Ganesh Benzoplast Ltd. – A Turnaround Story?

Company Overview

Ganesh Benzoplast Ltd is a 34 year old company, primarily engaged in two lines of businesses.

Liquid Storage Division

The Company is the leading independent Liquid Storage Tank (LST) provider, specialized in the storage and handling of liquid chemicals and petroleum products. Liquid Storage Terminal division provides storage tanks which are leased on rent for storing liquid chemicals, acids, phenol, oil products and edible oils etc. The Company provides complete storage and handling solutions at 3 terminals which are located at leading ports on western seaboard of India – JNPT (Nhava Sheva) near Mumbai, Goa and Cochin. The site require specialized infrastructure at terminals such as specialized berths, firefighting equipment, pipelines, transit storage and handling facilities and above all, safe and environmentally responsible handling practices.

Chemicals Division

Under Chemical Division, the Company is engaged in manufacturing and exporting wide range of food preservatives, lubricant additives, specialty Chemicals. It 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 markets its products through distributors in Africa, North America, North Europe, India, Australia, and the Middle East.

Company History

Origin

GBL was incorporated on 15^th May 1986, at Mumbai, Maharashtra. Over these 34 years since it’s inception, it has had a highly chequered history, especially in the area of financial performance.

At the beginning, the company was engaged in manufacturing of industrial chemicals such as Benzoate Plasticizers, Benzoic Acid and Sodium Benzoate. Its plant was setup at Tarapur, near Mumbai. The initial plant was set up in 1988 with an installed capacity of 3600 tons per annum of Benzoate plasticizers. The 2^nd unit to manufacture 1800 tons per annum of Benzoic acid and 1800 tons per annum of Sodium Benzoate was set up in 1992. Subsequent capacity additions were done in 1994 at 2^nd unit, increasing total plasticizer capacity from 3600 to 7200 tons per annum.  

As a diversification, company entered the Liquid Storage Tank (LST) business in 1994. As the company was involved in chemicals business, it realised that there is a large unmet need for storage of chemicals at the port in Mumbai. So it decided to setup a facility at then newly setup all-weather port at JNPT, Navi Mumbai, with an initial capacity of only 30,000 KL. This was soon expanded to 70,000 KL by 1995.

Diversification in Unrelated Businesses

Over the next 3-4 years, the company entered into two more, totally unrelated lines of businesses, Salt pans and Salt making, and Operations and maintenance of offshore vessels. As it added capacities to its older business and made investments to enter new businesses, the debt kept mounting rapidly.

Thunderbolts from the Blue

Then, years 2001 & 2002 brought with them 2 catastrophic events, which really broke the already over-loaded back of the company. In 2001, Bhuj, in Gujarat was hit by a massive earthquake, which caused an irreparable damage to the Salt pan and salt refining plant, nearly destroying the division completely. Following year, the company had suffered a 2^nd major setback, when ONCG cancelled its contract with the company for O&M of its offshore vessels. While the disruption to salt business was force majeure, an act of nature, the setback due to cancellation of large ONGC contract was due to lack of performance. The company attributed this to deliberate sabotage by competitors, caused by instigation of its employees. Both these events had a massive negative domino effect on the financial performance of the company, and it went from bad to worse, over the next decade. Just to highlight the magnitude of these 2 problems, GBL’s revenue dropped from about 123 Crores in FY2002, to 78 Crores in FY2003. 

Journey to BIFR

As the company’s finances worsened, it was dragged into legal tangle by the lenders. A major lender to the company, IDFC, had a charge on large number of GBL’s assets. It attached whatever remained of its Salt division assets, and threatened to do the same with other assets. With sinking finances, losses accumulating every passing year, by 2005, GBL’s net worth was fully eroded. With mountain of debt, the company applied for financial rescue, and BIFR (erstwhile mechanism, to rescue financially sick companies, with viable businesses) registered its reference in 2005. However, it was just the beginning of an unusually and painfully long haul to recovery. Despite its reference to BIFR in 2005, the BIFR board declared the company sick only in May 2010 and appointed IDFC as operating agency to prepare a revival scheme. The draft revival plan was prepared by 2013, but after further delays in approval from BIFR, company finally approached Delhi High Court, to get the revival scheme approved, which was granted in December 2015. After 10 years of tenuous journey, the company finally embarked on a 7-year long planned path to recovery. 

Industry Overview

Global bulk liquid industry spans across multiple large and important economic sectors such as Energy, Chemicals and Food. The major bulk liquids traded in the industry are Crude oil, LNG, POL products (Petroleum, Oil and Lubricants), Bulk chemicals & Petrochemicals and Vegetable oil. Bulk liquids are key source of raw materials for a number of sectors like automotive, textiles, consumer durables, personal care, energy, food and food processing.

India is world’s 2^nd largest consumer of oil and gas products. With a massive population base and a growing economy, India’s appetite for oil based products has been growing voraciously over last 2 decades, and is expected to continue growing in near future. With limited crude oil production within the country, India is thus a major importer of oil. Almost 82% of the consumption is met by imports of crude oil and products. All the oil cargo traffic moves into the country through ports. Thus, the demand for storage of such products at the ports will continue growing at a good pace.

