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:
Product manufacturing process
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
First glance at India Glycols Ltd's financials?
If you look at the company’s financial, there are the first few questions that should come to your mind:
- How has the Gross margin improved from 21% to 29%?
- How has the cash conversion cycle turned negative for FY18?
- Reasons for increasing Free Cash Flow(FCF)
- Reason for improving ratios
India Glycols Ltd: Quarterly Financials
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
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.
The company has 4 subsidiaries and 1 joint venture. All are of very small size and does not materially impact the parent company.