16th August, 2010

ANS Research Desk (Research Wing of ANS Pvt Ltd)

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Narmada Gelatines Ltd.

Research By,

Bhaskar Patel

Pranav Mehta

Nifty 5421

Sensex 18070

Script Details

Equity Capital 4.03

Face Value 10

Market Cap 38

Industry Chemicals

52 Weeks High/Low 114/66

6-month avg. volume

(BSE)

(NSE)

2753

Not Listed

Shareholding Pattern As On Jun’10 (%)

Promoters 75

Corporate Bodies &

Institutions

8

Public 17

Overview

Narmada Gelatines

Gelatines Ltd and its manufacturing plant is located at Jabalpur, Madhya Pradesh.

has a

Phosphate

in India and is today a frontrunner in India's Gelatin Industry

sophisticated technology to ensure quality at each stage of its manufacturing

products meet international quality standards

The company has an installed capacity of 2750 mtpa for Gelatine,

10,500 mtpa for Di

The company is

dominant position in the domestic market. industries like

Company has received awards from Capexil for Gelatine Exports in the past.following Certifications:

• • • • • • •

75%

8%17%

PROMOTER CB & INST PUBLIC

Recomm

BSE Code

NSE Code:

Overview

Narmada Gelatines was incorporated during 1961 and was earlier known as Shaw Wallace

Gelatines Ltd and its manufacturing plant is located at Jabalpur, Madhya Pradesh.

a special focus on Gelatin and Gelatin related products

Phosphate & Bone Meal. The company has pioneered the manufactur

in India and is today a frontrunner in India's Gelatin Industry. Narmada has successfully applied

sophisticated technology to ensure quality at each stage of its manufacturing

products meet international quality standards.

The company has an installed capacity of 2750 mtpa for Gelatine,

10,500 mtpa for Di-calcium Phosphate and 2500 mtpa for Bone Meal, on a single shift basis.

The company is having a Government recognized in house R&D facility and it is having a

dominant position in the domestic market. The company supplies its Gelatin products to industries like Pharmaceutical, Edible and Food, Cosmetics, Photographic, Industrial

Company has received awards from Capexil for Gelatine Exports in the past.following Certifications:

ISO 9000:2001 by BVQI

HACCP by DNV

EDQM

HALAL - Jamait - E - ULAMA

KOSHER

Drug License - Govt. of MP GMP -Govt. of MP

Recommendation: Long Term Investment (2-3 Years) Entry Price: Between Rs.

BSE Code: 526739 Bloomberg Code: SWG IN Curr

NSE Code: --- Reuters Code: NARM.BO

was earlier known as Shaw Wallace

Gelatines Ltd and its manufacturing plant is located at Jabalpur, Madhya Pradesh. The company

as well as Ossein, Di-calcium

has pioneered the manufacturing of Ossein and Gelatin

Narmada has successfully applied

sophisticated technology to ensure quality at each stage of its manufacturing process and its

The company has an installed capacity of 2750 mtpa for Gelatine, 4200 mtpa for Ossein,

mtpa for Bone Meal, on a single shift basis.

having a Government recognized in house R&D facility and it is having a

supplies its Gelatin products to , Photographic, Industrial etc.

Company has received awards from Capexil for Gelatine Exports in the past. It possesses

Between Rs.80-90

Current MP: INR 93.15

Gelatine – An Overview

Gelatin is a niche product industry derived from the protein collagen. It is one of the most

versatile biological products with a wide range of physical and chemical properties and is a

natural animal protein composed of various essential amino acids required for human nutrition.

Gelatine is derived from the selective hydrolysis and extraction of protein collagen found mainly

in the connective tissues of animals.

Collagen is the principal organic component of animal bones. In India bovine bones, are the

conventional raw materials used in Gelatine manufacture. The formation of water soluble

Gelatine may be regarded as hydration and hydrolysis of collagen. Gelatine molecules represent

various sized units, each a fragment of the Collagenous chain. Gelatine is not a single chemical

entity. It is a mixture of fractions different principally in molecular sizes. These fractions are

composed entirely of amino acid radicals joined by peptide linkages.