In the past 5 to 7 years, Indian chemical industry too has grown very rapidly. A lot of the chemical raw materials are imported, mainly from China, and a lot of the final products are exported, across the world. All of this cargo moves through the ports, requiring the storage and logistics infra for movement.

Both bulk and Speciality chemicals industry in India have witnessed a period of rapid growth since year 2013. With growing demand for novel products, more and more type of speciality chemicals are finding newer applications. There is probably not a single product that we use today that does not contain speciality chemicals. From food (additive, preservatives, flavours, colours etc), textiles (dyes, softeners, anti-wrinkle, textures & finishes etc), personal care (soaps, toothpastes, cosmetics, stabilisers, emulsifiers etc), home care (disinfectants, cleaners, detergents, pest control etc), healthcare (drugs, implants, diagnostics, devices etc), Walls, Fittings & furniture (varnishes, coatings, paints, metallic finishes, ceramic glazing, wood finishes etc), there is absolutely no product which is untouched by chemicals. As people demand newer products, with better finish, quality and durability, newer chemicals and their applications will keep emerging, enabling the chemical industry to keep growing at a good pace.

In past 2 decades, most of the manufacturing in chemicals industry has shifted from USA and Europe to Asia. This was due to couple of reasons. First, rising environmental concerns brought about strict legislations in these countries, making compliance very difficult and expensive for them. Second, costs were cheaper in Asia, so it was both efficient and economical to let the Asian countries and just purchase from them. Encouraged by this, several countries in Asia developed their local chemical industries. China of course raced ahead of others to become the global leader in chemical manufacturing, while India was much slower. Yet, India globally ranks 6^th in terms of chemical production by value, churning out 3.4% of global chemical production by value. In absolute value terms, India’s chemical industry is worth $180 billion, delivering a CAGR growth of 4.8% over 2014 to 2018. The CAGR is projected to kick up to 7.5% between years 2019 to 2023.

Business Overview

LST Division

GBL is the leading independent Liquid Storage Tank (LST) provider, specialized in the storage and handling of liquid chemicals and oil products. It has storage terminals at Jawaharlal Nehru Port Trust (JNPT), Navi Mumbai, Cochin and Goa. In the chemicals division, it makes Speciality Chemicals, Food Preservatives and Oil additives.

In LST division, the Company operates what is termed as “Tank Farms” to store liquid chemicals. The company sets up massive circular metal tanks to store these liquids. The international trade in these chemicals is typically done through large ships, and hence there is a very critical need for storing these chemicals in bulk quantities as close as possible to the ports for export / import. As the ships load / unload, the chemicals are moved to / from ships to these tanks.

Besides the tanks, there is additional infrastructure that the company owns and operates, which are critical to the storage / logistics operations. It operates jetties where ships can dock and carry out load / unload operations. The liquid cargo is moved between the ships and tanks using a network of pipelines, and associated pumping systems. Additionally, company also owns infrastructure necessary for loading / unloading of cargo to / from container trucks, which in turn bring / carry cargo to the inland sources / destinations.

Chemical Division

GBL is the only manufacturer of pure Benzoic Acid, and its derivatives like Sodium Benzoate, a well-known food preservative. It also makes Benzoplast, a superior plasticizer. The Company enjoys virtual monopoly in Sodium Benzoplast in India. Though its units can produce 72 different types of chemicals, its food preservatives business is the mainstay. GBL food preservatives are sold under “food guard” brand.

Products & Applications

LST Division

Primary offering of LST division is storage services for bulk liquids. Beside storage services, they also provide other allied services such as bays for tanker loading / unloading, blending / mixing of products, drumming and logistical services for movement of goods etc. Bulk customers enter into long term contracts, booking storage capacities for multi-year periods as per their needs. Clients with sporadic needs have the option of spot booking the capacity on a need basis. With acquisition of Stolt Rail Logistics recently (details follow in this document), GBL has added capabilities to provide long-distance liquid transportation through ISO tanks and railways wagons. This will help GBL provide end-to-end solution to its customers for cargo handling from ships to customer destination site. 

Chemical Division

Food preservatives are chemical division’s biggest selling products. Benzoic acid and its derivatives have anti-fungal and anti-bacterial properties, so they are used as food preservatives and also used in pharma industry. A wide multitude of products, especially processed food and drinks use the preservatives to increase the shelf life, and prevent spoilage. These products include Dairy based desserts, fruit products, cooked fruits, Jams & jellies, Dried fruit nuts & seeds,  cocoa based spreads, fruit pulps & purees, cocoa and cake mixes, chocolate products, Meat & poultry products, smoked / dried / fermented fish products, cereals / pulses / starch based desserts, table top sweeteners, Soups & broths, Sauces & Ketchups, Fruit & vegetable juices, Flavoured / carbonated drinks, Colas & Sodas and many more! Its literally used in every food product that appears on shelf of a store.

Plants and Facilities

LST Division

GBL’s liquid storage infrastructure is spread over an area of 1.10 lakh square meters. It operates a total of 82 storage tanks spread across all 3 of its port locations in JNPT, Cochin and Goa combined. It has a combined storage capacity of more than 3,00,000 KL, for storage of all types of Liquid Products such as ‘A’, ‘B’, and ‘C’ class liquids.

