Gujarat Reclaim & Rubber Products Ltd- Gold in the garbage !

Established : in 1974

Gujarat Reclaim and Rubber Products Ltd. (GRRP) produces reclaim rubber from scrap of whole tyres, tread peelings, natural rubber tubes, butyl tubes, moulded rubber products for different applications in both, tyre and non tyre rubber products. 

It is the largest manufacturer and exporter of reclaimed rubber in India  and the 3^rd largest in the world. The top 2 are China based companies.

 Promoters  : Mr. Rajendra Gandhi, Managing Director ( IIT, Mumbai)

Plants: Three one each in Ankleshwar, Panoli and Solapur. A fourth plant is coming up at Perunduria near Erode in TN .

Current Capacity is  60000 MT / annum

* GRRP has been a consistent dividend paying company for more than a decade.

* Use of Captive power plant at Ankleshwar for uninterrupted power supply.

Industry details:

	So what exactly is reclaim? There is a thin line of distinction between the terms recycling and reclaiming. The term 'recycling' is a broader one encompassing any form of reuse of waste rubber, prominent among them being grinding of vulcanized rubber waste either by cryogenic or ambient grinding process.  'Reclaiming' is a process of de-polymerization, wherein vulcanized waste rubber is ground, then treated with application of heat, chemicals and is then intensely worked mechanically. By application of heat and chemical agents to the crumb rubber a substantial regeneration of rubber compound to its original plastic state is effected, yielding a product known as reclaim. The reclaim can be processed, compounded, and re-vulcanized. The ‘reclaim’ is a de-vulcanized rubber available in sheet form and is suitable for blending with new rubber upto 40%. Reclaimed rubber is produced from used tyres and waste rubber and is considered to be the third source of rubber after natural and synthetic rubber. Both in the developing and developed countries, recycling is spurred on essentially by ecological consideration; however in the former it plays an important role in the economy as well. Reclaim rubber cannot be compared to virgin rubber, but it still has tremendous opportunities in tyre and non-tyre rubber products. This unique material offers advantages such as price stability, a process aid ensuring shorter mixing times and enabling higher productivity. It acts as an agent for savings in energy and compound cost. Reclaim Rubber has established its worth and versatility by its use in automobile tyres, butyl tubes, cycle tyres & tubes, battery containers, tread rubber, belts & hoses, moulded & extruded products etc. Financials snapshot:
Year		Revenue (Rs. In cr)	PAT(Rs.In cr)	EPS (Rs.)	Dividend (Rs.)	PayoutRatio (%)
2004		36	3.8	29	5	18
2005		46	4.1	31	6.5	21
2006		60	5.8	44	10	23
2007		86	9.86	74	13.5	18
2008		110	9.12	69	13.5	20
2009		133	13.54	102	17.5	17
2010		144	13.81	104	20	19
2011		189	17.62	132	23	17

Key Positives:

Trends:

1)      Reclaim rubber is increasingly being preferred for industrial use to virgin rubber due to direct cost as also energy saving benefits

2)      US & European regulations require tyre companies to start using higher recycled content in manufacture of tyres.

Markets :

1)      GRRP products are approved at 7 of the top 12 tyre companies in the world and 4 of the top 10 non-tyre rubber makers in India.

2)      Reclaim rubber is becoming am inherent component of formulations and hence becoming relatively price inelastic.

3)      Vendor approvals with the top companies is a long process and can take upwards of 24 months. This places GRRP in an unique position to take advantage of the burgeoning worldwide demand

Raw material procurement:

1)      The main constituent of a tyre is rubber and the largest single application of rubber is vehicle tyres. Every new tyre produced is destined to the scrap yard (with or without passing through retreading cycle). As every tyre is destined to go to waste stream for disposal/recycling/reclamation, despite its passage through retreading process, the number of used tyres being discarded is going to increase significantly.

2)      GRRP has about 150 + active suppliers of scrap tyres. Scrap availability is about 4 to 5 times of reclaim production in India

3)      Going ahead no shortage of supply is envisaged as nearly 75% of tyre industry demand is from the replacement market.

Process competencies:

1)      GRRP uses best in class technology for the reclaim process unlike the one used in the unorganized sector. This also lends it a strong advantage in terms of effluent disposal and environment sensitivity challenges.

2)      Process machineries are manufactured in house

3)      Key raw material to end product yield ratio is upwards of 95%.

4)      Incresing radicalization in tyres indirectly benefits GRRP as smaller players do not possess the technology to process  these effectively.

Financials:

1)      Total debt is about 49 cr of which 19 cr is domestic debt and the rest 30 cr foreign funding.

2)      The company follows a ‘No forex hedging’ policy.

3)      Expected exports for the current year are about 150 cr providing a natural hedge against the forex borrowing.

4)      RONW & ROCE for the last 5 years have been around 30% average.

5)      Lowest dividend payout ratio over the last 8 years is about 17%.

Future:

1)      Current year should see volumes of about 60,000 MT.

2)      Next year should see volumes of about 75,000 MT if TN plant becomes operational by March 12.

3)      The first phase of building the facility at Erode in TN will cost $11 million. The new plant built on a 12 acre site will produce butyl reclaim, and have administrative, storage and security facilities.

4)      Demand is strong and the company has already received next year requirement plans from OEM’s.

5)      GRRP is focussing on sales of synthetic rubber reclaims which find more uses compared with the Natural rubber based reclaims. The demand in the near future for these synthetic reclaims would far out match the growth for natural rubber reclaim.

Key challenges:

1)      The reclaim process is not environmentally friendly unless expensive scrubbers and effluent treatment plants are installed.

2)      About 65% of revenues are thru exports and hence forex dnominated and therefore subject to currency fluctuations.

3)      Indian Govt has been mulling with the possibility of withdrawal of DEPB benefits for ecxporters. This, if implemented, can result in a negative  impact of around ½ to 1% on the margins.

4)      Power is a key component of production and large increases in industrial power tariff can have a negative impact on the bottomline.

At the current price of Rs.1220, GRRP at an EV of about 210 cr.The company,though small in size, has an outstanding track record of prudent capital allocation. Management pedigree is excellent and they have rarely put a foot wrong either on the capital allocation or corporate governance front. Their focus is clearly on sustainable growth and their track record provides ample proof of this.

All in all, an excellent stock for patient investors.

At the time of writing this report, the author /his family have an investment interest in the stock mentioned above. Under no circumstance does the information in this report represent a recommendation to buy or sell the above-mentioned stock.  This report has been prepared and issued on the basis of publicly available information, internally developed data & other sources believed to be reliable. This is just a suggestion solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Readers using the information contained herein are solely responsible for their actions and are advised to satisfy themselves before making any investments. 

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