The principal end-users of gelatine are the food, pharmaceutical, photographic industries, with

users in technical applications. The largest market for gelatine is the food and food processing

industry. The consumption of gelatine for this industry (edible gelatine) is estimated to

represent some 61 % of the total market. This market also includes the nutraceutical segment,

which is the market for health supplements, vitamin capsules and tablets. The second largest

market for gelatine is the pharmaceutical industry with an estimated consumption of around 21

% of the total market. The photographic industry is the third largest consumer of gelatine,

absorbing some 13% of the total market in various applications. In addition to the three types

of gelatine produced for the abovementioned industries, technical gelatine is also produced.

This is used in the manufacture of abrasive papers, in sizing paper and textiles, and in the

production of printer's rollers and matches.

Industrial Usages of Gelatines

PHARMACEUTICAL FOOD & EDIBLE ENGG & CHEMICAL PHOTO-FILM

Extensive use in hard

capsules, soft capsules,

microcapsules, tablets and

other coating applications.

Vast use in Food industry

special focus on Gel

related components in

Chocolates, Cake, Jam

Applications for High

Bonding of Silicon

Carbide and Aluminum

Oxide Grains.

Gelatine is more than just

a bonding agent for the

light sensitive silver salts

and together with these, it

forms the photographically

active emulsion.

Constituent in

Manufacturing of Extra

Hard Printer Rollers, Cork

Compositions and Water

Dispersible Pesticides.

Suitable for use in the

manufacture of intravenous

plasma extenders.

Pure and natural food

protein containing most of

the amino acids essential

for human nutrition.

Use of Gelatin in Paint

related products due to

its nature of Water

Resistance.

Flowchart of Gelatin Manufacturing Process

DEGREASING

ACIDULATION

PRETREATMENT

LIMING

DELIMING/WASHI

NG

EXTRTACTION

FILTERATION

ION EXCHANGE

EVAPORATION

STERLIZATION

CHILING

DRYING

QUALITY CHECK

BLENDING

QUALITY CHECK

DISPATCH

MONO CALCIUM

PHOSPHATE

DICALCIUM

PHOSPHATE (DCP)

BY PRODUCT

Temp>50 DEG C

Alkali

CHILLED %5 HCL

5-6 Days ALKALI

LIME

PREODIC LIME CHANGE

PREODIC AIR AGITATION

EXCTRATION AT

55 TO 85 & BOILING

QUALITY VARIES WITH RISE

TWO STAGE

EVAPORATION

STAGE I 3-8% TO 20-22%

STAGE II 20-22% TO 30-40%

3-8% GEL SOLUTION

WATER WASH

ACID SOAK

TEMP MAX 22 Deg C

40-60 DAYS

CONC 4% pH 1.5 For

Min 48 Hrs.

STEAM

PHYSIC

AL

MICRO

BIOLO

GICAL

PHYSIC

AL

MICRO

BIOLO

GICAL

FINANCIAL HIGHLIGHTS

1.

2.

3.

4.

0

20

40

60

80

100

120

NET SALES EXPEND PAT EPS

P & L COMPARISON

2008 2009 2010 2011 (E) 2012 (E)

FINANCIAL HIGHLIGHTS

*

** No equity dilution is done and Number of shares remains

1. Net Sales have shown a CAGR of 14% for last 4 years. However going forward we believe that

the company will be able to achieve a CAGR of 18% since most of

industry which is estimated to grow at 14-15% CAGR for next 5 years.

CAGR since we think that the current low base effect in company’s Net Sales will help it achieve

higher growth.

The expenditures have historically formed an average 88% of the Net Sales.

company was able to reduce it to 84% mainly due to higher turnover.

due to High Raw Materials Costs, Power & Fuel Costs and higher Employee Costs.

