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.

Conclusion:

- 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)