India Glycols ltd

India Gylcols ltd : Demystifying the turnaround

December 26, 20182:52 am

I was looking for companies that have significantly improved their performance in the recent past, that’s when I came across a company by the name “India Glycols Limited”. Let me demystify the factors driving the turnaround.

About the company- "India Glycols ltd"

Setup in 1983, India Glycols Ltd is into the manufacturing of commodity & specialty chemicals,  natural gums, spirits and nutraceuticals. It is the largest manufacturer of Bio-MEG in the World. Bio-MEG is manufactured from natural products rather than via crude oil. To add to that, All of the company’s product are made via the green route i.e. through the use of plant and plant/agri wastes.

The company has 4 plants: 2 in Uttarakhand, 1 in Gorakhpur(Uttar pradesh) and one in Ahmedabad, Gujarat.

A few positives to add for the company would be its focus to gradually move from commodity to specialty products as well as cater more towards export market. As of now, the company is exporting to over 40 countries.

The company in the past also had setup a sugar processing company which they shutdown in 2014 due to nonviable nature of the business and are in the process of liquidating the assets. Waiting for the sugar market to improve.

Let's understand company's product
Key products manufactured by India Glycols:
1. Ethoxylates: 
Primarily used to make Surfactants. Surfactants in most basic terms enable solubility of oil & water which earlier was not soluble. 
Surfactants can be used in detergents, soap, face wash, fabric softeners, lubricants, inks, shaving cream, degreasers, emulsifiers etc.
Company’s Ethoxylates cater towards domestic market.
 
It can also be made through petrochemicals. India Glycols make it via the green route i.e. through the use of plant and plant wastes.
 
2. Bio Ethylene Glycols (MEG):
Used for manufacturing Polyesters (PET) and as Anti-freeze in automobile coolants.  
In India, MEG is mainly imported, India glycols is trying to substitute the import.
Also, given that Bio MEG is environment-friendly, it demands a premium pricing.
While PET industry is growing, anti freeze market is declining.
 
The company makes packaging bottles for Bacardi as well as Coca-cola.
With the encouraging demand for Bio PET bottles, the company is adding more capacities as it is running at full capacities.
Company exports 60% of MEG manufactured whereas 40% serves domestic requirements.
 
MEG can also be made through petrochemicals. India Glycols make it via the green route i.e. through the use of plant and plant wastes.
 
3. Potable liquor: 
Drinkable liquor. The company owns brands such as ‘Soulmate’, V2O, ‘Beachmate’ etc. They are pushing for the growth of this division with the Sales contribution from this segment increasing from 19% in 2014 to 34% in 2018. The company has licenses only in Uttarakhand & Uttar Pradesh. The company is also trying to increase its sales towards CSD (Army canteens). Although the sales growth is impressive but the margins are significantly low. That can be explained by the fact that the sales through the branded division is quite small compared to the Country liquor sales. Hence, lower profit margins.
  
4. Natural Gum and derivatives: 
Natural Gum or Guar gum finds its usage in the fracking process as a thickening agent & mainly used by the US to extract Natural gas and Petroleum. That’s why the price of the Gaur gum and its derivatives vary according to Crude oil prices. 
 
At one point in time when Crude was trading at about $120 in 2012, the prices of Gaur Gum reached an all-time high of ₹80,000 per MTand that’s something unreasonable leading to many factories being set up those days which are shut now. Currently, it’s trading at around ₹8000 -9000 per MT which is almost one-tenth of the all-time high.
Contribution of this segment to sales is not available.
 
5. Nutraceutical:
It’s the latest addition to the business of India Glycols. 
The company is currently focusing on widen reach, grow and increase market share rather than enhancing the margins. It finds usage in making API. Contribution of this segment to the business is quite Small but has a very good margin.
Exports 60% of product manufactured mainly to the European market.
Domestic clients include Ipca lab, Intas pharma etc
India Glycols- Liquor Brands
Product manufacturing process
India Gylcols ltd
India Glycols Ltd- Product manufacturing steps

Since Crude oil is India’s largest import and contributor to Current Account deficit,  Indian govt every now and then start pushing for the use of Ethanol as a blender with Petrol. In order to encourage the production of Ethanol, govt gives quite remunerative price which are good for the producer but not for those using ethanol as a feedstock.

Because of this, the prices of ethanol has gone through the roof. Hence, the company is importing its feedstock (raw materials) i.e. ethanol in the recent few years. The imports of Ethanol & other raw materials(Acetic acid), exposes the company to currency/forex risk.

Since Ethanol can also be made through petrochemicals, both Ethylene Glycol & Ethoxylates can be made from crude oil as well. And hence, higher crude oil prices is good news for the company.

Step by step manufacturing process

India Gylcols ltd
Bio Ethanol maufacturing process
India Gylcols ltd
Ethylene Manufacturing process
India Glycols ltd
Ethylene Oxide manufacturing process
India Glycols ltd
Ethylene Gylcol manufacturing process
India Gylcols ltd
Ethoxylates manufacturing process

First glance at India Glycols Ltd's financials?

India Gylcols ltd

If you look at the company’s financial, there are the first few questions that should come to your mind:

  1. How has the Gross margin improved from 21% to 29%?
  2. How has the cash conversion cycle turned negative for FY18?
  3. Reasons for increasing Free Cash Flow(FCF)
  4. Reason for improving ratios
India Glycols Ltd: Quarterly Financials
India Glycols ltd
India Glycols ltd: Impressive improvement in margins in last 4 Quarters

Company has been steadily improving the margin & profits, thus improving the ratios. 

