On 17 March, the share price of GHCL hit a 52-week high (Rs 552) surpassing its previous high of Rs 499.45 on 11 March 2022. In March, GHCL stocks have gained 43 per cent. What is working for the company? Gujarat-based GHCL caters to almost 25 per cent of the country’s annual domestic demand for soda ash. It is a well-diversified group with businesses across chemicals, textiles and consumer products. So, what is working for the company? It appears that a significant part of the movement in stock prices is due to the recent developments around the company's textile business.
It all started on 3 March 2022 after GHCL received 'No adverse observation/ no objection' letters from the BSE and the National Stock Exchange of India for a proposed Scheme of Arrangement. In early December last year, the board of directors of GHCL had approved a scheme of arrangement involving demerger of the spinning business division of GHCL to GHCL Textiles (subject to regulatory approvals). GHCL expects this new scheme to be completed by around September 2022. Then, the company has also recently divested its home textiles business to Indo Count Industries (ICIL) for Rs 596 crore. This sale, the company insiders say, may unlock the value for its stakeholders. The proceeds of the sale will be used to further grow the chemicals business, the core for GHCL.
BW Businessworld caught up with R.S. Jalan, Managing Director of GHCL to understand the situation. How will the demerger help? "The demerger will deliver various operational and strategic benefits to each business segment as separate listed entities. It will lend focused growth, concentrated approach, business synergies and will help increase operational and customer focus. It will also allow us to address independent business opportunities with efficient capital allocation and attract a different set of investors, strategic partners, lenders and other stakeholders," says Jalan, adding that the demerger will result in enhanced value creation for all stakeholders.
What happens post-demerger? "After the demerger, the spinning business will be separately listed and shareholders of demerged companies will get one equity share of the resulting company, i.e. the textile company."
But what was the thought process behind the demerger of the home textile business? According to Jalan, over the last decade, GHCL’s home textiles business had become a prominent market player in the sector. On a strategic note, it was decided that the business would be transferred to ICIL by way of a business transfer agreement dated 06 December 2021. "This decision was made to ensure continuity and further growth of the home textiles business as ICIL are market leaders in this particular product category," informs Jalan. Therefore, it’s clear that the spinning division will remain with GHCL and will be demerged into GHCL Textiles.
"We believe that the divestment of the home textiles business is a significant step towards unlocking value for GHCL and its stakeholders. It will enable us to focus on our strategic growth pillars, i.e., our chemical and spinning businesses," says Jalan. This divestment will enable the company to explore opportunities and undertake initiatives, such as greenfield expansion, enhancing its green energy portfolio, increasing its product baskets, and expanding the capacity of refined bio-carbonate business. It will also allow GHCL to enter into joint venture arrangements and explore opportunities in automation.
The acquisition by ICIL also makes sense. According to analysts, after the acquisition, ICIL’s capacity will stand at 153 million metres. ICIL will increase the acquired cutting and sew capacity to 45 million metres by operating in two shifts as GHCL was operating in a single shift only.
GHCL’s home textile revenue for FY21 stood at Rs 435 crore and for H1FY22 it was Rs 386 crore. "GHCL was operating at 50 per cent capacity utilisation level. The ICIL management stated in December that they would target increasing the capacity utilisation level as demand from ICIL customers continued to remain strong and products from GHCL’s home textile facility will be sold to ICIL customers. The management of ICIL indicated that the acquired capacity has a revenue potential of Rs 1,300-1,500 crore over the next two to three years," says a senior analyst tracking the company.
Growth strategy
How is GHCL planning to further grow its businesses? According to Jalan, the company's future growth strategy is based on various initiatives such as clean energy, long-term sustainability, environment friendly practices, corporate governance and talent management. GHCL is now looking at further enhancing its renewable energy portfolio to fulfil almost 80 per cent of its energy requirements from renewable sources. At the moment, 55 per cent of the energy requirement of the yarn division is being met through renewable energy resources. "We have commissioned a 10 megawatt (MW) solar plant in January 2022 and another 20 MW is in the pipeline which will be completed within three months. This will lead to cost competitiveness and better margins," says Jalan.
The company's spinning division is situated in Madurai, Tamil Nadu. It is equipped with the latest machinery making the company a highly cost-efficient spinning business in South India. It produces 30,000 metric tonnes of a wide variety of yarn annually.
What about the growth prospects of the chemicals business? As mentioned earlier, GHCL manufactures soda ash as well as sodium bicarbonate at its manufacturing facility located at Sutrapada, Gujarat. With an annual production capacity of 1.1 million tonnes GHCL is the second largest manufacturer of soda ash in the country, with a 25 per cent market share.
"Soda ash is used in the manufacture of glass, detergents, etc. Globally, soda ash is the 10th most consumed inorganic compound in the world, which has been used for over 5,000 years. It is a safe, simple compound and a key component in a variety of industrial processes from the manufacture of glass to dry powder detergents and lithium-ion batteries. It is also an important ingredient in the food and pharmaceutical industries." Globally, the soda ash market is growing at a 2 per cent CAGR requiring around 1.2 million metric tons of additional supplies every year.
Taking stock
The last three quarters saw the unfolding of the adverse impact of the pandemic on various segments of the economy. So, how did GHCL perform during the same period? Jalan says that despite the second wave of Covid, the demand for soda ash was strong. "We did face certain supply side disruptions, which could be offset due to better soda ash pricing. In the spinning business, yarn demand remained strong and higher prices were absorbed," he says.
The second quarter saw swift economic recovery across the country due to improved vaccination coverage and a growing sense of normalcy. "With a strong focus now on renewable energy, solar glass emerged as a new segment for soda ash. However, supply chain disruptions and an increase in raw material and energy prices continued to affect the top line," says Jalan, adding, "Our revenue grew at 16 per cent on a sequential basis."
By the third quarter, the aggressive vaccination drive by the government led to a revival of demand and consumption across all sectors. Certain challenges did persist due to an increase in the input cost and supply chain challenges. "Yet, we were able to achieve higher realisations and better margins. In Q3 FY22, we recorded a revenue increase of 25 per cent on a sequential basis, from the earlier quarter in FY22. We expect the positive trend to continue through 2022," says Jalan.