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.
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 Goods – Manufacturing 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).
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.