Of the 3 ports sites it operates from, JNPT is the largest facility of GBL. It has total capacity of 2.4 lakh LK at JNPT and operates 63 storage tanks on this site. Eight of these tanks are MS coated tanks and 13 are steel tanks. These 21 tanks deliver superior revenue realisation. Remaining 42 tanks are plain MS tanks. The site also has 30 bays for tanker filling, with total loading capacity of 400 tankers per day. GBL also owns and operates 2 steel pipelines of 5 Km each at JNPT site, spanning from jetty to the storage terminal. One of these pipelines is connected to BPCL jetty, and the other is connected to a shallow jetty. No other operator has a pipeline to the shallow jetty, handing GBL a significant competitive advantage. One of the pipelines is a heated one, which is critical feature to handle products which solidify at normal temperature such as Phenols. No other operator in JNPT has this capability.

Kochi port is GBL’s 2^nd biggest location, with a storage capacity of 38,000 KL, with 13 storage tanks. At Goa, GBL has storage capacity of 25,000 KL. It operates 4 tanks there. Company has received approval to set up LPG storage terminal at its Goa location.

Chemical Division

GBL’s chemical division operates its manufacturing facilities from 2 plants, located in MIDC, Tarapur area, close to Mumbai in Maharashtra. It has a manufacturing capacity of 6000 MT per annum for Sodium Benzoate and 7200 MT per annum of Benzoic Acid.

Its lubricants product portfolio includes Engine Oil Additives, Gear Oil Additives, Hydraulic Additives, Metal Working Fluid, Anti-wear, Rust & Corrosion Inhibitors, Corrosion inhibitor in mill oils, Rust preventatives, coatings and greases, etc.

Capacity & Utilization

LST Business

JNPT, GBL’s biggest location for LST business, has 63 tanks with total installed capacity of 2.4 lakh KL. In 2017, it had its last capacity enhancement at JNPT, when it added 48,000 KL capacity at approximate cost of Rs 29 crores.

Kochi tank farm has an installed capacity of 25,000 KL. Its last capacity addition was completed in October 2017, at an approximate cost of Rs 6 crores.

In LST business, the company is operating at optimum capacity utilization at all of its locations. In FY19, the capacity utilization at JNPT tank farm is at 100%. In the same year, Cochin facility was working at a capacity utilization rate of 95%, while Goa was placed at 70%. Management has quoted that they expect the capacity utilizations to continue at similar levels in the near future.

Chemical Business

It has a manufacturing capacity of 6000 MT per annum for Sodium Benzoate and 7200 MT per annum of Benzoic Acid.

Revenue by Segment (Rs Cr)

In terms of top-line, chemicals division stands tall, contributing almost 50% over the last 3 years. When we look at the bottom-line contribution, chemicals business is a clear drag, contributing losses. In the years preceding 2018, the losses from chemical business were even higher. This in large part has been the cause of financial troubles of the company. This lacklustre performance is even more puzzling when seen in the context of unprecedented growth and profitability seen across majority of companies in Chemicals industry in India over the last 7 years.

Promoters & Management

Company is promoted by Pilani family. In 1986, it was helmed by Shankarmal Pilali, with his sons Ramesh Pilani & Ramakant Pilani also involved in the business operations as directors. In 2001, Ramesh Pilani was elevated to post of Chairman while his brother Ramakant Pilani continued as Managing Director. In 2009, the leadership baton was passed onto the 3^rd generation, with Rishi Palani (son of Ramesh Pilani) taking over as Chairman, and Raunak Pilani (son of Ramakant Pilani) appointed as Director. The leadership tenure of the 2^nd generation was unfortunately unimpressive, with the company’s fortunes steeply heading south.

Like its chequered history, GBL’s management too has had a mixed report card. The first generation setup and stabilised the business in the first 10-12 years. The next 10-12 years under the leadership of the 2^nd generation were patchy at best. While external events such as earthquake in Bhuj that destroyed its Salt business division were beyond their control, there were several clear indicators that management had contributed to the financial sickness of the company. The decision to diversify into not one but 2 unrelated businesses – Salt refining and O&M of offshore vessels, was not a sound one, especially at a stage when company had barely been in existence for 12 years, and had already been dealing in 2 separate lines of businesses. Excessive debts on the balance sheet also lead to severe financial stress. ONGC contract cancellation in 2002 could have been mitigated or handled with caution. Receivables were allowed to go bad, resulting in write offs and litigations. Losses of the chemical division had been a big burden on the finances of the company even during the first decade of 2000. Ultimately the company had to take refuge under BIFR.

The 3^rd generation, Rishi Pilani, has brought back stability and profitability to the business. Though the older generation still holds leadership positions currently – Ramakant Pilani is the CEO and Ramesh Pilani is the CFO – Rishi Pilani is practically the face of the company, has navigated the tough times ably. He has worked earnestly to turn the situation around, and in these 10 years, company has received a new lease of life.

There are some indicators derived from the available data which point to the positive intent and earnestness of the current management.

