16th August, 2010

Narmada Gelatines Ltd.

ANS Research Desk

(Research Wing of ANS Pvt Ltd)

“ARHAM” Financial Centre

Research By, Harihar Chowk, RAJKOT (Guj)
Speak to: 0281 – 6699401
Bhaskar Patel
Drop a line to: research@anspl.net
Pranav Mehta
Nifty 5421 Recomm
Recommendation: Long Term Investment (2-3 Years) Entry Price: Between Rs.80-90
Rs.
Sensex 18070
Script Details
BSE Code
Code: 526739 Bloomberg Code: SWG IN Curr
Current MP: INR 93.15
Equity Capital 4.03
Face Value 10 NSE Code: --- Reuters Code: NARM.BO
Market Cap 38
Industry Chemicals Overview
52 Weeks High/Low 114/66
6-month avg. volume Narmada Gelatines was incorporated during 1961 and was earlier known as Shaw Wallace
(BSE) 2753 Gelatines Ltd and its manufacturing plant is located at Jabalpur, Madhya Pradesh. The company
(NSE) Not Listed has a special focus on Gelatin and Gelatin related products as well as Ossein, Di-calcium
Shareholding Pattern As On Jun’10 (%) Phosphate & Bone Meal. The company has pioneered the manufacturing
manufactur of Ossein and Gelatin
Promoters 75 in India and is today a frontrunner in India's Gelatin Industry
Industry. Narmada has successfully applied
Corporate Bodies & 8 sophisticated technology to ensure quality at each stage of its manufacturing process and its
Institutions products meet international quality standards
standards.

Public 17 The company has an installed capacity of 2750 mtpa for Gelatine, 4200 mtpa for Ossein,
10,500 mtpa for Di
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
75% dominant position in the domestic market. The company supplies its Gelatin products to
industries like Pharmaceutical, Edible and Food, Cosmetics,, Photographic, Industrial etc.

Company has received awards from Capexil for Gelatine Exports in the past. It possesses
17% 8% following Certifications:

• ISO 9000:2001 by BVQI

• HACCP by DNV
• EDQM
PROMOTER CB & INST PUBLIC
• HALAL - Jamait - E - ULAMA
• KOSHER
• Drug License - Govt. of MP
• GMP -Govt. of MP
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
Extensive use in hard
capsules, soft capsules,
microcapsules, tablets and
other coating applications.
Suitable for use in the
manufacture of intravenous
plasma extenders.
FOOD & EDIBLE ENGG & CHEMICAL PHOTO-FILM
Vast use in Food industry Applications for High Gelatine is more than just
special focus on Gel Bonding of Silicon a bonding agent for the
related components in Carbide and Aluminum light sensitive silver salts
Chocolates, Cake, Jam Oxide Grains. and together with these, it
forms the photographically
active emulsion.
Constituent in
Manufacturing of Extra
Hard Printer Rollers, Cork
Compositions and Water
Dispersible Pesticides.
Pure and natural food Use of Gelatin in Paint
protein containing most of related products due to
the amino acids essential its nature of Water
for human nutrition. Resistance.
 Flowchart of Gelatin Manufacturing Process

Temp>50 DEG C MONO CALCIUM DICALCIUM

DEGREASING
Alkali PHOSPHATE PHOSPHATE (DCP)
BY PRODUCT

CHILLED %5 HCL ACIDULATION CONC 4% pH 1.5 For

Min 48 Hrs.

5-6 Days ALKALI PRETREATMENT STERLIZATION

STEAM

LIME TEMP MAX 22 Deg C

LIMING CHILING

PREODIC LIME CHANGE

40-60 DAYS

PREODIC AIR AGITATION DELIMING/WASHI WATER WASH DRYING

NG
ACID SOAK

EXCTRATION AT EXTRTACTION PHYSIC QUALITY CHECK

3-8% GEL SOLUTION AL
55 TO 85 & BOILING MICRO
BIOLO
QUALITY VARIES WITH RISE GICAL
FILTERATION BLENDING

ION EXCHANGE PHYSIC QUALITY CHECK

AL
MICRO
BIOLO
STAGE I 3-8% TO 20-22% GICAL
TWO STAGE EVAPORATION DISPATCH
EVAPORATION STAGE II 20-22% TO 30-40%
 FINANCIAL HIGHLIGHTS

PROFIT & LOSS (STANDALONE RESULTS)

(IN CRORES)
Particulars Mar 12( E) Mar 11 (E) Mar 10 (U) Mar 09 (A) Mar 08 (A) Mar 07 (A)
Net Sales 117.49 99.56 84.38 68.58 56.22 52.87
Other Income 2.394 2.028 0.77 1.43 1.37 1.19
Total Exp. 98.69 83.63 71.24 58.15 49.11 48.34
Op. Profit 21.19 17.95 13.91 11.86 8.47 5.71
Depreciation 2.82 2.39 1.57 1.48 1.36 1.30
Interest 0.62 0.52 0.10 0.46 0.29 0.27
Tax 5.85 4.96 4.06 4.06 2.48 1.76
PAT 11.89 10.08 8.18 5.86 4.35 2.38
Adjusted EPS 29.47* 24.98* 20.28 14.52 10.62 5.64

Div
* (%) N.A. N.A. 30 25 20 15

** No equity dilution is done and Number of shares remains the same.

1. Net Sales have shown a CAGR of 14% for last 4 years. However going forward we believe that
P & L COMPARISON
the company will be able to achieve a CAGR of 18% since most of its Sales (85%) go into Pharma

120
industry which is estimated to grow at 14-15%
15% CAGR for next 5 years. We have taken a higher

100 CAGR since we think that the current low base effect in company’s Net Sales will help it achieve
80 higher growth.
60
2. The expenditures have historically formed an average 88% of the Net Sales. But in last 2 years
40
company was able to reduce it to 84% mainly due to higher turnover. Most of the expenditure is
20
due to High Raw Materials Costs, Power & Fuel Costs and higher Employee Costs.
0
NET SALES EXPEND PAT EPS 3. The company has been paying higher % of taxes (average 39.94
9.94%) for last 3 years which has
eaten into bottom line of the company. However going forward we believe that these taxes will

2008 2009 2010 2011 (E) 2012 (E) average out to nearly 33% (i.e. normal tax rates for corporates).

4. The company has been paying dividends for past 4 years at an increasing rate.
rate
Sources:: ACE Equity, Company Annual Reports
 BALANCE SHEET (STANDALONE RESULTS)
(IN CRORES)
Particulars Mar 09 Mar 08 Mar 07 Mar 06 Mar 05
Total Funds 42.50 38.65 36.17 35.38 35.58
Total Debts 2.47 1.89 0.80 0.53 4.14
Net Block 20.19 16.50 13.57 14.79 16.96
Cash & Bank 8.97 8.69 9.39 8.60 0.71
Net Current Assets 26.92 22.78 24.26 22.74 17.15
Contingent Liabilities 8.02 0.00 0.00 8.59 6.31
Adjusted Book Value 100.51 88.96 80.70 76.86 76.19
*The company has not yet published its balance sheet for FY 2010 so we have taken last year’s Balance
Sheet

1. The company’s Funds have increased by over 19% in a period of 4 years while its Debts have
BALANCE SHEET decreased by 40% in last 4 years. The lower debt has resulted in company improving its bottom
line by a substantial amount.
2. The company has been investing mainly in Fixed Assets like Plants and Machinery.
Machinery A major part
100

80
of Contingent Liabilities for year 2009 is ‘Claims
Claims against the company not acknowledged’.
60 3. The company has not gone for any major equity dilution for last 4 years and has been able to
40 manage the business via internal accruals only.
20 4. The latest Enterprise Value for the company is Rs. 31.62 Crores while latest Market Cap for the
0
Company is Rs. 38.11 Crores and its Reserves are Rs. 43.28 Crores. It is to be noted that
FUNDS DEBTS BV/SHR CONT. LIA
Enterprise Value is less mainly due to very low debt on the books of the company.
company
5. Inventories and Sundry Debtors have remained at constant levels for the last 4 years.
2006 2007 2008 2009
Sources:: ACE Equity,
Equity Company Annual Reports
 CASH FLOW (STANDALONE RESULTS)
(IN CRORES)
Particulars Mar 09 Mar 08 Mar 07 Mar 06 Mar 05
Cash From Operations 4.55 5.88 2.68 -1.03 1.92
Cash From Investments -2.76 -6.05 -0.73 13.10 -4.66
Cash From Financing -1.51 -0.53 -1.15 -4.18 -2.09
Net Cash Inflow/Outflow 0.28 -0.70 0.80 7.89 -4.83
Opening Cash & Cash Equiv. 8.69 9.39 8.60 0.71 5.54
Closing Cash & Cash Equiv. 8.97 8.69 9.39 8.60 0.71

1. Cash from operating activities has been positive in 4 out of last 5 years. Moreover the Inventory
Cash Flow
levels have also decreased from FY 2006 which shows that the company’s products are being
15
consumed on a regular basis. Also the interest outgo is nearly zero which has resulted in positive
10
cash flow from operations.
5
2. Cash from Investments consists of purchase of Fixed Assets consisting mainly of plants and
0
machineries.
-5
3. Cash from financing activities is negative for past 5 years which shows that the company has not
-10
gone for any long term borrowings or equity dilution to raise capital. At the same time company
has paid regular dividend. This is a good sign and shows the apt money management by the

from operations from investing from financing company.

Sources:: ACE Equity, Company Annual Reports
Cash Flow Ratios

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

Sources: ACE Equity, Company Annual Reports

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
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.
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.

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

• 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.
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.
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