The company has been paying higher % of taxes (average 39.94

eaten into bottom line of the company. However going forward we believe that these

average out to nearly 33% (i.e. normal tax rates for corporates).

The company has been paying dividends for past 4 years at an increasing rate

Sources: ACE Equity, Company

PROFIT & LOSS

Particulars Mar 12( E) Mar 11 (E) Mar 10 (U) Mar 09

Net Sales 117.49 99.56 84.38 68.58

Other Income 2.394 2.028 0.77 1.43

Total Exp. 98.69 83.63 71.24 58.15

Op. Profit 21.19 17.95 13.91 11.86

Depreciation 2.82 2.39 1.57 1.48

Interest 0.62 0.52 0.10 0.46

Tax 5.85 4.96 4.06 4.06

PAT 11.89 10.08 8.18 5.86

Adjusted EPS 29.47* 24.98* 20.28 14.52

Div (%) N.A. N.A. 30 25

remains the same.

However going forward we believe that

be able to achieve a CAGR of 18% since most of its Sales (85%) go into Pharma

15% CAGR for next 5 years. We have taken a higher

CAGR since we think that the current low base effect in company’s Net Sales will help it achieve

of the Net Sales. But in last 2 years

company was able to reduce it to 84% mainly due to higher turnover. Most of the expenditure is

Power & Fuel Costs and higher Employee Costs.

9.94%) for last 3 years which has

However going forward we believe that these taxes will

at an increasing rate.

: ACE Equity, Company Annual Reports

PROFIT & LOSS (STANDALONE RESULTS)

(IN CRORES)

Mar 09 (A) Mar 08 (A) Mar 07 (A)

68.58 56.22 52.87

1.43 1.37 1.19

58.15 49.11 48.34

11.86 8.47 5.71

1.48 1.36 1.30

0.46 0.29 0.27

4.06 2.48 1.76

5.86 4.35 2.38

14.52 10.62 5.64

20 15

1.

2.

3.

4.

5.

0

20

40

60

80

100

FUNDS DEBTS BV/SHR CONT. LIA

BALANCE SHEET

2006 2007 2008 2009

*The company has not yet published its balance sheet for FY 2010 so we have taken last year’s Balance

Sheet

The company’s Funds have increased by over 19% in a period of

decreased by 40% in last 4 years. The lower debt has resulted in company improving its bottom

line by a substantial amount.

The company has been investing mainly in Fixed Assets like Plants and Machinery

of Contingent Liabilities for year 2009 is ‘Claims against the company not

The company has not gone for any major equity dilution for last 4 years and has been able to

manage the business via internal accruals only.

The latest Enterprise Value for the company is Rs. 31.62 Crores while latest Market Cap for the

Company is Rs. 38.11 Crores and its Reserves are Rs. 43.28

Enterprise Value is less mainly due to very low debt on the books of the company

Inventories and Sundry Debtors have remained at constant levels for the last 4 years.

Sources: ACE Equity

BALANCE SHEET

Particulars Mar 09 Mar 08 Mar 07

Total Funds 42.50 38.65 36.17

Total Debts 2.47 1.89 0.80

Net Block 20.19 16.50 13.57

Cash & Bank 8.97 8.69 9.39

Net Current Assets 26.92 22.78 24.26

Contingent Liabilities 8.02 0.00 0.00

Adjusted Book Value 100.51 88.96 80.70

*The company has not yet published its balance sheet for FY 2010 so we have taken last year’s Balance

a period of 4 years while its Debts have

debt has resulted in company improving its bottom

in Fixed Assets like Plants and Machinery. A major part

Claims against the company not acknowledged’.

company has not gone for any major equity dilution for last 4 years and has been able to

Crores while latest Market Cap for the

43.28 Crores. It is to be noted that

Enterprise Value is less mainly due to very low debt on the books of the company.

