Guj apollo equipments ltd

GUJARAT APOLLO EQUIPMENTS LTD CMP 170 market cap 280 crores.

The company is a leading player in different products used in road construction and has been in this field for over four decades. The products manufactured by the company and its subsidiaries can be classified into two main categories:

First, Mobile construction machinery which includes paver finishers of all types and sizes and bitumen pressure distributors. These are high margin products on which the company has increased its focus.

Second type is industrial plant such as batch mix plants, drum mix plants, wet mix plants and crushing and screening plants.

During FY 10 the company restructured its operations wherein manufacturing of all products under industrial plants are consolidated at Guj Apollo Inds and manufacturing of mobile construction machinery is now being done by Apollo Earthmovers Ltd and its subsididary Apollo Inds Products.

The company has more than 30% market share in most of the products it manufactures.

Demand for the companyâs products is likely to remain robust due to Persistent spending of various state govts on maintenance of existing roads and NHAI notifying contractors for having mandatory ownership of construction equipment.

The company has diversified product portfolio dealing with road construction segment. And since past few years the company is focussing more on mobile equipment group which offers higher margins.

Company has presence all around India by having branches which stock and sell spare parts and provide servicesExports continue to be the focus area for the company and during FY 11, the company is targeting markets in South Africa, New Zealand, and South America.

FINANCIALS:

The equity is 17 crores with 1.7 crores of Rs 10 each. Promoter holding is around 48% with FII holding around 3% and DII holding at around 8% as on Sep 10. Promoter holding has reduced by around 1.5% due to selling of shares by distant cousins of the promoters during past 1 year.

DEBT has been low over the years with debt as at Sept 10 being at 38 crores. ROE has been consistently above 20% since past six years.

Last six years results

Year

05

06

07

08

09

10

HYsep10

Sales

68

113

156

187

181

214

111

NP

5.4

10.5

18

25.8

21.6

27

11.8

QUARTERLY RESULTS AND PROJECTIONS:

Coming to the stock performance, the stock price has corrected from a high of around 246 in Sep 2010 to a low of 162 in Dec 2010, mainly due to poor Sep quarter numbers. These numbers were affected due to extended monsoon due to which the user companies did not place orders for the products and contribution from the lower margin products was higher leading to margin pressure as well. But the pent up demand should give rise to good Q3 and Q4 numbers. According to various estimates by brokerages, the company is likely to report sales of around 285 crores and net profit of around 34 crores, which yields EPS for FY 11 of around 20. For FY 12 company is projected to do eps of around 26-27 and current correction seems to offer a good entry point into a good company with bright future prospects.

POSITIVES:

1. Company with good growth available at reasonable valuation due to a poor quarter.

2. Low debt

3. Good balance sheet and return ratios

4. Demand likely to be good due to govt focus on road development

5. Company having good market share in the products it manufactures

NEGATIVES:

1. Fortunes of the company largely depend upon govt spending on road projects

2. Competition from foreign players is likely to intensify in view of high govt spending on road projects

3. Sharp increase in raw material prices

4. Competition from un organised sector

5. Poor acceptance of new product like Crushers and Compacters on which the company is focussing.

6. Operating cash flow since past two years has not been too enthusing.

Hi Hitesh,

This looks like a good company based on the past numbers & the valuation looks attractive , however i have a few concerns.

1). I don’t know where you got the sales data from, but when i see the consolidated results, its has been pretty flat for the past 3 years(299,277,287 crs) whereas net profits have actually gone down (46.6,28.6,32.9) . Further this fiscal they have done just 8.35 crs. So assuming conservatively that they do 15crs net profit , the current market cap of 260 doesn’t appear that cheap. Any insights whether we can see any turn around in the company?? Looks like competition seems to have caught up & squeezed the margins. DO u feel one can enter the stock now??

If one reads the annual report of the company closely, one can see that they hold mutual funds equivalent to the market cap of the company as on date. The company is ideally positioned to benefit from the uptick in road making which is promised by Nitin Gadkari. Considering you are getting India’s leading road equipment manufacturer ( 40% marketshare ) for free , I feel this is a very safe price to enter the stock.

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If you read Nitin Gadkari’s interviews very carefully, new roads being constructed by NHAI will entirely be of cement. So the residual aggregate business is of little value.

management is holding remaining stake in the construction equipment business as current investments.

disclosure: have taken full exit

Gujarat Apollo Industries Ltd. appears to be a mis-priced bet at current valuations. At the CMP of Rs. 183, the Co. is available at a total EV of about 290 Crs., which seems under-valued.

The jewel in the Co.’s crown is the 30% stake that it holds in Ammann Apollo India § Ltd. (AAIPL), a Co. in which the Swiss based multinational Ammann group holds the balance 70%, that was sold to them by the Co. in 2013-14, while retaining the day to day mgt. It is pertinent to note that Mr. Asit M. Patel is the MD of both Gujarat Apollo & AAIPL. Getting Ammann on board meant that AAIPL had access to the latest technology with higher promoter net worth & corporate governance. AAIPL is in the business of road construction equipment & related services & has been growing at a fast pace. From Sales & PAT of 215.08 Crs. & 1.42 Crs. for the period ending December 2013, to Sales of 482.23 Crs & PAT of 34.46 Crs for the 12 month period ending December 2015 to finally Sales of 679.84 Crs & PAT of 53.51 Crs. for the 15 month period ending March 2017. It has been paying out dividends / buy backs liberally. Looking at the potential size of the opportunity, the Co. has added about 57 Crs. to its Property, Plant & Machinery in the period ending March '17. thereby increasing its fixed assets by more than 50%

The Co. Gujarat Apollo itself is available at a multiple of less than 8, based on the consolidated results of 16-17, which includes extraordinary write offs of about 10 crs. Its BV as of March 31, 2017 is about Rs. 340 per share, with net current assets in excess of Rs. 130 per share. The promoters have been increasing their stake in the Co. with repeated buy backs through the open market, first at a price of up to Rs. 120, then 150 & currently up to a price of Rs. 189. In the process, taking their stake up from around 50% to 60% in the last few years. Their stake post the current buy back is likely to go up to 66%.