1. Fixed salary to promoter Chairman & Managing Director (Rishi Pilani). No perks, no bonus or incentives
2. CMD does not take any sitting fee for board meetings
3. Unsecured term loans from bank of ` 7.097 Crores from M/s. Kotak Mahindra Bank Ltd which is secured against personal properties of promoters, carrying interest rate of 16% p.a & repayable in remaining 32 equal monthly instalments
4. Unsecured Loans and advances from related parties is of ` 18.938 Crores from M/s Susram Financial Services & Realty Pvt. Ltd as unsecured long term and interest free loan, repayable after March, 2021.

In terms of salaries, the male family members receive salary at very moderate levels. Ramakant Pilani (CEO) and Ramesh Pilani (CFO) draw annual salary of 30 lakhs, which given their years of experience, is very moderate. Similarly, Rishi Pilani draws a moderate salary of 54 lakhs per annum. However, it’s a concern that their respective spouses – Manju Pilani, Sushila Pilani and Poonam Pilani too receive salaries of 16.2 lakhs, 30 lakhs and 30 lakhs respectively, even though their role / designations are not even mentioned in the company’s annual report, hence their contribution is questionable.

Besides, the company reports its related party transactions with its group companies. As such there are no alarming transactions observed, so there is no cause for concern on that front too.

Key Customers

Among its key clients, GBL counts some big and well-known names such as global agri-commodity and food giants Cargill and Louis Dreyfuss, Indian Petroleum giants Bharat Petroleum, Hindustan Petroleum and Indian Oil, KLJ group – the largest maker of plasticizers in South Asia, Indian Pharma major Jubilant Life Sciences and leading chemical makers such as Deepak Nitrite, Vinyl Chemicals, Jupiter Dyechem etc. For its food preservative products, it counts global giants Cocoa-cola, Pepsi, Indian majors Dabur and Parle Agro as its customers. For its oil additive products it has leading names such as Castrol and Gulf oil as its customers.

Turnaround under BIFR

The BIFR revival plan for most companies typically involves certain waivers and concessions, in order to aid the recovery process and hasten it.  These measures usually include

• Reworking the debt terms with the consent of the lenders. This may include waiver of part of interest due, or renegotiating lower interest rates.
• Moratorium on interest or principal payments for a period of time
• Lenders bringing in additional capital to bring the business back on track
• Tax breaks till the company does not reach a certain stage of recovery
• Stop on distribution of dividend to conserve capital and utilize it for business operations
• Waiver of mandatory CSR spending from profits
• Curtailment on unnecessary spending

GBL too has been benefitting from some of these provisions, which have aided in its recovery. It has been exempt from paying income tax till its recovery, and has not paid any income tax since 2010. It is likely to start paying income tax as soon as it’s out of the BIFR mandate, which could be by end of this financial year (FY2021). 

Since 2016, GBL has been operating under the revival plan approved under the erstwhile BIFR regime. To its credit, the company has made a sincere and admirable attempt the come out of financial sickness, and has made very good progress since then. Fortunately for GBL, the LST business has come to its rescue. It has grown well, and has gone from strength to strength. It has been the profit and cash generator for GBL.  On the strength of good showing from LST business, GBL’s net worth has come back to positive since 2018. It has also used part of the earnings to increase its capacities in 2017, which in turn adds to both the top and bottom line.  The company has also used the cash wisely to reduce the debt burden, and consequently the interest burden arising from it, thereby boosting its profitability even further.

Financial Performance

On most of the important metrics, there has been a marked improvement in performance of GBL. Revenue has been growing steadily at a CAGR of about 20% over the last 5 years. Operating profit has been growing at an even higher CAGR of about 28% over the same period. Net profit has been erratic, going up and down, but that’s largely due to the fact that the chemical business has been only contributing losses to the bottom line for most of the period.  The company is net worth positive again since 2018 and has been rapidly improving on that front with each passing fiscal. Similarly debt burden has reduced very well, reducing to 1/3 of the level seen in FY2016. Company has also been delivering positive cash flow from operations consistently. In last 5 years, it has been able to meet its capex needs without adding anything to its debt burden, and yet has been consistently delivering free cash flows too.

Impact of reducing debt is clearly seen in greatly improved interest coverage. Asset turns have tripled from levels seen in 2011, indicating vastly improved operational efficiency. Even with good growth in sales, receivables have been under control. Ratio of depreciation to fixed assets has been at fair levels too.

With shareholders’ equity turning positive in FY18, RoE has turned positive too, and is currently at a very attractive level of 23%. Similarly, RoIC has shown drastic improvement and stands at 21% in last fiscal.

On most counts, the turnaround seems real and sustainable.  Ideally, it’s time for GBL to exit BIFR in the current fiscal.

Key Ratios

Demerger Proposal

In 2017, the company started pursuing a proposal to demerge the Chemical business from the LST business. It appointed consultants to prepare the scheme of demerger. Following are the key points in the proposal

1. GBL will separate out the entire Chemical division into a new entity, with all its assets and liabilities. This will be a wholly owned subsidiary of GBL.
2. The LST business will be retained with GBL, except for assets in Goa.
3. LST assets in Goa will be hived off to a new entity, GBL LPG on a slump sale basis. This will be a wholly owned subsidiary of GBL.
4. So post demerger, GBL will have two wholly owned subsidiaries – GBL Chemicals & GBL LPG
5. Post demerger, the parent company will be renamed as appropriate.
6. Each shareholder of GBL will be allotted 1 share of the resulting company for every share of GBL.
7. The shares of the resulting company will be subsequently listed on the BSE.