Inventories and Sundry Debtors have remained at constant levels for the last 4 years.

: ACE Equity, Company Annual Reports

(STANDALONE RESULTS)

(IN CRORES)

Mar 06 Mar 05

35.38 35.58

0.53 4.14

14.79 16.96

8.60 0.71

22.74 17.15

8.59 6.31

76.86 76.19

1.

2.

3.

-10

-5

0

5

10

15

Cash Flow

from operations from investing from financing

Cash from operating activities has been positive in 4 out of last 5 years. Moreover the Inventory

levels have also decreased from FY 2006 which shows that the company’s products are being

consumed on a regular basis. Also the interest outgo is nearly zero which has resulted in positive

cash flow from operations.

Cash from Investments consists of purchase of Fixed Assets

machineries.

Cash from financing activities is negative for past 5 years which shows that the company has not

gone for any long term borrowings or equity dilution to raise capital.

has paid regular dividend. This is a good sign and shows the apt money management by the

company.

Sources: ACE Equity, Company

CASH FLOW (STANDALONE RESULTS)

Particulars Mar 09 Mar 08 Mar 07

Cash From Operations 4.55 5.88 2.68

Cash From Investments -2.76 -6.05 -0.73

Cash From Financing -1.51 -0.53 -1.15

Net Cash Inflow/Outflow 0.28 -0.70 0.80

Opening Cash & Cash Equiv. 8.69 9.39 8.60

Closing Cash & Cash Equiv. 8.97 8.69 9.39

in 4 out of last 5 years. Moreover the Inventory

levels have also decreased from FY 2006 which shows that the company’s products are being

consumed on a regular basis. Also the interest outgo is nearly zero which has resulted in positive

consisting mainly of plants and

is negative for past 5 years which shows that the company has not

gone for any long term borrowings or equity dilution to raise capital. At the same time company

This is a good sign and shows the apt money management by the

: ACE Equity, Company Annual Reports

(STANDALONE RESULTS)

(IN CRORES)

Mar 06 Mar 05

-1.03 1.92

13.10 -4.66

-4.18 -2.09

7.89 -4.83

0.71 5.54

8.60 0.71

Cash Flow Ratios

Sources: ACE Equity, Company Annual Reports

1. The Company’s D/E has historically remained at very low levels showing that the company has

an unleveraged position which it can use to its advantage for future expansion.

2. ROCE and ROE of the company have shown continuous improvement from FY 2006 onwards

thereby suggesting good utilization of capital by the management.

3. Cash flow per share and Free Cash flow per share for the company are very good which suggests

that even after capital expenditures company is able to maintain a positive cash inflow.

RATIOS

Particulars Mar 09 Mar 08 Mar 07 Mar 06 Mar05

Cash Flow Per Share 11.27 14.43 6.37 -2.89 4.44

Price to Cash Flow Ratio 2.85 3.47 9.25 -24.36 7.10

Free Cash Flow per share 18.59 -2.84 7.72 13.97 6.72

Price to Free Cash Flow 1.73 -17.64 7.65 5.05 4.68

Sales to cash flow ratios 15.09 9.66 20.56 -43.12 25.76

RATIOS

Particulars Mar 09 Mar 08 Mar 07 Mar 06 Mar05

D/E Ratio 0.06 0.04 0.02 0.07 0.15

Current Ratio 5.30 4.06 5.21 5.02 5.06

Interest Coverage Ratio 22.42 24.86 16.33 3.58 5.48

PBIDTM (%) 16.16 13.55 9.79 7.84 10.06

PATM (%) 7.98 6.95 4.08 1.67 3.67

ROCE (%) 25.55 19.59 13.10 4.29 10.38

ROE (%) 15.33 12.70 7.49 3.01 6.27

Net Sales Growth (%) 21.99 6.34 5.03 9.17 -4.42

EBIT Growth (%) 46.04 61.21 196.52 -60.37 136.95

PAT Growth (%) 34.79 82.59 156 -50.39 350.14

4. PAT Margin has been improving continuously for past 4 years which shows that company

possesses some pricing power over its customers.

