Hi-Green Carbon Ltd.
A recent SME IPO that caught my eye because of impressive ROE figures being reported (60%+ in screener).
RHP - https://www.higreencarbon.com/images/prospectus/RHP%20-%20Hi%20Green%20Carbon%20Limited.pdf
The company is in space of recycling tyres through pyrolysis, that yield recovered carbon black (used by tyre companies), steel (from the wires in tyres), fuel oil and sodium silicate. All of the products from pyrolysis can be sold to other industries, with minimal environmental impact.
Now, pyrolysis alone is inefficient. Company supposedly has a patented process that is more efficient.
Currently, the company has a plant capable of processing 100 TPD of waste tyres. Annual capacity declared in RHP is lower at 24000 TPA, presumably due to maintenance requirements, and capacity utilisation is even lower at ~ 16500 TPA for FY2023, implying around 70% capacity utilisation in previous financial year. Revenue breakdown by the product is given in the RHP - fuel oil is responsible for a large part of the revenue, in contrast to the expectation that recovered carbon black is more valuable.
At current valuation of around 400cr, with TTM sales of around 80cr and TTM profit of 12cr, the company is certain not cheap with revenue multiple of 5x and earnings multiple of 35x. Becomes viable as a long-term growth story, if this company will keep reinvesting profits back into operations for increased capacity. All this, is assuming a 10 year view, where the revenue projections can vary wildly (500 cr annual revenue in 10 years is possible given the market size, but requires execution capability and management quality to get there). The market valuations will follow if the revenue and profit continues on the upward trajectory. However, looking at the current valuation and expansion plans of the company, it is definitely overvalued.
6 Replies
Concerns and Red flags
1. No disclosure of any patents in the DRHP. No patent filings could be found with the company being assigned the patent. No mention of any tech transfer or partnership with a foreign company. No reselling of the patent to get income via royalty appears to be on the table. If any patent exists, it may be held by the sister concern - Radhe Renewable Energy. The company should be valued more like a PP&E setup with outsourced tech, rather than a pyrolysis tech company. The value of the patent cannot be ascribed to the company valuation.
2. Valuation. This company is expensive for a micro/small cap. For 70-80cr in annual sales and profit of 10-15cr, it is trading at a revenue multiple of 5x and earnings multiple of 35x, which is on the higher side. 200-300cr mcap would give me valuation comfort, despite current expansion plans.
3. Durability of the business. Nothing stops a tyre manufacturer from setting up a competitive business internally for vertical integration, bypassing this company entirely. The process could be replicated in house, if the economics of a tyre company warrants it. There are larger players globally - Pyrolyx and Klean. Pyrolyx USA underwent liquidation, despite having an offtake agreement with Continental Tyres, so technology isnt enough.
4. Limited market size for end products. RCB is likely to have a global market size of 2-3B$ in 2030. Pyrolytic fuel oil is expected to be around 500M$. With a small market size, and scope for increased competition (cost of setting up a plant is minuscule), a terminal revenue multiple of 5x would be extremely generous, and so would an earnings multiple of 20x. The best criteria to value this company would be the installed capacity, how soon it can add capacity to gain marketshare, and operational performance.
5. Related party transactions. For a small company, the operating structure seems complex. Raw materials are procured from one company. Equipment is provided by another.
Napkin calculation for market cap projection.
On a terminal basis, I would value this company with the following assumptions -
Revenue in year 2030 - 500cr minimum
Profit in year 2030 - 50cr minimum
Earnings multiple -10x minimum, 20x maximum
Expectation for justifying earnings multiple - offtake agreements for carbon black with major tyre manufacturers, and less dependency on revenue from pyrolytic oil.
Market cap band - 1000-2000cr.
The only way for a higher mcap is even higher revenues and more profits. Clearly, the market has run ahead of fundamentals right now.
what is your view on the Promoters?
1. They have off-loaded 29% of total equity.
2. They were to use the proceeds from the equity sale for purchase of another 100TPD plant in Maharashtra. The land has already been purchased from internal sources. Rest, including machinery, by the equity sales proceeds. The machinery is being acquired by another of their group companies (arms length deal, but I am skeptical).
3. There are lot of pending payments / loans on the promoters from the company.
4. Past adherences to the legal requirements have not been regular.
5. From FY14 - FY18, they were in losses.
Other notes:
1. The tech is of their group company, and not this company's own.
2. Pretty much, no moat around this company. and No long term supply chain or sales committment.
3. Very capital intensive process (around 60% of total revenue).
1. 29% offloading was due to IPO, so that's fine. Further offloading would be seen as an issue, especially if growth is not fully realized.
2. The capex is funded by the company, but its a related party transaction at the end of the day. I dont like this operating structure for such a small group. I'd assume siphoning of money via related party transactions. Assume X% of skimming happens, and thus cost of fixed assets and raw materials is inflated by same.
1 was just a note for me. Retaining 71% control is okay (mild good) in microcaps.
I will like to see more years of this company rather than putting in money in near future.
I'm waiting for this to drop to 100 Rs. At listing, this was kind of undervalued. Current valuation is something else though.
DIIs have mostly exited. FIIs have trimmed the stake. Looks like institutional investors believe the current price point is not sustainable and better returns can be realized elsewhere.