Rationale for Demerger

GBL’s infra business and Chemical businesses are two totally separate lines of business. The demerger will benefit GBL in several ways

1. There is no synergy between the Chemical and LST business, so there are no operational benefits by keeping the businesses under same entity
2. Both businesses have separate regulatory requirements
3. The nature of risks and returns in 2 businesses is very different; hence they will attract different set of investors / strategic partners.
4. Demerger will ensure, each company is free to focus on their respective businesses for better outcomes.
5. Right now, the liabilities and losses of Chemicals division are weighing down heavily on LST business and impacting the overall valuation of the company.
6. Each entity will be responsible for its own P&L, its own liabilities.

Progress so Far

In the 3 years since the proposal was floated, there has been very slow but steady progress on the plan.  The company’s board has approved the demerger proposal in 2019. Further, it has created 2 wholly owned subsidiaries GBL Chemicals and GBL LPG. These 2 entities legally exist now, though in FY19 there has been no business conducted under these. However, it clears the ground for the formal split of the businesses, and listing of the chemicals business separately. It also opens the path for a strategic investor to invest in the LPG business, without having to get involved in other businesses. A major roadblock in getting an approval from regulators for the demerger proposal is the pending contingent liability settlement with Morgan Securities and Credit Pvt Ltd. SEBI had put the demerger approval on hold, requesting GBL to resolve the claims of Morgan Securities. Once this is done, it should approve the demerger proposal and green light the listing of chemicals business separately.

For almost 2 decades now, the chemicals business of GBL has been struggling for profitability. Though GBL started its existence with Chemicals, and other businesses were funded by profits from chemicals division, it’s ironic that this division has been struggling since so long now. Even till as recent as 2018, though it contributes almost 50% of the top-line, its profitability and consistency has been abysmal. It has been a total drag on the LST business. In absence of high margins and profitability of the LST business, GBL would have been long buried under debt.

Market & Opportunity Size

LST Division

Overall, bulk liquids amount to 35% of global sea trade. CNG, LNG & POL commands > 80% of the total global storage capacity, while chemicals and other bulk liquids make up the rest.

As per estimates in 2017, global tank storage capacities are growing at a rate of approximately 7 to 9% CAGR. This is being driven by the rising demand for fuel and raw materials.

India is the world’s third largest consumer and second largest importer of Crude oil. In 2018, India imported 228 million tons of crude oil, valued at $120 Billion. India fulfils about 82 per cent of crude, 45 per cent of natural gas, and 95 per cent of cooking gas requirement through imports, hence the demand for liquid cargo handling, storage and distribution at ports and hinterland will continue to register an upward trend.

In recent years, at major ports the share of liquid cargo has grown to about 38 per cent in FY2017-18 as compared to 33 per cent in FY2016-17. In 2019-20, POL volume flowing through the Indian ports was pegged at 237 million tons, besides a volume of 29 million tons for other liquids.

Liquid bulk storage capacity utilization at Indian ports stands at around 90% to 95%, which is much higher than global average of 70 to 75%. This results in higher turnaround times and longer waiting period for berthing of ships, leading to congestion at ports. Average turnaround time for liquid bulk at Indian ports is 3.7 days and goes up to 4.5 days at JNPT and Chennai. Similarly, average pre-birthing time at Indian ports for bulk liquid vessels is about 2 days, and goes up to 3 to 3.25 days at JNPT and Haldia. Comparatively, most major international ports have minimal berthing time of 5 to 10 hours, or even “Berthing on Arrival”. This indicates severe lack of infrastructure both in terms of ports and bulk storage. To match up to the demand, the bulk storage capacity has to grow at 6% to 8% CAGR.

As per some reports, while the demand for liquid trade is growing steeply, the liquid storage infra has not kept pace with it. As per estimates in 2017, India needs to create an additional liquid storage capacity of 100 million tons in the next 10 years. This presents a very attractive opportunity for companies in the bulk liquid storage terminal business, and a long runway for growth.

Chemical Division

The global benzoic acid market was valued at USD 868 million in 2017 and is expected to rise to USD 1,219 million by the end of 2023, growing at a CAGR of 5.9%. Growing demand from the food and beverage industry is likely to be a major driver for the global benzoic acid market. Benzoic acid and its sodium, potassium, or calcium salts are used as a food preservative due to their effective antifungal property. Benzoic acid is particularly helpful in warding off mold and yeast, though it also has a minor protective effect against bacteria. The growing demand for preserved and packaged food from the global consumer demographic is likely to drive the demand for effective natural preservatives such as benzoic acid. Acidic food or beverages, such as sparkling drinks, majorly require benzoic acid, as benzoic acid is more effective in an acidic pH. Rising demand for packaged food will continue to drive demand for benzoic acid.

Growth Triggers

LPG Terminal

GBL has plans, since 2012, to setup LPG storage tanks on its Goa site. It had applied for approvals in same year, and received same in 2014. The approvals were valid for 5 years, i.e. till 2019. However, given the financial mess around then, it was in no position to invest funds to setup the unit. It has also been unable to get strategic investors to fund the project. In 2018, it approached the regulators for extending its permission citing its financial situation. Within the company, the plan is still alive. With a much improved financial condition, its probability has improved drastically. As and when it happens, will definitely be driver of revenue growth in the coming years. The land for the tanks is already available at Goa. Plan is to setup a capacity of 20,000 tons which is likely to involve capex of around 175 to 200 crores. Company intends to bring in financial or strategic investors to partly fund the project. Expected construction time for it is 2 years, and the company expects the revenue to ramp up in 12 to 18 months after that.

Like liquid storage business, even LPG storage unit is likely to be high capex, high fixed cost and high margin business, which will provide good return on capital. As per company’s estimates, rental yields for LPG are likely to be 5 to 7 times that of JNPT terminal. If this is achieved, it expects to double its revenue, and significantly boost its EBITDA. As the Goa assets are already hived off into a wholly owned subsidiary, GBL’s plans to bring in an investor / partner for capex is easier to implement now. So, we should see some momentum on this project now.  

New Capacity Addition at JNPT

The management has not shared any clear plan on capacity expansion either at JNPT or at other locations. The fact that company is operating at 100% capacity utilization at JNPT and at 95% utilization at Cochin means that the company has to add new capacity; else it just cannot grow its revenue or profits. The last capacity expansion done in 2017 has quickly been ramped up within 1 year. With strong demand, any new capacity expansion will very quickly translate into revenue for the company. Financially, it now enjoys good profits and cash flows to be able to invest in capex for new capacity, so it is no longer dependent on raising expensive debt. In fact, as per some accounts, the demand is so strong that the potential customers are willing to fund the expansion, to be set-off against future rentals. As the company enjoys very high margins, any capacity addition will not only translate into higher revenue, but will also deliver higher EBIDTA.

Turnaround of Chemical Business

In the past 2 years, financial metrics of chemical business also have been improving. While it was a big contributor to the top-line always, it’s only in the last 1 year that the chemical business has been showing slow but definitive signs of a turnaround. It turned out a EBIT of 2.65 million in Q1, loss of 8.58 million in Q2, a profit of 11.74 million in Q3, profit of 58.49 in Q4. The good show was continued in Q1 FY21 results with division showing a EBIT profit of 49.28 million. Four out of last 5 quarters have been profitable at operational level, which is a promising sign of turn around for chemicals division. Profitability is helped by lower raw material prices.

Rerating Triggers

Positive Net Worth

With sustained effort and focus, GBL achieved a significant milestone in its revival plan, when its net-worth moved back to positive territory. As of march 2020, the net worth stands at 145 crores. GBL has well and truly turned the corner.

Drastic Reduction in Debt

In FY2009, against revenue of 39 crores, its debt stood at massive 327 cr. When the company went under BIFR revival plan in FY15, its debt was at 254 Cr, against revenue of 121 Cr. Its recovery has been very good since then, and in the year ending Mar 2020, its debt stood at mere 62 crores, which clocking a revenue of 247 Cr. With healthy cash flows to show, if it wishes to, the company is capable of being debt free within the next 1.5 to 2 years. With reducing interest burden, GBL can utilize the cash flows to add capacities to its LST business and boost its revenue and profits further.

Exit from BIFR

At close of FY20, company is financially well placed to exit BIFR mandated revival plan. Its net worth is healthy again; debt levels are down to very manageable levels. Simultaneously, it’s also delivering healthy profits (42 Cr in FY20), driven by good margins (OPM at 30% in FY20), backed by solid cash flows from operations (27 crores in FY20). It has been consistent in delivering similar positive performance for last 4 fiscals. With business units demerged, debt reduced to moderate levels, financial recovery almost complete, time is ripe for GBL to exit BIFR and chart a more prosperous course for itself in near future. GBL had already applied to NCLT for exit from BIFR in 2018. It’s a slow process, taking its own time. On its part, GBL has ticked all the boxes that regulators will look at.

Proactive Resolution of Contingent Liabilities

Due to its past financial troubles, GBL has been part of several lawsuits for payments. Over the years, these have massively added to the contingent liability of the company. As of FY2019, company is exposed to contingent liabilities adding up to 52.3 crores, spread across 6 separate suits / claims. Compared to the net worth of the company, this is a significant amount (about 36%). If the company loses these cases, it would have a massive material impact on the financial health of the company. Hence it is important that company works to resolve these liabilities. This has been a major overhang on the valuation of the company.

Fortunately, it has made a significant progress in the last few months on this front. Contention with State Trading Corporation (STC) for Rs 24.26 Crores has been settled in Feb 2020 for an amount of Rs 2.19 Crores. Order to this effect has already been issued by NCLT. Another case of Avron chemicals worth 9 crores has been settled at a value of 2.85 Crores. Resolution of these 2 cases translates into a reduction of 63.60% in contingent liability. Given this positive development, expectation is that company would work to resolve the remaining contingent liabilities too in near future.

Removal of Pledge from Promoter Holding

As of Mar 2019, promoters have had a large majority of their holdings pledged, against business loans taken by them. Promoters group holds 43.02% of the total equity in the company at end of FY 2019. Of this, 82.08% shares have been pledged. While such massive pledge creates negative sentiment, promoters have done it for the benefit of the company. Company has taken a loan of 23.4 crores from Oriental Bank of Commerce and this is secured against mortgage of storage tanks, plants and machinery at JNPT, Cochin and Goa, hypothecation of land, building, plant and machinery of chemical division, along with the pledged shares of promoters and promoter group companies.

