GHCL: Unlocking value

Recently, GHCL board approved the proposal to hive off its textiles business.

The chemical maker’s inorganic chemicals and textiles businesses will be separately listed companies, after the National Company Law Tribunal approves the scheme of arrangement, according to an exchange filing.

Each shareholder of the current company will receive equal shares in both the companies, indicating a mirror shareholding structure.

The demerger of the Textile business would be a major decision for the company as the business has been under stress for some time, remaining a headwind on overall company performance.

The Soda ash business remains a strong cash generator for GHCL. GHCL management sees value unlocking in both the businesses given their different business dynamics and risk/return profiles.

It remains positive on the long-term outlook of the Soda ash business, and currently does not see any major impact on demand due to Covid-19.

The demerger would create value for the shareholders given the strong long- term outlook of the soda ash business.

The decision for the demerger of the Textiles business is taken by management to unlock the underlying value in both the businesses as the risk/return profile of the Textiles business is very different from that of the other businesses.

Currently, the major factors weighing in on the Textiles business performance are the slowdown in the US economy and changing consumer preferences.

Sales of the Textile business for FY19/9MFY20 were Rs11.9bn/Rs8.58bn, representing 35.5%/34% of total sales. However, EBIT during the periods stood at Rs666mn/Rs507mn, representing 10%/9% of the total.

Inorganic chemicals remains the forte of GHCL and this has been proven with strong EBITDA/ton growth in the segment over the years.

The ongoing economic slowdown, lumpiness in the Automobile sector and oversupply situation could play an overhang factor in the short term and impact prices by 2-3% (as expected by management).

However, a slight demand recovery is being seen in the Detergent and glass segment. Domestic demand for soda ash has seen 10% CAGR over the last decade, and we believe it will remain stable going forward.

GHCL’s soda ash business continues to perform well with strong margins. Although the current oversupply situation and economic slowdown could result in a price revision in soda ash by 2-3%, the long-term outlook remains strong.

Textiles constitute 35.5% to the chemical maker’s total revenue, as per its FY19 earnings.

It consists of manufacture and sale of textiles including, but not limited to, yarn manufacturing along with weaving, processing, cutting and sewing of home textiles products.

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