I was researching GHCL Ltd due to its enticingly low PE ratio along with other factors (clean & conservative management, ~26% market share in the soda ash market, increasing OPM, Increasing dividends, increasing EPS, textile segment separated- hence getting rid of diworsification, etc.,).
But right now, the company still looks un-investable due to the following reasons.
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Soda Ash prices have been reduced twice (once in Nov 2022, & then in April 2022) [Everyone in the industry – Listed (Tata Chemicals) or unlisted (Nirma) is reducing the same]. The management is saying that the input prices of raw materials have also been reduced by the same amount – hence this price drop won’t affect the margins. But overall, seems like GHCL is a price taker.
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96% of the company’s revenues are from India. And in India, the demand for soda ash is going to be the same for the next few years (~5% CAGR, mentioned in the earnings call by MD). The electric vehicle application for soda ash is not fully ready and will take time for the tech to be ready as per management themselves.
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A lime kiln broke down resulting in a loss of two months of production from that plant. So, for FY2024, the production volume will be similar to FY2023 (& hence the sales). The utilization currently is also 94%. So no further room for an increase in capacity utilization as well. [Source: Page 4 in the earnings call, Earnings call, GHCL]
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As others have pointed out earlier, GHCL’s MD has been conservative. But read what he said 6 months ago. “a major growth in the soda ash production is not likely to happen in the next two-three years – up to 2025-27.” They are expecting more of a margin expansion. [Source: MD on GHCL]
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I also think the burst of sales from 3052 crores in FY22 to 4545 crores in FY23 has already been factored into the price of the stock which is almost trading at an almost all-time high. At this point, I am not so comfortable buying this stock. I would probably call it a “Slow grower” (Peter Lynch’s sluggards) & definitely not a multi-bagger.
Please let me know what you think of these points. Would be happy to learn.
Disclosure: Only researched. Not invested.
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