GHCL: Growing bigger

I write about GHCL with complete awareness that the reflexive response of the reader would be to flip the page and move on. Oh wow. Now that you haven't done what I feared, welcome to some of the things I find remarkable about a company dismissed for a market capitalisation of Rs 1,200 crore against estimated cash earnings of Rs 300 crore-plus for 2015-16.

One, the company is among India's three largest soda ash manufacturers, reporting Ebitda (earnings before interest, taxes, depreciation and amortisation) margins in such a predictable range (28 per cent in a bad year, 33 per cent in a good year) that one is tempted to call this business 'annuity'. Besides, one would have assumed the company's claim to cost leadership was a brag, but curiously I find that GHCL reported Ebitda margins higher than Tata Chemicals for 2014-15. So there.

Two, the country's soda ash sector is encircled by a forbidding moat, making it virtually suicidal for anyone who hopes to enter and break even - capital expenditure of Rs 2,500 crore for 500,000 tpa (tonnes per annum capacity). Generating Rs 1,000 crore around an Ebitda margin of even 30 per cent is unlikely to get bankers to say 'you have our fullest support'.

Three, even as one is likely to classify the soda ash business as 'commodity', the product has been most un-commodity-like: Prices have gradually trended higher, which explains why no soda ash manufacturer has gone back to shareholders with 'We regret to report that'

Four, the company diversified into the business of home textiles when it was boring, integrating yarn spinning into the manufacture of home textiles; it modernised and re-invested in the business (three of four units less than a decade old); it transformed a peak loss of Rs 18 crore in the late 90s into a robust bottom line today.

Five, there is evidence of a professional stretch. What was a capacity utilisation of 70 per cent in the textile capacity in 2013-14 is an estimated 85 per cent in 2015-16; clients comprise Target, Bed Bath & Beyond, Revman and Wal-Mart (Mexico). Apparently, the managing director has not been on an armchair issuing orders.

Six, 70 per cent of the yarn manufactured by the company is directed towards merchant sale. Nearly all the yarn manufactured addresses the commodity-end but is likely to graduate to the finer, prospectively strengthening the divisional Ebitda margin by 300 basis points.

Seven, the company is investing Rs 375 crore to enhance soda ash capacity by 100,000 tpa, completely through accruals (three words I would prefer over even Vivaldi's Spring).

Eight, the company intends to draw down its total debt from Rs 1,297 crore (December 31, 2015) to a targeted Rs 1,100 crore, even as its net worth is likely to report its sharpest growth. This could moderate gearing from 1.37 to around 1.0 this time next year.

Nine, this transformation could strengthen funds management, driving down rupee debt costs by a targeted 150 basis points, transforming credit rating (from 'BBB-' to a targeted 'A+') and strengthening interest cover to around 5.0 (assuming earnings do not rise and debt declines).

And, all this despite you-know-who and you-know-what. And, that's the story.

The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed