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Wednesday, April 28, 2010

GAEL Quaterly March 2010, Annual Results March 2010

Gujarat Ambuja Exports just reported its March 2010 Quaterly Income statement.
We will analyse the same and see if we can add any value to the information available.

Point 1. Profit before depreciation interest has improved significantly. On a quaterly basis its an improvement of 9.65% (965 basis points) on a yearly numbers we can clearly see that the company has made significant improvement in operating margins 2.21% .. yes its less than the unbelieveably high 9.65% but we must understand that March 2009 quaterly results were badly impacted due to the financial collapse that occured worldwide in early part of 2009.

Point 2. Depreciation figures are also inline though the March 2010 quaterly numbers are a low 1.58% .. the yearly figures are infact slightly higher at 2.39% from last year's figures.. So the profits are not being doctored on the positive or on the negative by reducing or increasing depreciation.

Point 3. Interest payments have reduced modestly from 0.69% of sales to 0.60% of sales.. so no major changes and the reduction in interest as compared to sales is a positive for the company.

Point 4. Tax expenses have increased sharply on a quaterly basis due to losses reported in march 2009 quarter. On a yearly basis the tax payments have increased modestly by 33 basis points (0.33%). Though tax payments increase would result in reduced net profit.. it indicates that the revenue numbers are true profits.. a sharp increase in profits without an increase in tax payout could mean the results are being fudged.

Point 5. Net Profit margins for the period has increased .. and matched the annual Operating profit margin improvement.

Let us also look at the segment results available

Point 1: If you see the profit margin of the various segments.
 - Windmill division - 60.11%
 - Maize Processing Division - 12.15%
 - Other Agro Processing Division - 5.18%
 - CottonYarn Division - 1.81%
Windmill division has the largest profit margin and 2nd largest profit margin is in the Maize processing divisio with 12.15%. Other Agro Processing division comes a distant 3rd with 5.18% and last of all is the Cotton yarn division with 1.81%

Point 2: Maize processing division margins have improved significantly over the past year from 7.34% to 12.15% in March 2010. Other divisions have not seen much change in profit margins as compared to last year.

Point 3. Maize processing division sales as a percentage of overall company sales/revenues has increased in march 2010 to 23.94% from 13.47%. an increase of 10.47%
At the same time the "Other Agro processing division" segment revenues as a percentage of overall company revenues has fallen by 12.24%

The segment revenues show us that the Maize processing division has been improving its margins and also is taking a larger share of GAEL annual revenues.

Company has had an overall increase in its operating profit margins of 2.21%. Margin expansion has happened as revenues of GAEL have shifted to better margin "Maize processing division". The poor results base of March 2009 (due to worldwide financial crisis in 2009 which impacted march 2009 results) also played a part in the net profit jump of 109.04%.

The company valuations are as follows:
CMP: 22.15
Market Cap: 306.45Cr
Sales March 2010: 1410.60Cr
Profit Before Depreciation,Interest and taxes : 111.05Cr
Depreciation: 33.76Cr
Taxes: 23.28Cr
Net Profit: 49.28Cr
EPS: 3.56

Conclusion: GAEL is still grossly undervalued. We can expect the company to announce another 40 paisa divident in 2nd half 2010 taking the total divident payout for 12 months to 80 paisa per share. Divident yield: 3.61%. lower most target Market Cap of GAEL is 492.8Cr (Target Share price:  35.6 per share)

Please note this is the lower most target level for GAEL stock. we can expect GAEL stock price to do much better as revenues and margins for maize processing division is increasing. With proper set of positive news flow and increased investor participation GAEL can reach its ideal stock price of 100+ .

Saturday, April 24, 2010

Gujarat Ambuja Exports: What is the ideal stock price for GAEL

Gujarat Ambuja Exports (GAEL) has been on a tear lately..
Closing Price: April 19,2010: Rs 16.40
Closing Price: April 23,2010: Rs 26.70
Thats a rise of 62.8% in 4 days. Infact on April 23,2010 the stock was on circuit.
NSE : 31,058 pending buy orders at 26.90
BSE : 61,513 pending buy orders out of which 1000 buy orders at 26.80.

The top question in our minds is:
1. What is the ideal sell price for GAEL stock that we own?

Let us step back in time and look at the buyback scheme that was launched in April 4,2007 and the buyback scheme (link) closed on Jan 15 2008
April 4,2007 Closing price of GAEL stock: 26
Jan 15,2008 Closing price of GAEL stock: 83.45

GAEL had started the buyback with the intention of buying back equity worth 26.25Cr at a maximum price of Rs 38 per share ie it had a mandate to buyback 69,07,894 shares (assuming the buyback happened at the highest price of 38 per share)

The buyback was successfull in buying only 9,66,615 equity shares at an average price of 34.26 only 13.99% of the mandated buyback amount. During the buyback period the stock moved from 26 to 83.45

Now ideally a company of GAEL stature should be selling at one times sale.
Enterprise Value = 1 times Sales
March 2009 Sales: 1610.91Cr
Current Enterprise Value: Market Cap + Debt -Cash-Cash equivalents
Current (CMP: 26.70) GAEL Enterprise Value: 369.4Cr(Market Cap)+90.32(Debt)-11.69(Cash)-26.21(Cash Equivalents) =  421.82Cr

To have an Enterprise Value equal to 1 times Sale (1610.91Cr) the Market Price should be: 1558.49Cr that would translate to stock price of  Rs 112.64. So the Ideal sell price for GAEL stock is: 112.64.

The stock however could face stiff resistance around its 52 week high of 36.20and its Jan 15,2007 closing price of Rs 83.45
I can fully understand that these target prices (112.64 and 83.45) are a tall order. Most likely the stock would be out of our hands much before these numbers. Having said that 38-40 levels is given for the stock and one can confidently target 38-40 levels in 12 months time frame (hopefully sooner). Levels of 83 and 112 are for very long term players who are comfortable with GAEL's management and business model.

Tuesday, April 20, 2010

IFB Agro: Value Investing

March 21,2010: IFB Agro: Value Buy
April 20,2010: IFB Agro: 20% rise ..What next?

IFB Agro: 20% rise..What Next?

IFB Agro industries was recommended as an investment on March 21,2010 at a price of 80.55
Today IFB Agro traded at 98.75 (up 19.99% for the day) we review the investment once again and estimate what should be our strategy going forward.

1. Price movement chart: This clearly shows that the company is on an uptrend and support is being provided by the 50Day Moving Average. Any investment can be considered at the 50Day moving avg (around 80 levels)

2. Performance Chart: This shows that there is a sharp increase in profitability though profitability varies from quarter to quarter which is a big negative for the stock and shows inconsistencies.

3. Index Comparison: IFB Agro is moving along with the index which does not provide us with any insight infact the stock is performing at the same levels.

4. Shareholding Charts: Shareholding charts show that the promoter shareholding has increased which was already specified in the initial investment discussion.

Conclusion: Company valuations are still cheap
CMP: 98.75
Market Cap: 79.07Cr
Sales March TTM (Twelve Trailing Months): 298.4Cr

Gross Profit TTM: 24.4Cr
Interest TTM: 1.66Cr
Taxes TTM: 4.77Cr
Net Profit TTM: 9.36Cr
Debt March 2009: 12.34Cr
Ideal valuation would be atleast 1 times sales ie 298Cr. The company results are still very shaky and we need to see consistent profitability every quarter. Strategy can be two fold.

Strategy 1(Active trading): Sell on rise and buy close to 50Day moving avg.
Strategy 2: Buy close to 50Day moving avg and hold for long term to see value unlocking.

Note: These are my personal views and not any recommendation for investment. Please do your own deep dive before making any investment decision. Also note that IFB agro does not give any dividents which means your investments do not earn any returns while you wait for stock price appreciation. There also seems to be hostile investors in IFB Agro holding more than 10% shares in the company.

Friday, April 16, 2010

Gujarat Ambuja Exports: Sharebuyback Jan 15,2008 Avg Price 34.26

Here is the official communication to Bombay Stock Exchange by the company for the share buyback which was closed on Jan 15,2008 the Average buyback price was 34.26 no of shares bought: 9,66,615 Total money used for buyback: 3.3Cr.

As mentioned this was done in preperation for the sharply higher expected revenues from the maize plant setup in uttarachal. The stock during the buyback did reach a high of 104.6 per share on Jan 2,2008.

If we further read the complete document the high price for buyback was set at 38 per share and the amount of money available for buyback was 26.25Cr.
It is a SEBI Order that buyback can be done with free reserves only and only 10% of the free reserves can be used for share buyback.
Considering that 26.25Cr was the kitty for buyback we can safely assume the free reserves with the company in 2007 was atleast 262.5Cr. Right now the market cap of GAEL is 235.2Cr (CMP:17/-)

So folks Right now GAEL is dirt cheap .. I hope you all will pass on some profits back to me (Virtually!!)

Here is the snapshot of the buyback that was done at avg price of 34.26

 The stock right now is languishing becuase of supply side issues. Quantum reduced their holding of GAEL stock
BSE 1,05,000 shares sold

NSE: 1,79,000 shares sold

They have sold almost 2% stake from 2007 till date:
Stake June 26,2007: 7,040,841
Stake March 8,2010: 2,815,802

Right now Shareholding in GAEL is as follows:
Reliance Growth Fund: 4.26% 5,888,660
Quantum M Ltd: 2.65% - 3,669,339

Conclusion: Buy ..Buy.. Buy.. GAEL

Thursday, April 15, 2010

Pitti Lamination: Positive news in Moneycontrol

Ashish Chugh on April 5,2010 has recommended a buy on Pitti laminations citing improved margins.
On 5th April 2010 Pitti closed at a price of Rs 43.95. We had first recommended Pitti Laminations at a price of Rs 34 on December 2009 and improved margins were reported on Feb1,2010 when Pitti lamination price was Rs36.8..
With mainline news companies picking up the stock the stock is poised for further rise.. A target of 1 times sales is a good conservative target for a company in infrastructure,power category. 12 to 24 months time horizon is recommended.

Here is the link to the article in moneycontrol (Link)

Wednesday, April 14, 2010

Gujarat Ambuja Exports : Review

Gujarat Ambuja Exports (GAEL) was recommended first on June 01,2009 at a price of Rs 28.70 per share.
GAEL was again recommended as the "Best Value Buy" at a price of Rs 23 per share.

This review of the company is being done when the current market price of GAEL stock is Rs 17.50 per share a fall of 39.02% from 28.70 and a fall of 23.9% from Rs 23.  A fall of this magnitude definitely questions the rationality of the initial investment decision. more so because from 17.50 to reach 28.70 we need an appreciation of not 39% but 64%

That is precisely why Warren Buffet says:
Rule No 1 of Investing: Do not loose money
Rule No 2 of Investing: Do not forget Rule No 1.

As an investor we are at crossroads:

1. "Buy" as this is an opportunity in disguise
2. "Sell" the fundamentals have changed for the worse and company is going to dumps.
3. "Hold" company needs some time to get its act together and will recover to give us good returns on investment

Let us look at the 10 years balance sheet:

Income statement for past 10 years

Cash Flows for 10 years:

Financial Ratios for the past 5 years

The Financial ratios are a good place to start with as they take into consideration the balance sheet, income statement and the cash flow statement to deliver us the the data in terms of ratio's

Return on Capital Employed (ROCE): 15.61% (March 2009) This should be higher than the borrowing rate.

