>Grauer and Weil (India) Ltd: Investment Rationale & SWOT Analysis (EAST SECURITIES INDIA LIMITED)

Grauer & Weil (India) Ltd (GWIL), incorporated in 1957, is a market leader in Rs 7000 mn electroplating chemical industry with 38% market share. GWIL is the only company in India and one of few in the world, which offers as wide an array of surface treatment products and solutions under one roof - Chemicals, Equipments, Paints & Lubricants. GWIL had a large tract of 10 acres Surplus land in Mumbai's western suburb Kandivali, which has been developed into a Mall - Growel’s 101, which is a highly valuable asset generating significant cash flows for the company. This will grow significantly over next couple of years as they utilize the balance development potential (only 60% of the development potential utilized till now). Over the years, the company has paid most of the debt that was taken to develop the mall and GWIL is all set to become a debt free company by FY16.

GWIL's sales & profits have grown, 13% CAGR and 17% CAGR during FY10-FY14 despite slowdown in the economy. Low gearing & no major capex required in next 2 to 3 years coupled with the recovering economic condition and good growth in auto and auto ancillary companies (main drivers of chemical business), GWIL is all set to generate healthy free cash flow in next couple of

years. Revenues from real estate business will also see a sharp jump as renewal of ~ 40% of lease, due next year, and is likely to happen at ~75% increment We initiate coverage on Grauer and Weil India Ltd (GWIL) with BUY rating and DCF valuation based price target of Rs 28 (11.2x to FY16 EPS).

Investment Rationale

One-stop-shop for various surface protection solutions with extensive dealer network

• GWIL manufactures more than 600 chemicals which includes pre treatment chemicals, general plating, conversion coating, speciality chemicals and basic chemicals. GWIL offer wide array of chemical products which make them unique in electroplating industry.

• The Company has well organized dealer network and strong distribution system in multiple locations in India which covers the major states such as Maharashtra, Gujarat, Madhya Pradesh, Uttar Pradesh, Haryana, Rajasthan and west Bengal. Together these states contribute 85% of business.

• The wide array of surface treatment products with well organized dealer networks and strong distribution system in multiple locations, GWIL enjoys advantageous geographical and customer mix which reduce the risk of high dependency on limited buyers and improve the pricing power of organization.

• All these help the company not only grow its business but also do the business in a profitable manner.

Very strong revenue visibility

• Stable economic condition and good growth in auto and auto ancillary companies which are the main drivers of chemical business, are expected to boost the segment revenue at a CAGR of 19% over a period of FY14-FY16.

• The order book at the Engineering Division is reasonably encouraging stood at Rs 420 mn, out of which 95% would be executed during this fiscal. Also, the enquiries under discussion hold lot of promises.

• The renewal of old lease agreement would propel rental income from Growel's 101 Mall at a CAGR of 24% over the period FY14-FY16.

• On the consolidated basis, we expect top-line and bottom-line numbers to grow at a CAGR of 15% and 23% respectively, over the same period.

Growel's 101 - high asset valuations with potential to propel the Margins

• Under the real estate segment company owns and manages the 10 acres of land with 0.47 mn Sqft of Mall (Usable area ~ 0.28 mn Sqft) & a development potential to construct additional 0.25 mn usable area. At present the leasable area is 0.25mn Sqft of which 85% is occupied.

• The renewal of its 9 year old lease agreement with Big Bazaar & Cinemax, due next year, should happen at ~75% increment.

• Recovery in economy & consumer sentiment should improve the occupancy ratio which would further improve the margins.

Relocation of paint manufacturing plant would help improve the margins

• The existing paint manufacturing plant is in Mumbai, has heavy octroi duty which increases the cost of materials. Plus, the labor charges at Mumbai plant are also higher which adversely impact the margins.

• Shifting of paint manufacturing plant from Mumbai to J&K would improve the margins on account of absence of octrai duty and low labor charges.

• The company will get some more benefits like tax exemption, low cost of power, free water availability etc in new location.

• All this would help the company increase its profitability in the long run.

New technical collaboration should improve the export further

• The company enjoys several foreign technical collaborations.

• Foreign collaborations not only help the company to gain more technical know-hows but also help increase its footprints in the overseas markets.

• We believe that several strong collaborations would continue to help the company grow its business in domestic as well as overseas markets.

All set to become zero debt company

• GWIL had taken debt to fund their Mall expansion projects few years back which will be fully repaid within next 2-3 years.

• The management has strong focus on repayment of debt which would continue to improve the PAT margin.

• Repayment of debt and strong cash positions in the coming years would lessen the financial risk in the business.

Outlook & Valuation

Recovery in the economy and early good signs from auto industry definitely bode well for GWIL. Its market leadership position in the surface protection business puts the company on the strong footing to capitalize on the improving business scenario. The mall business is doing well and going to be stronger in the future. Hence, we find the company's growth prospect very sound in the coming years.

We initiate coverage on GWIL with BUY rating, having DCF valuation based price target of Rs.28 per share (11.2x to FY16 EPS) over a period of 15 to 18 months, representing the potential upside 101%.

Risk & Concern

• Low cost products from Chinese market are the major concern in chemical business. This may hurt the margin profile of the company.

• Online shopping and heavy discount on products while doing e-shopping may hurt the growth prospect of the mall business.

SWOT Analysis

Strength

• Well diversified in chemical, engineering and real estate segment

• Market leader in Rs 7000 mn electroplating chemical industry with 38% market share

• Manufacturing more than 600 chemicals under one roof

• Well organised dealer networks & strong distribution system in multiple locations across India

• By FY16, net of cash, the company would be almost debt free

• Strong R&D with innovation and addition in product

Weakness

• Small size of mall with single location

• Slow down in economy will adversely impact chemical as well as mall business

Opportunity

• Has potential to construct additional 0.25 mn usable area in Growel’s 101 mall

• New technical collaboration should improve the export further

Threat

• Online shopping and heavy discount on products via e-shopping may change the dynamics of mall business unfavorably.

• Low cost products from Chinese market are the major concern in chemical business.

RISH TRADER