5. PAT growth had seen substantial jump in 2007 due to low base effect but now it is slowly

tapering out.

Sources: ACE Equity, Company Annual Reports

Z score

The Z-score formula for predicting bankruptcy was developed in 1968 by Edward I. Altman, a

financial economist and professor at the Leonard N. Stern School of Business at New York University.

The Z-score is a multivariate formula that measures the financial health of a company and predicts

the probability of bankruptcy within two years.

• It divides companies into three zones on basis of Z score

Z > 2.99 -“Safe” Zone

1.8 < Z < 2.99 -“Grey” Zone

Z < 1.80 -“Distress” Zone

• Narmada’s Z-Score, though high, has been decreasing continuously mainly because of

increase in their total liabilities (i.e. from Rs. 53 lakhs in 2006 to Rs. 2.47 Crores in2009) and

also because Total Market Capitalization for Narmada has been decreasing for the same

period suggesting that company is undervalued from a historical perspective.

PARTICULARS 2009 2008 2007 2006

T1 0.64 0.62 0.69 0.68

T2 0.10 0.08 0.04 0.01

T3 0.23 0.18 0.12 0.08

T4 5.24 10.68 29.74 53.65

T5 1.53 1.39 1.43 1.40

Z SCORE 6.35 9.24 20.56 34.68

REMARKS Safe Safe Safe Safe

POSITIVES

Main Customers operating in a growing industry

Nearly 85% of Narmada’s revenues come from supplying to Pharmaceutical Industry which in itself

is expected to grow at nearly 14% CAGR for next 5 years. This gives good revenue visibility for

Narmada if it is able to maintain its market share in the Gelatin Industry.

Debt Free Status

Narmada has very low amounts of debt on its books. Due to lower Interest outgo its Profit Margins

are good and also its Interest Coverage ratio as well as Current ratio has also remained at higher

levels. The unleveraged Balance Sheet will also help the company to go for borrowings in the future

if the need arises.

RISKS

Dependence on a single product

Narmada is mainly focused in producing Gelatine which it supplies to Pharmaceutical

Industries. This exposes the company to a significant risk arising out of single product

dependence. It may happen that some negative development regarding Gelatin’s properties or

some new player entering the same field may result in substantial revenue loss for the

company.

Recommendations

At current price levels of Rs. 95 the company’s stock is trading at a P/E of 4.66. Going

forward we expect the company to achieve an EPS of Rs. 24.98 in FY 10-11 and an EPS of

Rs. 29.47 in FY 11-12 provided that there is no equity dilution. So at Current Market price

of Rs. 95 FORWARD P/E for the company comes out to be 3.83 and 3.22 for FY 11(E) and

FY 12(E). Keep in mind that the stock is not very liquid and is listed only on BSE.

Now taking a conservative P/E of 6 and 6.5 for both 2011 and 2012 and EPS (E) of Rs.

24.98 and Rs. 29.47 we expect the stock to reach a price of nearly Rs. 150 and Rs. 191 in

2011 and 2012 respectively.

Disclaimer: The information being provided to you is compiled from sources we believe to be reliable. ANS Pvt. Ltd cannot and does not take any guarantees about the accuracy, reliability, validity or timeliness of the

information and/or data provided/made available to you in this document. The views are purely indicative. Neither ANSPL nor any of its associates, subsidiaries, affiliates, directors, and/or officials become liable or have

any kind of responsibility for any loss or damage that you may incur from any decisions taken by you based on our recommendations. None of the information contained herein constitutes a solicitation from ANSPL to Buy

and/or Sell securities and/or any Future, Options or Other Financial Contracts. Clients may exercise their own caution and double check or verify the information contained in our recommendations.