Voith Paper Fabrics India Ltd- Slow but Sure

The company’s primary business is supplying the Paper Industry  Paper Machine Clothing or Felt.

Paper Machine Clothing is used to produce all grades of paper from light weight tissue to heavy weight container board. These tailor made engineered fabrics are made up of synthetic.

History:

The company was incorporated in 1968 with major shareholding being with Porritts & SpencerUK which later became a part of Scapa Group of  U.K. In 1999 the majority of shares were acquisitioned by  VF Auslandsbeteiligungen  GmbH, Germany . The company got name of  Voith Paper Fabrics India Ltd. (VPFI) under the Voith Group in 2007.

 

Products:

The business commenced initially with the manufacture of woollen and cotton dryers for pulp, paper and board industry with technological support of Scapa earlier and now with Voith Group, while extending the range of clothing for use on paper machines as the main business, VPFI also started manufacturing textile felts, geo-textiles and filter fabrics.

Keeping the area of core competence in view, VPFI has continued to upgrade its products. Today the focus is on paper machine clothing (PMC), fibre-cement sheet making felts and hi-tech textile processing felts.

With the satisfactory entry into forming fabric business, VPFI is the only Indian manufacturer in a position to supply the entire range of machine clothing to paper manufacturers.

 

Manufacturing:

VPFI. has its registered office and the manufacturing facility on a 30 acre site in  Faridabad,  Haryana near New Delhi.

Number of employees: 124

Promoter holding: 74.04 % (VP Auslandsbeteiligungen GmbH Germany- a step down subsidiary of Voith Gmbh, Germany)

Promoter profile:

Founded in 1867, Voith, Gmbh and its group companies employ more than 40,000 people, generate  €5.6 billion in sales, operates in over 50 countries around the world and is today one of the biggest family-owned companies in Europe.

In 2010-11,Voith Group grew sales by 8% to €5. 594 billion (approx Rs.36,300 cr) & PAT of € 200 million ( approx Rs.1300 cr)

VPFI Financial snapshot:

Equity : Rs.4.39 cr

Debt : Nil

Investments ( Fixed Deposits in banks): Rs.67.13 cr ( approx Rs.153 per share)

Current Share price: Rs.282

Market Cap: Rs.123.7  cr

EV: Rs.56.57 cr

Year ended Sept 30, 2011:

Revenue: Rs.55.86 cr

Other income: Rs.5.64 cr ( income from FD’s)

Total income: Rs.71.50 cr

PBT: Rs.16.6 cr

PAT: Rs.11.5 cr

EPS: Rs.26.26

Dividend per share: Rs.3

1^st quarter ended Dec 31, 2011:

Revenue: Rs.14.67 cr ( 3.5% growth yoy)

Other income: Rs.1.59 cr ( income from FD’s) ( 60%growth yoy)

Total income: Rs.16.26 cr

PBT: Rs.5 cr ( 26% growth yoy)

PAT: Rs.3.45 cr ( 34% growth yoy)

Some key negatives

Contingent liabilities NOT provided for  are at manageable level of Rs.16.5 lakhs

Current capacity utilization is close to 90% and some capex may be required in the not too distant future.

Average ROCE & RONW for the past 4 years have been a not too impressive 14% and 10% respectively mainly due to the huge cash component in the balance sheet which earns sub optimal returns.

Key information points:

The 20 year high & low of the stock price is Rs.350 ( in 2006 ) & Rs.21.90 ( in 2001) respectively.

This company is a virtual monopoly in the paper fabric industry in India

Operating margins have hovered between 28% & 32%  over the past 4 years.

VPF’s Faridabad property is worth about 120 cr at current market rates. Though there is absolutely no possibility of land monetization here, I’m mentioning this purely for information sake only.

Business prospects:

China and India have emerged as the largest drivers of demand growth for the paper industry. Asia accounts for

 about 40% consumption currently.  Estimates suggest that these two countries will contribute  to  59 % of global

 incremental demand from 2009 to 2020.  

India  is  the  fastest growing market for paper across the  globe  and  it presents  an exciting scenario; paper consumption estimated to touch  :

 14  million  tons by 2015/16

 20 million tons by 2020

Industry  view is that growth  in  paper consumption  would  be  in  multiples  of GDP  and  hence  an  increase  in consumption  by  one kg per capita would lead to an increase in  demand  of over  1 million tons.

Since,  a number of European and US paper mills are shutting down owing  to cost  and other factors, an

attractive export opportunity also  exists  for Indian   paper  mills.  This is likely to result  in enhanced demand 

for products of VPFI. 

Since,  Paper Industry in India is primarily dominated by small and  medium size  units; and less than a 

dozen mills account for almost 90%  production of  newsprint  in  the country, there is a growing need  to 

 modernize  the Indian mills, improve productivity and build new capacities, which would in turn result in 

demand for the products of VPFI. 

Further, due to enhanced awareness & consciousness, more and more items are now coming in market in 

 tetra-packs and paper-wraps. This would also give a boost to the packaging industry and is  likely to create

 additional demand in packaging & board paper, indirectly helping VPFI. 

Delisting play? 

Voith Gmbh’s Annual report says “ As a family owned company, Voith has the freedom to focus fully on

 implementing its medium to long term strategy.” 

Currently 11.40 lakh shares of VPFI are held by non promoter shareholders. Hypothetically speaking, lets look at

 various price points scenarios for delisting

Delisting Price	Resultant Outflow	Cash on books	Net cash impact on Voith gmbh
( Rs.)	( Rs.cr)	(Rs.cr)	(Rs.cr) positive / (negative)
280	31.92	67.13	35.21
320	36.48	67.13	30.65
360	41.05	67.13	26.08
400	45.61	67.13	21.52
440	50.17	67.13	16.96
480	54.73	67.13	12.40
520	59.29	67.13	7.84
560	63.85	67.13	3.28
600	68.41	67.13	-1.28
640	72.97	67.13	-5.84
680	77.53	67.13	-10.40
720	82.09	67.13	-14.96
760	86.65	67.13	-19.52
800	91.21	67.13	-24.08

It is clear from the above that, delisting ( if and when it ever happens – remember, we’re talking of a hypothetical

 scenario !) is unlikely to happen at a price less than Rs.600 per share.  

Voith paper fabrics India ltd has been largely a consistent performer and if one relies on past history, the net cash

 position in 2 years should not be less than Rs.72-75 cr ( assuming that the company will spend 12 to 15 cr

 towards capex in the coming 2 years)

All in all, an investment in the stock @ current price of about Rs.282 offers a good proxy to a growing market

 while parking one in the lap of a promoter with excellent pedigree.

Delisting, if it ever happens will be the proverbial cherry on top.

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. 

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. 

.