Being the world’s largest manufacturer of Bio-MEG, and top clients such as Coca-Cola & Bacardi which are now looking for Bio PET bottles gives India Glycols some weight, which also has improved the cash flow.

The same can be said about the improving gross margins- better product mix.

India Glycols Ltd- Volume & Value realization
India Glycols ltd analysis
What's driving the change at India Glycols ltd?

The company uses Green route or Agro route to manufacture all its products. But the same products manufactured by India Glycols Ltd can also be manufactured by Petrochemical route.

Obviously, the prices of the products manufactured by India Glycols compete with the prices of products manufactured via the petrochemical route. 

Well, in case the Crude oil prices are high, the cost for manufacturing these products via petrochemical route would be higher & hence higher price of products whereas the product prices fall if the crude prices move southwards.

So, when the product prices are high i.e. when crude oil prices are moving high, India Glycols would be benefitted as it is getting a higher price for its products but the raw material cost for the company would remain more or less the same fashion. Whereas the crude oil price fall is bad news for the company.

Other factors would be increasing contribution of liquor to sales which has grown from 19%(₹657 cr) to 33.5%(₹1379cr) of sales.  Also, the policy to liberalize Liquor policy by the new UP govt which was earlier given exclusively to the Wave group, has widened the possibilities for the company and that so in the branded liquor. The low margins(below 1% EBITDA level) has seen a significant improvement to reach 3-4% of EBITDA levels but it is still low compared to other players.

Nutraceuticals which is still a small business with revenue of about ₹200cr has EBITDA margins to the tune of 35% level, contributes significantly to Net profits.

One point of growth would end consumer preferring to buy Green products. 

You might be of the impression that low profit margin of 2-4% will have hindrance to growth as the company might have to depend on external capital to grow. But that will only be to some extent as the negative working capital and as negative cash conversion cycle provides a cushion to fund the growth.

Only if things improve further, it can be considered a good bet with the probability to company improving margins in the future.

In terms of valuation the company is available pretty cheap i.e. Market Capitalization to Sales ratio of  just 0.23X and that too trailing 12 months. If we consider the revenue for 2019, the valuation looks further cheap. In terms of  the management, they seems capable with a good shareholding of 61%.

Q3 Fy19 would be an interesting quarter to watch out for, given the steep fall in crude oil prices. If the company is able to maintain or improve its margin, then there is something seriously positive going for the company, else it was just due to higher crude oil prices.

author-avatar

Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

10 Comments

  • Apurva says:

    Hi, Sekhar
    Excellent work, good detailed analysis. Can you help me in following points based on your analysis.

    Any idea about product wise volume growth and realizations during last 4-5 years, barring FY18 the revenue seems stagnated around FY12 level.

    There is definite improvement in margins and working capital but we don’t have more clarity on growth levers for the company and probably which is a reason behind lower valuations. Secondly how will current crude level impacts its business. Based on your calculation if you can help me to understand what will be desirable crude level for its sustainable business, it will be really useful.

    Regards,

    • mm Shekhar says:

      Hi Apurva, there is hardly any data available for the company. Not even a single research report.
      Whatever data I have is through annual reports or my own research.

      I have updated the blog with the volume & value realization for the last 5 years.

      With respect to crude oil & their product prices, I think only industry people can give the exact calculations.
      Low valuation is due to the low margins and commodity nature of the business. Although they are trying to move towards specialty products, it would take some time for that to be really visible.

  • Apurva says:

    Dear Shekhar,
    Appreciate your prompt reply.

    From volume and realization it is clear that their 30% of business (EOD) is stagnant / declining in volume terms while another 30% (Glycol business) is also stagnant barring FY18 where it has experienced exceptional growth 28.5% volume and 16% realization growth. And the business which is driving growth has low margins.

    The quantitative data also leads to a question of exceptional growth in glycol business which is partly answered by rising crude prices.

    Based on your analysis and its historic numbers it is fairly visible that company has done well in rising crude scenario where the margins are above 11-12% and in reverse cycle it came down to below 8-9%. It will be really interesting to see its result in coming quarters as crude has corrected sharply.

    May be crude cycle is also one of the major parameter in its valuation.

    Once again thank you. Keep sharing your detailed analysis.

    Thanks

  • Tino says:

    Excellent analysis.Important raw material is molasses and recent govt policy to mix ethanol with fuel to save sugar industry will affect India glycol.now molasses price will increase and margin pressure will come for glycol products.immediately after policy announcement IGL share price was constantly Declining.So with increase in molasses price and decrease in oil price doesn’t august well for IGL.
    It’s alcohol business won’t be affected much since the company was importing ethanol since past 3 years .Nutracutical business also remains the same which provides highest margin.

  • Tino says:

    As expected PAT reduced to 27 cr.purchase of stocks in trade increased to 67cr compared to last quarter. This may be because of increasing ethanol and molasses price.However alcohol business picked but may be due to elections effect.next quarter PAT may be 13 to 15 cr and will consolidate for upcoming quarters.
    I am gonna sell this in loss .

    • mm Shekhar says:

      Have not looked at the numbers. But things have gone south with the start of the trade war. All over the world index is moved by just 100 stocks, rest everything is falling. Commodity companies are expected to perform well during good times. Don’t know what will be the right decision but if you think that there is a better opportunity, it makes sense to sell at a loss rather than holding a losing stock hoping it to recover.

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