Ganesh Benzo Guest post by Varadharajan R. He tweets at @varadhar1
Varadha is a self taught investor who views investing as an intersection of economic incentives, psychological motivations and on the ground triangulation. He focuses on hypothesis that confluences several broad ranging factors and picks stocks that have an asymmetric risk-reward trade-off. He has done several sessions on forensics, triangulation, scuttle butt and writes occasionally. He is an engineering graduate from IIT Madras, and has studied finance at IIM Ahmedabad.
|Current price : 81.10|
|52 Week High / Low : 85/31.50|
|Market Cap : 420.10 Cr|
|FY 2016 EPS : 8.44|
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“Monopoly cloak room business cloaked by dirty oil”
Continuing with the theme of out of favor stocks, I try to look at beaten down stocks that have multiple cushions – yawning gap in perception Vs reality, change in promoter behavior, reversion to mean on multiples, a significant turn in event (CDR/SDR/ bankruptcy) that causes an uptick in earnings and low institutional ownership and sell side coverage. If you buy these at low enough prices, eventually you make good money and if your thesis is wrong, you end up not losing much – say 10-20%. To do this, I apply a principle of triangulation – where I validate three independent data points and see if I can build a very robust, tight thesis. Usually I look for consistency in management actions, financials and independent industry/third party feedback (from someone who is not in the industry).
One of the greatest, idiot-proof businesses in the world are “monopoly toll bridge/cloak room” businesses much like Burlington rail road. These are immune to technology changes, competitive pressures and even to incompetent management to a very large extent. Ironically, a lot of these moats weren’t quite born out of volition – a lot of them were the legacies ironically of the founder’s father/grandfather’s labor of love gone horribly wrong. Case in point being NESCO, whose repeated failures at manufacturing business eventually led to an inexpensive land bank that ironically hosts conferences/exhibitions for its more successful brethren to showcase their wares to customers and visitors from across the world.
I am grateful to a low profile, extremely sharp investor in Chennai under whose wings I have learnt a lot of the tricks of the trade. He had pointed me out to this company called Ganesh Benzo which ironically, surprise, surprise, has very little to do with the business – always a good starting point. A boring, misnomer name hiding a high ROE business is a good way to avoid a crowded trade.
Background Of The Company
Company operates in two divisions : Chemicals and Liquid Storage Terminal (LST)
Liquid Storage Terminal :
Ganesh Benzo has a 2 acre land in JNPT, one of India’s busiest ports and a gateway into western India, given its proximity to Mumbai. It also has LST’s in Cochin and in Goa which allow for storage of petrochemicals/liquids overnight or for short periods of time. It has capacity of almost 3 kl with 260,000 kl in JNPT and space for potentially another 20,000 kl. This means
JNPT : The tanks in JNPT are Ganesh Benzo’s most prized assets. It has about 10 tanks totaling up to about 260,000 kl. From my scuttle butt, about 180,000 kl of this which has been running for a while has a capacity utilization of 90-95% while the rest 60,000 kl which was commissioned in FY ’17 is running about 50-60% utilization. It is expected that this will go up to about 75-80% utilization in FY ’18.
Cochin has a capacity of 30,000 kl and is running at about 60-75 % capacity. Again with growth in consumption of petrochemicals in Kerala, this would grow steadily. While I do not have the exact statistics for this, Cochin’s rentals are less than a third of JNPT’s as the tanks in Cochin are class B and class C tanks (not fit for highly inflammable/corrosive liquids) and Cochin port is not as crowded as JNPT.
Goa has a capacity of 30,000 kl and is running at about 70-75 % capacity. Again, rentals in Goa are lower than in JNPT (about 40-50% of that of JNPT).
While the company does not disclose it, my sense is that JNPT accounts for more than 70% of the revenues and more than 85-90% of the operating profits of the company.