In an encouraging trend, since Q1 FY20 (June 2019), the promoters group has been reducing their pledge rapidly, and it stands at 64.56% at the end of June 2020. As the company continues to reduce debt, the promoter pledging is likely to come down with it. Of course, the pledge on shares can come off even before the entire loan is paid off. As the outstanding loan reduces, it can retain other assets while releasing the pledged shares. This would significantly boost investor confidence, creating an uptick in valuation of the company.

Demerger of Chemical and LST Businesses

Chemicals division has been a huge underperformer for more than a decade now. Despite clocking healthy revenue, it has failed to deliver on profitability. With separation from Chemical business, GBL’s infra business will be rid of the burden that has been eroding its value for so long. This will create major value unlocking in the GBL stock. LST business has all along been high margin business, providing steady cash flow. It also has long term contracts (3 to 7 years) with some of its customers, ensuring a steady revenue and stream of cash flow. With separation, there will be clear revenue visibility and predictability, which will ensure a far superior valuation for the parent company with the LST business.

Significant Stake Acquisition by Stolt Nielsen

On 7^th Oct 2020, GBL announced that it is acquiring 86.52% in Stolt Rail Logistics (SRL), which is a GBL promoter group company, engaged in logistics of bulk liquids. The company was a joint venture between Stolt Nielsen Ltd (SNL) and GBL promoters. SNL is a global giant in bulk liquid logistics business, with annual revenue of about $2 Billion. It has liquid storage terminals in 12 countries with installed capacity of 50 million KL. In comparison, GBLs total installed capacity is a mere 3 lakh KL. It is also world’s largest owner of ISO tanks, used for transportation of liquids and chemicals. The deal announced is an all stock deal, whereby SNL will give up its stake in SRL, and in turn, GBL will issue preferential shares to SNL. Post the deal, GBL will own 86.52% in SRL, and SNL will own 10% in GBL. SNL is also likely to be given a board seat in GBL.

Promoter group holds hold 49.94% in the JV. The preferential shared allotted to SNL is at a price of Rs 62, which is at a slight premium to value of Rs 58, arrived at by SEBI defined formula. So the preference shares are being allocated at a fair value, thereby ruling out any promoter mischief. SRL is a provider of end to end bulk liquid storage and transportation from shore to plant. SRL owns tank containers and leases rakes and tanks at various port and inland locations. It utilizes Indian railways infrastructure for transportation of liquids. It has loading and unloading facilities at JNPT, Nagpur, Dahej and Daund. So there is a good potential synergy in combined business, making it a good acquisition for GBL. Moreover, since this is an all stock deal, there is absolutely no impact on cash flow or debt position of GBL, keeping its finances intact.

A stake acquisition by a globally reputed giant not only validates that GBL is indeed back on firm ground, but it also potentially provides them a capable strategic partner to help grow its LST and LPG businesses. It can help GBL move to next level by providing strategic, technical and financial help.

Competitors

In LST business, GBL has several competitors such as Indian Oil Tanking Limited, Gulf Petro, Aegis Logistics, Kiran Group, IMC, Adani, Vopak, Ennore Tank Terminals. The Indian bulk liquid storage industry at this stage is very nascent. Capacities are very low and the demand is underserved currently, hence there is more than enough scope for all the leading players to grow and be profitable for years to come.

In chemicals, its competitors are Hemadri Chemicals, Aarti Industries and several smaller players. GBL though, enjoys the leadership position within the Indian market and is also seen as a significant player in the global scenario. If it can emerge stronger from its financial past, it can consolidate and cement its position as a leading player in its space globally.

Competitive Advantages

For the large part, both GBL businesses are commodity service and product businesses, with almost nothing to differentiate its products / services from its competitors. There is no IPR, no technology edge, no crushing market leadership, no distinguished promoter pedigree, no financial muscle, no marketing magic. Yet, just by the virtue of being in the right business at the right time, it enjoys certain advantages, which competitor will find difficult to catch up to.

1. The meat of GBL business is liquid storage at the site of the port. It requires land at port, which is not very easy to obtain. Any new entrant will find it extremely difficult to obtain land plots within the port area, especially at a premier port like JNPT.
2. Bulk handling of chemical liquids requires specialised expertise. Some of these liquids are hazardous and inflammable. So safety and security is the biggest concern in logistics of these liquid chemicals. GBL has had almost 2 decades of experience in this field, with a very good safety record. For any new player or a competitor, building up such expertise will take time. Achieving high level of trust for its safety record, will be even tougher.
3. If there is any leakage / spillage of liquid chemicals from its tanks / storage facilities, it could lead to a huge environmental damage as well as significant loss of life too. If such an adverse event materialises, company’s net worth could potentially be wiped off due to arising contingent liabilities, making this a potentially high-risk business. It’s not easy for new entrants to build a flawless safety record as GBL has done over time.
4. Company’s business involves handling of critical cargo for its customers. The relationships and trust have been built over the years. It’s not easy for any new entrant or an existing competitor to just start winning contract / business from large companies for bulk liquid storage.

