Gujarat Heavy Chemicals is going in for a vertical split to list its textile & retail and soda ash businesses separately.This will unlock significant value for investors over a 12-month period
GUJARAT HEAVY Chemicals (GHCL) is a leading soda ash manufacturer in the country, which aspires to become a global home textiles player, fully integrated from spinning to retail. While its soda ash business continues to grow, the company has made acquisitions in the US and UK in the home textiles space over the past couple of years. Its current market capitalisation (m-cap), though, does not fully reflect its home textiles and retail businesses. However, with the company going in for a vertical split to list its home textiles & retail and soda ash businesses separately, we expect significant value-unlocking for investors over a period of 12 months.
BUSINESS:
The company currently operates a 0.85 million tonnes per annum (mtpa) soda ash facility in India and has acquired a subsidiary in Romania with 0.3 mtpa capacity. The Romanian subsidiary is currently breaking even and is expected to turn profitable, thanks to high soda ash prices. In India, GHCL enjoys a unique advantage of owning captive sources of its vital inputs for soda ash such as salt, limestone, met coke and fuel. The company undertakes captive mining of lignite and has replaced imported met coke with briquette coke developed in-house.
GHCL has set up two spinning mills in Madurai with a capacity of 1.15 lakh spindles to manufacture cotton yarn, which is supported by a weaving, dyeing and printing unit at Vapi, with annual capacity of 36 million metres for home textiles.
In the home textiles arena, GHCL acquired three companies in the US and one in the UK. The UK subsidiary, ‘Rosebys’, is the largest home textiles retail chain with more than 300 stores across the UK. The US acquisitions include Dan River, HW Baker and Best Manufacturing Group, primarily catering to the B2B segment. GHCL is also rolling out a chain of 300 retail stores for home textiles in India, which will be present across exclusive and multi-brand outlets. GHCL also operates windmills, which generate carbon credits for the company. It has even set up business process outsourcing (BPO) units in India and the US.
GROWTH DRIVERS:
The uptrend in soda ash prices continues, thanks to strong demand. Soda ash prices are currently ruling around Rs 13,300 per tonne, which is nearly 20% higher than the average price for FY08. Similarly, the volume benefit from expanded capacities will accrue over the next few quarters as the company ramps up its capacity utilisation level to 90% by the end of ’08. GHCL also plans to increase its domestic soda ash capacity beyond 1 million tonnes in next 2-3 years.
On the home textiles and retail front, the company is in the process of turning around its acquired companies and streamlining processes. Its subsidiary in the UK, Rosebys, has already achieved break-even and the company is working hard to achieve breakeven at its US subsidiaries.
GHCL is currently in the process of splitting the company vertically to separate the home textiles & retail and soda ash businesses. The home textiles and retail business, which will have a turnover of over Rs 1,000 crore in the first year itself, will be separately listed on stock exchanges. This is expected to unlock significant value for shareholders. In line with other textile players, GHCL’s home textiles division has so far suffered due to the rupee’s appreciation. However, the outlook for the textiles industry is improving, with the rupee having weakened considerably over the past few months. Currently, at Rs 42.7 against the US dollar, the rupee is trading at a 13-month low.
FINANCIALS:
During the year ended March ’08, the company posted a 31% fall in its standalone net profit, mainly due to a dismal performance by its textiles business. A spurt in interest and depreciation costs also hurt GHCL’s profitability as its expansion projects in soda ash and yarn spinning businesses were complete. However, the benefits of these expansions are expected to accrue only in the current year. Over the past 10 years, the company’s sales have recorded a compound annual growth rate (CAGR) of 13.5%, while net profit has grown 7.8%.
VALUATIONS:
The spin-off of textiles and retail business is the most important trigger for the company in the near future. The new company with over 300 retail outlets in the UK, another 300 in India, institutional clients in the US, well-established brands and benefits of vertical integration is likely to command healthy valuations, despite the low profitability currently. We expect that GHCL’s shareholders will be allotted shares in the new company in a certain proportion under the demerger arrangement, which is yet to be finalised.
In the absence of any published data on GHCL’s overseas subsidiaries for FY08, we believe this business will report annual profit of over Rs 40 crore for FY09 and command a price-to-earnings (P/E) multiple of 20, taking the m-cap of the new company to above Rs 800 crore within a year of listing. Considering GHCL’s current m-cap of around Rs 850 crore, this provides a lucrative opportunity for value growth.
