the Technical Indicators are in the positive mode, I started filtering all these scripts, one by one, on fundamental indicators.

And the stock at the middle of the list caught my eye. Having robust fundamentals with very cheap valuations.

Gujarat Heavy Chemicals Limited (aka GHCL)

Let’s try to give it a shot and let me know what you think about this analysis in the comment section below this post. Criticize OR additional opinions. Please, no favoring.


Operational Cash Profits are extremely high.

Normal PE ratio of the stock is 8 but if we look over the not-so-popular Cash PE then the scenario is totally changing.

It’s Operating Cash Profit in Year-end 2016 was 627 Crores which is exactly 2.43 times higher than Net Profits which stands at 257 Crores.

The drop in Net Profit is due to some non-cash expenses like Depreciation. So the normal PE is around 8 but the not-so-popular Cash PE is 3.6

Might read this article to understand – Why Cash PE retains more weight than Normal PE.


Wonderful Quarter Results.

Despite undercoverage of actual Earnings due to non-cash expenses, company managed to give excellent quarter results.

Q4FY16 – GHCL hits 52-week high on good Q4 results

Q1FY17 – GHCL surges 7.79% after reporting strong Q1 results

Q2FY17 – GHCL’s Q2 net profit up by 79%

If we just consider Cash Earnings then that “79%” might have touched the sky.

Operating Profit Margins are also increased by 4% to 24% in FY16. More likely to increase this year end as the Textile business is taking a drift up. TTM margin is 26%.

Bottom level margins (NPM) is also increased as compared to previous year’s but is lowered due to high Depreciation and Interest burdens eating up the margins. We will come to this “Interest” part later.

Additionally, many analysts are estimating robust earnings in coming future. The whole internet is covered with positives.


3 pillared business.

Company is operating in 3 different sectors under one umbrella:

  • Textile – Production of 100% cotton compact yarn, cotton blend yarn, 100% polyester yarn, viscose blends yarn and other fancy yarn.
  • Consumer GoodsManufacturing of various grades of Edible as well as Industrial grade salt.
  • Chemical – Manufacturing of Soda Ash, plant situated at Sutrapada (Gujarat).

Learn more about sectoral operations on Company’s official website.

40% of revenue is generated through Textile branch and rest from other 2.

Here, I want your concentration on diversification benefits retained by the company.

Suppose Textile Industry tumbled as a whole then still company had 2 other pillars to sustain their business.

Consumer Goods industry is an ever going sector. And chemical industries started taking off some demands in past few years.

GHCL textile sector’s revenues are expected to grow at 25-30% in FY17. Also, Chemical business is also uninterested from Global Competitors, especially China market. This part is explained by MD of GHCL in an excellent manner.

It implies that the operational risk of the company is nearly negligible.


World Largest Soda Ash Maker Chinese plant Shut down.

A world-leading Chinese Soda Ash maker plant is shut down in late Sept’15. It created an excellent opportunity for Indian Ash Makes firms which eventually leads to price hike hence good Profit Margins.

Additionally, Soda Ash is also used for glass for Real Estates, Automobiles, Wine Bottles etc.

The Indian market for soda ash has arguably the greatest potential to expand in the near term with the relatively robust economy, its gap in housing and its rapidly escalating wine and automotive industries – all of which are expected to support rising glass demand.

Here is what proclaimed by Ashish Maheshwari, Director of Blue Ocean:

“Caustic soda is a money spinner because one of the world’s largest caustic soda ash manufacture plant in China has been shut down for almost six months. So, caustic soda prices are at a new high at present. So this company will keep on making good money on it 7.5 lakh thousand ton capacity”. (Read the full article here).


Mudar Patherya collected some good stats in his own Sarcastic language.

You can read the full article at Business Standard Website. Below are the highlights:

  • Company’s margins in such a predictable range (28% in a bad year, 33% in a good year) that one is tempted to call this business ‘annuity’. GHCL reported Ebitda margins higher than Tata Chemicals for 2014-15.
  • The country’s soda ash sector is encircled by a forbidding moat, making it virtually suicidal for anyone who hopes to enter and break even – capital expenditure of Rs 2,500 crore for 500,000 TPA capacity.
  • Soda ash business as ‘commodity’, the product has been most un-commodity-like: Prices have gradually trended higher, which explains why no soda ash manufacturer has gone back to shareholders with ‘We regret to report that’.
  • The company diversified into the business of home textiles when it was boring, integrating yarn spinning into the manufacturer of home textiles; it modernized and re-invested in the business.
  • There is evidence of a professional stretch. What was a capacity utilization of 70% in the textile capacity in 2013-14 is an estimated 85% in 2015-16; clients comprise Target, Bed Bath & Beyond, Revman and Wal-Mart (Mexico).
  • 70 per cent of the yarn manufactured by the company is directed towards merchant sale. Nearly all the yarn manufactured addresses the commodity end but is likely to graduate to the finer, prospectively strengthening the divisional Ebitda margin by 300 basis points.
  • The company is investing Rs 375 crore to enhance soda ash capacity by 100,000 TPA, completely through accruals.
  • The company intends to draw down its total debt from Rs 1,297 crore (December 31, 2015) to a targeted Rs 1,100 crore, even as its net worth is likely to report its sharpest growth. This could moderate gearing from 1.37 to around 1.0 this time next year.
  • This transformation could strengthen funds management, driving down rupee debt costs by a targeted 150 basis points, transforming credit rating (from ‘BBB-‘ to a targeted ‘A+’) and strengthening interest cover to around 5.0 (assuming earnings do not rise and debt declines).

That’s it.


High Debt Element.

A major concern associated with this company is its Debt element in its capital structure.

Its Debt to Equity Ratio stood at 1.27. And as proclaimed earlier, its bottom line margins are eaten up by Interest charges which are around 21% of the Operating Profits.

However, if the future earnings are secure than leveraging the finance is not an issue to some extent. And it’s a sectoral characteristic that almost every company in this chemical sector have D/E more than 1.

Positive thing is that the company had reduced its Debt by 5% in FY15-16 and Equity reserves are increased year by year.

Chances are, it will reduce its debt in future to an excellent extent as more & more Free Cash generation is taking place.


Excellent technical Indicators.

Let’s trust my friend and consider that the Technical parameters are also robust.

These are my opinions on this stock. Let me know what you think.

Disclaimer: I might be biased in my analysis for many reasons. So consult your financial adviser before you took some serious actions.

GHCL stock

  • Sushanth

    Promoter Holding is about 18% any risks there.

  • Meet Sugat

    Where is article link ? Might read this article to understand – Why Cash PE retains more weight than Normal PE

  • Recently, promoters holdings are also increased and however, the company is managed by professionals with very less intervention of promoters. So if they retain more or less, might not be the problem. Consider reading this thread from Valuepickr –

  • Meet Sugat

    What change in textile sector that we expecting growth now ?

  • Harikishan

    Hi Sowmay, The article you have provided is extremely informative. Since the stock has surged extremely from March-2016, I believe there are chances of some corrections to happen for the stock.

    Secondly, in the link you have provided for Cash PE, more about cash EPS is provided. Could you help me in providing the formulae for calculating Cash PE.

    • Peter Lynch once said – “I bought a stock which was turned 5 multibagger in past and later, it again turned 10 times multibagger”

      Harikrishnan, It doesn’t matter whether stock is at low or high or rising or dribbling. What’s ,matter is whether stock delivering good results or not.

      If returns are excellent then market will value it back. It’s that simple, it’s that hard.

      • Harikishan

        Yes Sowmay, you are correct. Since it is PSU, I was skeptical about it. I believe there are chances of dramatic changes happening in PSU’s in short time. But looking at the ratios of GHCL, I feel it is rightly valued. Hope it turns out to be multibagger.

        • Yes! PSU might be a little issue but still, it deserves a PE ratio around 12 to 15.

  • Luke_Skywalker

    But it seems to be trading at life time highs..Is it a good time to enter or better to wait for dips?

    • I’m not recommending to enter now or later, what I’m providing is just pieces of information to you. Your moves recites with you.

      However, it’s doesn’t matter whether you invest at highs or low, what matters is the underlying value of a stock.

  • Harikishan

    Hi Sowmay, when i calculated the cash PE for GHCL, i am getting a different value, could you help me in providing the formulae you used in calculating the cash PE.

    • It’s simple. Just figure out that by how much times Cash profits are higher than Net profits then divide that number with normal PE ratio.

      Formula = Normal PE/(Cash profit / Net profit)

      = 8.5/(627/257) = 3.4 Cash PE.

      Is it clear?

      • Harikishan

        Thanks Sowmay, Understood now 🙂 .
        In the link you provided, couldn’t find much about Cash PE. wanted to know much about cash PE, like its importance and the desired range of Cash PE, a better performing company must have. Any links or info related to Cash PE explicitly would be helpful for detail understanding.

      • Harikishan

        Hi Sowmay,

        Somewhat understood, but couldn’t understand the importance of Cash PE. Could you help me in understanding the concept of Cash PE. A brief would be fine, like what the expected range w.r.t to PE is believed to be good valuation.