Debt Equity Ratio: 0.30
Long Term Debt Equity ratio: 0.05
The debt equity ratio has fluctuated from a high of 1.43 to a low of 0.30 (past 5 years). Long term debt has been relatively stable never rising above 0.09 in the past 5 years.  As  per my understanding this basically shows that the company has been taking short term debt for raw materials stocking
- Avg. raw material holding 74.73 when Debt Equity was: 1.43.
- Avg. raw material holding 34.66 when Debt Equity was: 0.30

No of Days of Working Capital: 25.16 (March 2009) Tight working capital management helps improve cash flows and profitability.

Another important activity which will provide us a better idea of the changes happening within is to look at the segmented results.

If we look at the Maize processing division revenues and results for year ended March 2009 and compare it with the results of Agro processing division for the same year we can see that the profit margins are higher for Maize processing division:
March 2009 Maize processing division revenues/results: 2228.74/172.97 = 7.76%
March 2009 Other Agro processing revenues/results: 12120.73/721.79 =  5.95%

Looking at 3 Quarters for the current financial year ending March 2010:
Maize processing division revenues/results: 2430.55/248.73 = 10.23%
Other Agro processing div. revenues/results: 6740.88/264.01 = 3.91%

What we can observe is that GAEL revenue generation is moving from the low margin "Other Agro processing division" to higher margin "Maize processing division".
This development is however not having a positive impact on the bottomline due to the sharp fall in the revenues of "Other Agro processing division" .

So the maize processing division margins are improving but the maize processing division earnings are not sufficient to compensate for the fall in earnings of "Other Agro processing division"

Notes on Account: The following notes on account for the quarter ending December 2009(link):
The forward exchange contracts (shortterm & longterm) outstanding at the quarter end have been marked to market and has been adjusted to hedge reserve as per the accounting policy followed by the company. The balance in hedge reserve at the quarter end December 2009 is 841.88 lacs as compared to 717.82 lacs at quarter end September 2009 and Rs 7357.32 lacs at year end March 2009.

The financial turmoil in the global markets resulted in huge forex and derivative trading losses. Since the forward contracts are to protect the revenues from dollar rupee fluctuations the true nature of losses can be determined only when the actual settlement of the contract (due to high volatility in rupee-dollar exchange rate) The company had hedge reserves of close to 73.57Cr at the end of march 2009 which according to the latest filing of Dec 2009 is down to 8.41Cr

Promoter buying stock from the open market:
Promoters have been buying stock from the open market:
Jan 2009 to Dec 2009: 1,98,256 shares.
Jan 2010 till date: 1,87,075 shares.

- The company has increased production capacity of value added Maize products in year 2007-2008.
- In Anticipation of increased profitability GAEL did a stock buyback of 966,615 shares at an average price of Rs 34.5 per share. (Max buyback price set to Rs 38/= per share)
- The financial crisis of 2008-2009 impacted GAEL in a negative sense and resulted in forex hedging potential losses of close to 73.57Cr
- GAEL Maize products division results have been improving and its share of GAEL's bottomline is increasing. we however see a drop in "Other  Agro processing division" revenues and sales.
- Promoters have been increasing their stake in GAEL as the stock languishes close to its 4 years lows (link)

I would suggest a "Strong Buy" at these levels. With a return to normal operations we can easily expect a 100% return from these levels in 12-24 months timeframe.  Long term the stock can be a multibagger in the making for a patient investor. Exchange rate volatility though still very much in play, exchange volatility is a function external to the companies control and assume GAEL has learnt from the crisis and better planning will be done for the future.

New capacity additions (Maize division) is operational and a return to normal operations (Other Agro division) can easily see GAEL deliver better results. Promoter buying of company stock from the open market and previous attempts by the management (2007) to decrease equity by share buyback means the company is valued atleast above Rs 38 per share (max buyback price as per buyback agreement)