GUJARAT HEAVY Chemicals (GHCL) is a leading soda ash manufacturer in the country, which aspires to become a global home textiles player, fully integrated from spinning to retail. While its soda ash business continues to grow, the company has made acquisitions in the US and UK in the home textiles space over the past couple of years. Its current market capitalisation (m-cap), though, does not fully reflect its home textiles and retail businesses. However, with the company going in for a vertical split to list its home textiles & retail and soda ash businesses separately, we expect significant value-unlocking for investors over a period of 12 months.
BUSINESS:
The company currently operates a 0.85 million tonnes per annum (mtpa) soda ash facility in India and has acquired a subsidiary in Romania with 0.3 mtpa capacity. The Romanian subsidiary is currently breaking even and is expected to turn profitable, thanks to high soda ash prices. In India, GHCL enjoys a unique advantage of owning captive sources of its vital inputs for soda ash such as salt, limestone, met coke and fuel. The company undertakes captive mining of lignite and has replaced imported met coke with briquette coke developed in-house.
GHCL has set up two spinning mills in Madurai with a capacity of 1.15 lakh spindles to manufacture cotton yarn, which is supported by a weaving, dyeing and printing unit at Vapi, with annual capacity of 36 million metres for home textiles.
In the home textiles arena, GHCL acquired three companies in the US and one in the UK. The UK subsidiary, ‘Rosebys’, is the largest home textiles retail chain with more than 300 stores across the UK. The US acquisitions include Dan River, HW Baker and Best Manufacturing Group, primarily catering to the B2B segment. GHCL is also rolling out a chain of 300 retail stores for home textiles in India, which will be present across exclusive and multi-brand outlets. GHCL also operates windmills, which generate carbon credits for the company. It has even set up business process outsourcing (BPO) units in India and the US.
GROWTH DRIVERS:
The uptrend in soda ash prices continues, thanks to strong demand. Soda ash prices are currently ruling around Rs 13,300 per tonne, which is nearly 20% higher than the average price for FY08. Similarly, the volume benefit from expanded capacities will accrue over the next few quarters as the company ramps up its capacity utilisation level to 90% by the end of ’08. GHCL also plans to increase its domestic soda ash capacity beyond 1 million tonnes in next 2-3 years.
On the home textiles and retail front, the company is in the process of turning around its acquired companies and streamlining processes. Its subsidiary in the UK, Rosebys, has already achieved break-even and the company is working hard to achieve breakeven at its US subsidiaries.
GHCL is currently in the process of splitting the company vertically to separate the home textiles & retail and soda ash businesses. The home textiles and retail business, which will have a turnover of over Rs 1,000 crore in the first year itself, will be separately listed on stock exchanges. This is expected to unlock significant value for shareholders. In line with other textile players, GHCL’s home textiles division has so far suffered due to the rupee’s appreciation. However, the outlook for the textiles industry is improving, with the rupee having weakened considerably over the past few months. Currently, at Rs 42.7 against the US dollar, the rupee is trading at a 13-month low.
FINANCIALS:
During the year ended March ’08, the company posted a 31% fall in its standalone net profit, mainly due to a dismal performance by its textiles business. A spurt in interest and depreciation costs also hurt GHCL’s profitability as its expansion projects in soda ash and yarn spinning businesses were complete. However, the benefits of these expansions are expected to accrue only in the current year. Over the past 10 years, the company’s sales have recorded a compound annual growth rate (CAGR) of 13.5%, while net profit has grown 7.8%.
VALUATIONS:
The spin-off of textiles and retail business is the most important trigger for the company in the near future. The new company with over 300 retail outlets in the UK, another 300 in India, institutional clients in the US, well-established brands and benefits of vertical integration is likely to command healthy valuations, despite the low profitability currently. We expect that GHCL’s shareholders will be allotted shares in the new company in a certain proportion under the demerger arrangement, which is yet to be finalised.
In the absence of any published data on GHCL’s overseas subsidiaries for FY08, we believe this business will report annual profit of over Rs 40 crore for FY09 and command a price-to-earnings (P/E) multiple of 20, taking the m-cap of the new company to above Rs 800 crore within a year of listing. Considering GHCL’s current m-cap of around Rs 850 crore, this provides a lucrative opportunity for value growth.
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