        Since, I am new to fundamental analysis. Your help would be appreciated.

        • Cash PE is just the cash adjusted earning. Sometimes earning can be manipulated due to high non-cash expenses like Depreciation. So at this times, earnings are lowered but technically, company got all the money it needed so further operations will intact. That’s why it’s a good company despite of product decline.

          That’s the importance of Cash PE. It also happens in negative way like in the case of Inox Wind.

          • Harikishan


            When I calculated Cash PE for Inox wind, it is 6.34 and PE is 10.98. So it is positive for Inox wind rite ? I guess there would be better growth prospects for Inox wind going ahead. I also read about your link regarding Inox wind.

          • You calculated it wrong. Inox Wind hadn’t received cash from many of its clients. That is why their Trade receivables are so much high and increasing at alarming rate.

            There are many other things which should be considered. Accounting sucks!

  • It’s an cyclic sector. Things are in positive mode for textile. Margins are increasing. Higher demand in Indian market. Textile exports are at its high. Some major players are Raymond, trident, welspun etc.

    Recently, Snapdeal has partnered with India Post to jointly work on bringing thousands of weavers and artisans from Varanasi through its website.

    So overall textile sector is taking a positive upturn. Have a google search for Indian Textile Industry. Or you can also read about this sector here –

    • Meet Sugat

      Hey, it’s cyclic sector, but amount of clothes we wear same or we start buying more than needed ? Or margin increases ?

      • Yes! Margins are increasing and as well as the Global demand of Indian Textile is also increasing. These are both in direct proportion. Demand increases, price increases eventually margins increases. That’s economics.

    • Meet Sugat

      Higher demand we can relate to good economy ? Rural ?

    • Meet Sugat

      I read your link, in that I can see graph going up n up in last 3-4 years, I read somewhere we should invest in cyclical at bottom, then investing now after 3-4 good year will be good ?

  • Kalyan Madicharla

    Hi Sowmay, after reading this post and all the comments, want to know if you invested in this stock already? Or planning to enter?

    • Yes! approx 4% of my PF. Will enter on dips too.

  • Abrar Hazarika

    “The whole internet is covered with positives.”
    This line makes me uncomfortable.

    It seems like the bulls have accumulated this heavily and now injecting ‘good news’ into the market commentary.

  • Can you tell me which link you’re talking about?

    • Meet Sugat

      The one you provide for textile sector

  • AG

    Hello .. good that you do stock analysis. However, just take care of these two points when you are doing it in public domain –

    1. Always first disclose your position in the stock. You have not done this. Only when someone asked in comments section you disclosed.

    2. I am not sure if you are a registered investment advisor or not. If not then just be very particular about your language while analyzing. Write as if you are sharing your views. But don’t recommend if you are not a registered investment advisor. I think you have tried to mention that these are only your opinion on the stock but at places you are in recommendation mode.

    I suggest you to check regulations pertaining to investment advisory. If you are on the right side then no worries. Continue with the good work.

    • Thanks for your advice.

      • Jitu Deepak khatri

        AG , have you ever gone through his all articles? I don’t think so, otherwise you wouldn’t have commented this. Thanks.

        • AG

          Yes, I went thru a couple of his articles. This is not to discourage him. He seems to be an enthusiastic blogger.

          Just that regulatory norms and boundaries exist in financial services domain when one writes in public space. There are many successful bloggers who used to write freely earlier but since the regulations tightened they are cautious as to what they write and speak in public space – just an example, Value Picks.

          I am a professional in this field myself and so thought of bringing this small but important regulatory aspect to his notice because nowhere in his introduction he has indicated if he is a registered investment advisor or not. If he is not then he should clear the necessary exams, get registered and then give opinion as freely as he wants. Its up to him.

          My comments were not about quality of his analysis. He has taken my comments positively and thanked. You please don’t get offended. You may have felt a bit offended as you are possibly a long time follower of his content. I didn’t mean to offend any follower or fan here.

  • Harikishan

    Hi Sowmay,

    Currently GHCL has corrected around 13% like other stocks, but has not bounced back. Do you think it might be just profit booking or any negative news for soda ash market or etc…? As internet was filled with positives on GHCL, it should have bounced back rite ? any informative research sharing from your end would be appreciated 🙂

  • There was no negativity regarding the company position. Profit booking might be the reason. Most of the technical indicator are showing “oversold” state of this stock. Most possibly, it will take a bounce back.

    • Harikishan

      Yeah, might be. Actually the shareholding pattern has many FII’s compared to DII’s, I think it would take some more time to bounce back.