The Co. is in the business of equipment manufacturing for the construction & mining sector. With the opening up of the mining sector & the Govt. thrust towards infrastructure development, the performance of the Co. is more than likely to get better going forward.

Disc: Invested

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Thanks for the write up.
Have a couple of questions, would be great if you could answer:-
What is the exact cash on the books pre-buyback? And why does it have WC borrowings?
Has the co provided any information on why the sales fell y-o-y yet the profitability has surged (product mix?)

Why are all the investments happening at the consol level? Optically last quarter on a standalone level their interest coverage was below 1, any particular reason for this?

As Ammann Apollo India § Ltd. (AAIPL) is central to the investment thesis, I am attaching the AR of the Co. Being a multi-national, it distributes a large share of its profits. For the year ending December 2015, on a profit of 35.32 Crs, it paid out almost 70% of it by way of Dividends (3.39 Crs at Rs. 45 per share) & a share buy back (21 Crs)

Similarly, for the period ending March ’17, the Co. made a profit of 53.51 Crs & paid a dividend of 75.26 Lakhs. In addition, it June 2017, it passed a resolution to buy back 3,16,106 shares for an amount of Rs. 26.3 Crs. As mentioned in the earlier post, this is in addition to investing about 60 Crs in capacity enhancement from internal accruals during this period.

After the investment made in capacity expansion, AAIPL is still sitting on cash & other liquid investments of 86 Crs. as on March 31,’17

No wonder the promoters of Gujarat Apollo, which itself is sitting on large liquid assets, are aggressively increasing their stake with repeated buybacks.

Annual Report Ammann Apollo March 2017.pdf (2.0 MB)

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As per the disclosure made to the exchanges on 11th August, the promoter stake has gone up from 60.34% to 63.81%, with the Co. having bought back & extinguished 7,43,864 shares. The buy back period is up to 3rd November '17 & the Co. could buy up to 12,69,841 shares, which could take the promoter stake to 66.52%

http://www.bseindia.com/xml-data/corpfiling/AttachLive/CAF4EC3C_E250_4AC5_972B_F89EC6FCD0F1_121514.pdf

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Congratulations! such good results. Another good pick by you.

@RajeevJ Hi Rajeev,
There is an other income component of 15cr for this qtr compared to 4cr last year. Could this be attributable to their 30% holding of AAIPL or would it be a one-off? Most of this income seems to go directly to bottom-line without a corresponding increase in cost of materials and other expenses. What factors could have caused an almost four-fold growth in income from AAIPL compared to last year? Thanks!

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A look at the components of other income in the last AR, shows interest as a primary constituent. Other income in subsequent qtrs can be different. I guess the spurt in this qtr’s other income could possibly have come from the gains made by the Co. Gujarat Apollo on share buy back by Ammann Apollo. (Not to be confused with the buy back being carried out by Gujarat Apollo from the Indian public through the secondary market).

It is interesting to note that how so ever good the qtrly results may appear to be, the do not contain the co.'s share of profits (30%) from the joint venture Ammann Apollo, which is going from strength to strength.

Another interesting development is that the current buying is not part of the the Co. buying back as it cannot buy beyond Rs. 189, but by investors who see value at current levels.

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The stock seems to be getting re-rated & finding favour with a few HNI’s & hopefully some institutional interest may be coming in.

Meanwhile, the Annual Report of 2016-17 came in today. Attaching the same.

Gujarat Apollo 16-17.pdf (2.2 MB)

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https://economictimes.indiatimes.com/news/economy/infrastructure/cabinet-approves-rs-3-5-lakh-crore-bharatmala-phase-1-project-to-develop-40000-km-roads/articleshow/61196485.cms @RajeevJ

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Might be naive question but how share buyback of from subsidary can generate income for its holding company?. It might be possible only if the holding company tendering their shares in the subsidary to the joint venture company which in this case is Ammann.

Sir,

If Guj Apollo is doing a JV with AAIPL, then why is the income from AAIPL reflected in Other Income? Shouldn’t this be consolidated income?

Starting from 2014 why is there is a huge dip in sales (nearly 1/5th) and hasn’t recovered since. Also the OPM has been negative and shows no signs of improvement over the past 4 years.

Can you please share your views on these.

P.S: Newbie investor :slight_smile:

http://www.bseindia.com/xml-data/corpfiling/AttachLive/9EE46809_7E82_48F7_9B2B_CC4069CA354A_192258.pdf

Promoter selling.

The quantity in question is only about 7000 shares. Is it being done for effect?!

Another 7500 shares sold today by the Promoter. This is getting interesting! At Rs. 189/-, the Co. finds the share cheap enough to buy back the share & at Rs. 250/- the Promoter feels the need to sell!

Incidentally, when a fellow investor Sharad Shah, made an offer to buy a chunk of shares to the promoter, it was politely declined!

Ammann India, a JV between Swiss Ammann & the Apollo group completed the state of the art plant in April this year. This plant will also act as an export hub for Ammann’s supplies overseas.

http://www.apollo-equipment.com/about/news/ammann-india-unveils-new-improved-facility/