Growth Ahead :
Ganesh Benzo plans to go for an expansion in LPG in Goa. To go for expansion in LPG storage that they are planning to set up in Goa and have already got the requisite environmental/government clearances to do so. The company has also submitted bids for two more LST’s the results of which are, as yet unknown. The rentals for LPG storage (given that it is gas) are 5-7 x that of liquid storage and you also get a lot more ancillary revenues in terms of pumping, piping, cross connections etc. This is the right step for the company and this answers a lot of questions about incremental RoCE which is often the key metric to look at such companies. Given that the company is investing into initiatives that at worst will maintain the RoCE, I believe growth will not be RoCE dilutive. To my mind this is one of the most important questions to answer while investing into a company run by a promoter with a dubious past record – what will the future hold ? If direction-ally the actions point to a consistent and high ROCE, I believe it’s a risk worth exploring further
For the LST business
Chemicals Division is processing a quality range of food preservatives, lubricants and API drugs. Its range encompasses Sodium Benzoate, Benzoic Acid and Benzaldehyde, Food Preservatives, Petroleum Sultanate, Lubricant Additives, Lubricant Components, API/Bulk Drugs etc. These are pure, accurate in composition and safe to use and extensively used in food, automobile and pharmaceutical industries. The Company is the only manufacturer of pure Benzoic Acid & its Derivatives like Sodium Benzoate well known food preservative and Benzoplast a Specialty plasticizer which is a superior plasticizer as compared with other plasticizers.
The company’s products are commodities and the company has little or no pricing power which shows up in its low and fluctuating margins. Suffice to say, that this business has very little equity value.
To its credit, Ganesh Benzo has been reducing the capital employed in this business over the years and as per FY 2017 numbers, the CE in this is less than Rs. 10 lakhs. The business has been making consistent losses over the years.
Latest Company Results
“Who Does Not See That ?”
Till about a decade back, the company was being run by a second generation entrepreneur Ramakant Pilani. The company went into CDR and let’s just say, was not run to the highest standards of ethics and governance. However, things started changing post 2011-12, when Rishi Pilani, who had worked in companies like GE took over. He streamlined finances
Debt is down from Rs. 470 Cr. in 2007 to Rs. 150 Cr. in 2016 with the help of cash generated by Liquid storage business and write offs of debt by the lenders .As of now, the net worth is still negative but this should not present a concern as the companies cash flows are incredibly strong with an OCF or Rs. 42 Cr. In FY ’16 and possibly about Rs. 55-60 Cr. In FY ’18 (without the Goa expansion). For a business that has little or low risk of technological obsolescence and has a fairly enduring moat with high operating leverage, an EV of Rs. About Rs. 650 Cr. (Rs. 400 Cr. M-cap with Rs. 160 Cr. Of debt) for an OCF of Rs. 60 Cr. (before principal and interest repayments) gives away all the growth for free.
Usually such businesses trade at 4-5 % OCF yield. With increased focus and possibility of a de-merger of chemical business, this can potentially double its M-cap.
It’s very important to make sure to have a list of a few dials of Ganesh Benzo which need close monitoring
- “Other expenses” are still very high – I find it intriguing that legal expenses are about Rs. 8 to 10 Cr. On a total turnover of about Rs. 80 Cr. From the LST business. While I understand some of that is because of the overhang of CDR and the usual legal costs associated with it, its’ still very high for a SME. Usually this is a conduit for “leakage”.
- Lack of professionalization at multiple levels – one of the key things I focus on is depth of management talent. This can be found through the number of KMP’s in the annual report who are either a. on the board b. drawing a good salary (preferably upwards of Rs. 30-40 lakhs p.a. which is the minimum that you need to attract someone with 12-20 years of experience in an industry(
- There are stray incidents that show company’s lack of focus on quality which worry me a lot.
Some of these could be black swans.
- There are still complaints about the management’s behaviour in the past including wilful bouncing of cheques and a not so ethical attitude with banks in Ganesh Benzo,
- Contingent liabilities
Given that there is a de-merger possibility, a good chunk of these claims would be palmed off to the chemicals company. I have found that usually in such a de-merger, the promoter uses the less profitable entity to sand bag all the past “baggage” and keep the new entity free of all issues to get a higher valuation. This also potentially represents an opportunity to buy the “stub” post listing as all investors throw it away and focus on the “juicy” one.
Other data points :
Notice something quirky here – this is nothing unsual for companies that are coming out of CDR.
While the smart HNI money is accumulating shares, debt management funds that had got equity in lieu for restructured debt sold down their shares continuously. However, smart HNI money is accumulating these shares. This is always a good sign.
Letter heads have evolved from focus on chemicals to positioning the company as a leader in LST. Its’ a small yet significant Freudian slip that shows that the company is thinking in the right direction.
The company Ganesh Benzo did an interview on CNBC for the first time in its history and talked about its plans to demerge the two businesses. As I was completing this article on August 18th, the company made an announcement that the board has formally approved the de-merger. This, I believe is a good start.
I have used inputs from :
- Annual reports 14,15, 16 and companys’ investor presentations and conference call transcripts of Ganesh Benzo
- Inputs from people in the financial community
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