Valuation

As of 30^th October the company’s stock closed at Rs 63. Its trailing EPS is Rs 8.02. Thus it’s undervalued at current levels. We see a similar trend across all the valuation metrics, with the stock being valued below par. In large part the dull valuation are a result of the company’s troubled past. A company is valued richly primarily due to following reasons. It must have healthy margins, preferably superior to its industry peers, must deliver good profitability and return on equity, must demonstrate high growth for a long period of time and finally it must convert profitability into free cash flows.   As its business stands today, GBL ticks 3 of the four points above. What is missing at the moment is visibility of growth. With LST working at 100% capacity, LPG unit not a reality yet, growth avenues for next 2-3 years are not visible.

Hence, until the growth aspect is not fixed, the stock will see very limited uptick from growth perspective. However, in the short term, the stock can still see a significant upside, driven due to rerating of the stock. As it has been gradually emerging from its business lows, the stock has seen decent uptick in recent past. It has already witnessed 2 rerating triggers – Positive net worth and reduction in debt over past 2 years. As more triggers (discussed in “Rerating Triggers” section above) unfold, the stock is likely to get rerated in terms of P/E multiples, delivering significant gains from current level.

Risks

Contingent Liability Risk

Past Contingent Liability Risk

Owing to its rocky past, GBL is embroiled in legacy lawsuits from several financial claimants. As of FY19, it had a sum of over 52 crores as contingent liability. As detailed in an earlier section, management has been actively working to settle the disputes amicably with the suitors. They have achieved significant success. However, about a third of the total figure is still outstanding. Until the time this is achieved, the sword will continue to hang over its financial well-being.

Potential Future Contingent Liability Risk

LST business involves storage of hazardous / inflammable / toxic chemicals, which are potentially very harmful to human life as well as environment. Massive quantities of such chemicals stored at single location poses even bigger risks to not just properties of GBL, but also to all the businesses / communities within a large radius. Any leakage / fire incident / safety lapse at the facility, either due to negligence of company, external or internal sabotage, natural disasters, or triggered by factors outside of its control, can cause massive financial damage. This can not only wipe out the precious assets of the company, but also give rise to even bigger damage claims from third parties. Any such incident can potentially wipe out the entire company instantly. 

Execution Risk

Past 5 years have marked the turnaround phase of the company. It has performed well to come of financial distress. Going forward, it can sustain the recent success if it continues to execute well on its plans. However, if it fails to execute correctly, it could slip back into mess. Excessive debt, unrelated diversification, inefficient operations, complacency in handling finances, any of these slips could undo the potential promise the business holds. Management must thus chart a clear and prudent strategy for the future, and must execute on it diligently.  

Macro-economic risk

World has been witnessing tough times recently. The global Covid pandemic has caused severe financial stress, across the world.  There have been widespread concerns over looming threat of a recession. Crude oil prices have been subdued in recent years, and crashed to new lows during the pandemic. The demand for crude had dropped significantly due to nation-wide lockdown. Given that the Indian and global economies are not out of woods yet, there is a threat of macro-economic risk, which could cause a dent in the progress that GBL has made in recent years on its road to financial recovery.

Regulatory risk

Both the LST and Chemical business are subject to stringent environmental and industrial regulations. GBL’s future growth critically depends on expanding capacities. This requires regulatory approvals, which are increasingly difficult to obtain. For example, the company is dependent on JNPT (or other port operators) to lease land for its storage capacity expansion. Any failure to obtain the approvals will have direct material impact on the business of GBL. Even for the chemicals business, the company depends heavily on approvals and environmental clearances.

Conclusions

Ganesh Benzoplast is at the late stages of its turnaround phase. It has endured rough phase for years and survived with the support of BIFR revival plan and strength of its LST business. Like all turnaround cases, it is capable of delivering great returns for its shareholders. Markets have already seen part of the gains in last few months. If the business continues to head in the right direction, there is a considerable upside, as the stock can easily double in near future, even from current levels. But investors must monitor some critical aspects very closely. Any slips on these could well be a signal to exit.

Critical Monitorables

1. Demerger Completion – Though the groundwork for the plan has been done now, it needs to be concluded with the listing of chemicals division. Any further delay will have a negative impact
2. LPG Project – This has been in the plans for last 12 years. Earlier companies own finances were a challenge, and now the financial closure is a concern. This project is extremely critical for the next phase of growth of GBL. If there is any further delay in start of this project, it will indicate negative sentiment for the company
3. LST Capacity Enhancement – Both JNPT & Cochin facilities are running at almost 100% capacity utilization. Company needs to add storage capacities at both the locations or even add new locations quickly. Unless this is done quickly, revenue and profit growth will stagnate, severely limiting its valuations
4. Management Decisions – The management has been disciplined in its strategic, tactical and financial decision making since the BIFR revival started in 2016. As the and when the company exits BIFR, it must continue with the same discipline. Hence, all major decisions of management must be observed closely for any signs of alarm / red flags.

Disclaimer: I am not a SEBI registered analyst. This article is for educational purposes only. This is not a stock recommendation, nor an advice to buy or sell a stock. Please consult your financial adviser before you make an investment decision.