GRP Limited Research Report

Q3 FY 2022 Review

GRP Limited reported net revenue of ₹9,341.96 lakhs for the quarter ended December 31, 2021, as compared to ₹9,005 lakhs for the quarter ended December 31, 2020. EBIT and Profit After Tax was ₹108.04 lakhs and ₹79 lakhs for the quarter ended, December 31, 2021, as compared to ₹ 2,331.91 lakhs and 164.17 lakhs during the corresponding quarter of the previous year.

Investment Summary

Overview

• One of the top three manufacturers of reclaimed rubber globally and the largest in India.

• 7 manufacturing units with 76,100 tons/year capacity.

• 18% share in Indian Market & 50% India’s Export in reclaimed rubber.

• GRP Limited supplies to 7 out of the top 10 global tyre companies.

• Invested ₹15.25 Crore towards enhancing production capacity in the Engineering Plastic Division and Polymer Composite Division.

Quarterly Summary

Business

• GRP Limited, established by Mr. Rajendra V Gandhi in 1974, manufactures reclaimed rubber (recycled rubber) from end-of-life tyres and tubes. Having commenced operations as a tyre recycling company, GRP has transformed into sustainable materials company over the years. It also separates nylon tyres to produce raw material for sale to the engineering plastic components manufacturers in the automotive and electrical applications. The residue rubber from the above business is further used by other businesses with recycled plastic waste to produce composite material, which replaces wood and concrete.

• The GRP Limitedcompany is a leader in the domestic tyre recycling industry, and amongst the top five manufacturers of the reclaimed rubber.

• GRP has total installed capacity of 76,100 tons per year across all business segment.

• GRP Limited operates in following segments:

  • Reclaim Rubber: This is the core business, as company procures tyres at its End-of-Life (EOL), to produce reclaimed rubber (a replacement to Natural & Synthetic Rubber), used predominantly by tyre manufacturers.

  • Engineered Plastics: Another business recovers Polymide waste from tyres and along with other forms of EOL waste to produce Engineering Plastic compounds for sale to the plastic manufacturers in the automotive and electrical applications.

  • Polymers Composites: The residue rubber from the above businesses is used by yet another business to blend with recycled plastic waste to produce composite material which replaces woods & concrete. The applications for these composite boards are mainly in the transportation industry and currently limited to North America only.

  • Tyre Retreading: A commercial Vehicle retreading business in Joint Venture with a global company, Maragoni SpA to help fleet owners’ life of their type by providing additional life.

• GRP Limited Revenue dropped by 20% in FY 2021, compared to previous year. Contribution of revenue in FY 2021 from reclaim rubber business was 93 % and from ‘Others’ was 7% as compared to 95% and 5% in previous year.

• Due to Coivd-19 and increase in raw material prices, GRP Limited revenue and profit margin was impacted in FY 2021

Revenue Trend

Topline and Bottomline trend (Lakhs)

EBITDA Margin Trend (%)

ROE, ROCE, and Asset Turnover trend (%)

Shareholding Pattern (%)

Top Shareholders

Ratio Analysis

Financial Overview

Profit and Loss Statement (₹ Lakhs)

Cash Flow Statement (Lakhs)

Balance Sheet (Lakhs)

Industry Overview

• The global reclaimed rubber market size has been estimated at $ 2,931.5 million in 2021 and is projected to register a CAGR of 9.6%.

• Reclaimed rubber products are in high demand in major end use industries, such as automotive, consumer goods, aerospace, footwear and others. Due to a shift in the trend towards eco-friendly and recyclable materials, the growth of these industries in emerging countries has provided a major stimulus to market growth in the Asia Pacific countries. In developed countries, the ban of landfills in the EU, as well as other favorable regulatory frameworks provided by government to encourage and support recycling has increased the product demand.

• India is the world’s third largest producer and fourth largest consumer of natural rubber. Within the country, the automobile industry is the largest consumer; India produces 6.5 lakh tyres every day.

• Of the 1.5 billion plus waste tyres that are generated every year worldwide, 6% are in India. In addition, India also imports around three lakh tons of tyres to recycle every year. They are subject to thermochemical treatments in high temperature to produce industrial oil and other derivatives.

• The Union environment ministry’s new draft notification, published on December 31,2021, proposes to regulate the disposal of such waste tyres by enforcing the ‘Enhanced Producer Responsibility’(EPR). According to new draft notification, by 2024-25, all manufacturers and importers of new tyres will need to recycle all their products, starting with recycling 35%, and then 75% of their products for the first two years, and achieving 100% by 2024.

• GRP Limited is one the top three manufacturers of reclaimed rubber globally and the largest in India. The company has built healthy relationships with both domestic and many international tyre manufacturers and distributors. Exports mainly to Europe, US, and Latin America, contributed to 66% of total revenue in FY 2021.

• GRP is likely to benefit from the upcoming regulations that will include tyre manufactures in the ERP framework of the government, thereby easing availability of its reclaimed rubber, which will remain key monitorable.

Recommendation Rationale

• GRP Limited revenue has grown by 45% to ₹27,719 lakhs in first nine months of FY 2022, compared to previous year, backed by recovery in demand and volumes in both domestic and export market.

• Revenue is likely to reach pre-pandemic levels in FY 2022, with the steady recovery in reclaimed rubber segment along with rising demand for non-reclaimed products, especially engineering plastic.

• Allied businesses such as Engineering Plastics (EC), Polymer Composites (PC) and Customer Dies Form (CDF), have contributed to 9.5% of total revenue in the first nine months of FY 2022. Ramp up in PC and EC capacity, on the back of healthy demand and the recent capital expenditure (capex) should support further diversification in the revenue profile.

• Export presence in more than 60 countries across 300 plus customers.

• Raw material cost accounts for half of the operating income. End-of-Life rubber tyre, the key raw material, is procured from an extensive chain of suppliers. Fluctuations in raw material prices could impact the operating margin, as witnessed in the past.

• GRP is highly dependent on performance of the tyre industry, which contribute around 60% of its revenue. While company has diversified presence into multiple segments such as EP, PC and CDF, extent of revenue contribution from these segments remains a critical aspect.

Valuation

• Out of the last 4 financial years, company had reported negative revenue growth rate in 3 financial year (FY 2018, 2020 and 2021).

• EBITDA margin has been ranging between 6% to 7% over the last 4 years.

• Revenue and net profit of FY 2022 was impacted due to Covid-19 lockdowns and low demand for the products.

• Company earns around 90 % of its total revenue from reclaimed rubber segment.

• Performance of reclaimed rubber segment is indirectly dependent on Automobile Sector.

• In last financial year, performance of Automobile Sector was weak due the shortage of semiconductor. Thus, it impacted performance of the company.

• Even in current financial year, due to shortage of semiconductor and rise in price of raw material, automobile sector is impacted. As things are getting normal, there could be improvement in performance of the sector from the next financial year.

• Based on current performance of company in first nine months, we expect, company could post higher revenue for the current financial (2022), corresponding to previous year.

• With the improvement in Performance of automobile sector, Expansion plan, Diversification in revenue profile, ERP policy by Government, Adoption of upgrade technology: All this could help company to grow and improve its financial performance.

• We have taken data of last 5 years (2017-2021), forecasted revenue for FY 2022-2026. Revenue growth is assumed to be 10%.

Estimated Income Statement (₹ in Lakhs):

• We initiate coverage on GRP limited with a “BUY” and a 9 months Target Price of ₹ 2487.

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