VALUE PICK - NARMADA GELATINES LTD.

About The Company & Products

  Narmada Gelatines Ltd. formerly known as Shaw Wallace Gelatines Ltd established in 1961 was taken-over by Late Shri Manu Chhabria and is now owned by Dubai's Jumbo Group under the leadership of his elder-daughter Kiran Chhabria.

 The company is one of the leaders in manufacturing of Gelatin in India, company also manufactures Ossein, Bone Meal Products and Animal Feed Grade - Di Calcium Phosphate. 

Narmada offers various types of gelatin which are used in many industries including some recession proof industries. Pharmaceuticals and Cosmetics: Gelatin is used in hard capsules, soft capsules, micro capsules, tablets and other coating applications. It is also used in suppositories and as a plasma substitute for medicines. Gelatin is also used in cosmetics such as bath oils, skin creams and moisturizing lotions.  Edible & Nutraceuticals: Gelatin is widely used in deserts and confectioneries such as ice-cream, marshmallow, candies, jellies, custard etc. The use of gelatin as an economical natural medicine for bone related diseases such as arthritis is increasing, it is also used in protein shakes and nutritional bars. Industrial: The manufacture of several coated and bonded abrasives including industrial grinding wheels use gelatin specially made suitable for high bonding of silicon carbide and aluminum oxide grains. Other extensive applications include use in manufacture of extra hard printer rollers, cork compositions and water dispersible pesticides. Photography: Gelatin is used in production of photographic film and paper. 

Narmada's plant is located at Jabalpur in Madhya Pradesh and has a capacity of 2,400 tonnes per annum and company certifications include: ISO 9001-2008 by BVQI, ISO 22000-2005 by DNV, EDQM, HALAL, KOSHER.

Company's awards tally: Award for ossein export by Capexil 1975, National award for import substitute by The Govt. of India 1992, Export performance award from Madhya Pradesh Industrial Corporation 1994, Highest gelatin export award by Capexil 1995, National award for outstanding contribution to environment to an employee 1998, Award for Gelatin export by Capexil 2001, Award for Gelatin export by Capexil 2004.

 

The Ace Investor - Value Pick

(BSE:526739) NARMADA GELATINES LTD.

Company listed on BSE, Currently trading under 220 with a P/E of around 8, Market Cap is about 110 crores, Promoter holding is strong at 75%, Company is virtually debt free and has good amount of reserves on its books.

   The company as pointed above supplies to two major recession proof sectors one is Pharmaceuticals and the other is Food Products (Edible) which is a major positive point for the company. We are really bullish on the pharma sector and food sector like everyone else is but there are very limited opportunities to directly play the two sectors therefore the focus is on proxy-plays to these recession proof sectors. 

Narmada's multi-national competitor Nitta Gelatine is exporting 50% of its production and is heavily dependent on exports while Narmada is supplying almost 97% of it to the domestic market which includes many big pharmaceutical companies either directly or indirectly.

   
One of Narmada's clients is a small company called Sunil Healthcare Ltd which is engaged in production of gelatin capsules for reputed brands such as Glaxo, Ranbaxy, Sun Pharma, Wyeth, Intas, Alembic, Cadila, Dabur, Solvay & Panacea Biotech. Sunil depends on Narmada for almost 50% of its total gelatin requirements and in Nov 14 company announced that they are adding more capsule manufacturing machines to increase their production by 30% as they are very bullish on the demand of gelatin capsules in the long-term. Though the positive impact of Sunil Healthcare's expansion plan will be minor on the top line of Narmada but it gives an idea on how industry players are looking at the gelatin capsule prospects.

 

Narmada recently announced Dec-14 quarter results which look really stable and company has maintained healthy OPM, Below is detailed financial performance table for the company over the years.

Particulars	FY05	FY06	FY07	FY08	FY09	FY10	FY11	FY12	FY13	FY14
Sales	46.11	50.33	52.86	56.22	68.34	83.71	90.93	106.47	121.80	130.46
Operating Profit	3.26	2.93	4.78	7.14	10.65	12.56	14.52	15.13	21.70	24.21
OPM	7.07%	5.82%	9.04%	12.70%	15.58%	15.00%	15.97%	14.21%	17.82%	18.56%
Other Income	1.84	1.26	1.13	1.37	1.39	1.40	1.18	2.19	1.92	2.60
EBIDT	5.10	4.19	5.91	8.51	12.04	13.96	15.70	17.32	23.62	26.81
Interest	0.69	0.41	0.27	0.29	0.46	0.10	0.01	0.17	0.10	0.06
Depreciation	1.27	1.58	1.30	1.36	1.48	1.57	1.73	1.74	1.83	1.90
Profit before tax	3.14	2.20	4.34	6.85	10.10	12.28	13.96	15.41	21.69	24.86
Tax	0.73	0.07	1.72	2.48	3.50	4.07	4.60	4.87	6.29	8.59
Net profit	1.87	0.93	2.38	4.34	5.86	8.18	9.47	11.06	15.40	16.26
Adjusted EPS in	3.12	1.55	3.97	7.23	9.77	13.63	15.78	18.43	25.67	27.10
Dividend Payout	Y	Y	Y	Y	Y	Y	Y	Y	Y	Y

 
As it can be seen above company has maintained consistent top line growth and has paid dividends consistently since last 10 years, It has also maintained healthy OPM of over 15% since last 6 years while its expensive competitors Nitta Gelatines,India Gelatines & Sterling are highly unstable financially.

NARMADA GELATINES LTD is extremely undervalued at P/E of under 10, As per my understanding this zero debt company with such a massive promoter stake and low float should trade at significantly higher valuations as it is the only listed gelatine company with stable financial performance.

The risk for the domestic gelatin manufacturers is cheap imports of gelatine and capsules from China but the risk is temporary as China has maintained its "cheap made in china class" by pushing chromium contaminated gelatin made from tannery waste into India. This issue was reported by Indian Drug Manufacturer's Association and by various researchers to DGCI (Drugs Control General of India) during last year but the then govt. failed to take any actions against the imports, I think MODI govt. which has a Pharma Vision to make India one of the best exporting pharma market should be taking action against Chinese imports soon, both to promote domestic production as well as protect the patient population.

Narmada can turn out to be a huge wealth creator for the long-term investors.
 It has started rallying recently as it reported stable earnings and Nitta reported poor set of numbers.

 Value investors should latch on to Narmada Gelatines at current market price of under 220 for a long-term price target of 1000+.

Note: There is a major technical breakout in the stock above level of 250, So there is no problem in entering at higher levels for long-term.