Good set of number from GAEL
We are pleased to inform that Company has decided to put up a Green Field plant at Malda,
West Bengal for 1000 TPD Maize Processing at an estimated cost of 300 crores. The plant
\will manufacture Starch, Liquid Glucose and Sorbitol to cater to the requirements of Eastern
part of the country and export markets of Bangladesh and South East Asian countries. We have been allotted land admeasuring 66.85 acres at Malda Industrial Growth Centre (Pb—II), District Malda. The project shall be executed within a period of two years from now. With this
initiative, the Company shall have manufacturing and marketing presence in North, West,
South and East India and will establish it as a truly Pan India manufacturer in maize processing sector.
In the latest quarterly result , GAEL’s margin has reduced sharply . Both Maize and Agro processing divisions seems to be hit badly . I could not find any details about the margin and profit reduction . If any one has any details , please share it
Price of maize shot up due to lower production. This will be corrected after a much higher supply after this monsoon. Don’t know about agro.
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The Indian Express: Agriculture department to farmers: Grow maize at your own risk.
GAEL has to go Avanti feeds way and encourage farmers…next two quarters going to be very tough due to maize shortage
I think they can pass on some of the margin hit going forward. So it may not be an issue in the long run for the company and its margins. Plus valuations give a lot comfort as of today in my view.
Problem is Management has already clarified in a news article that industry can not run more than 50 percent utilisation due to unavailability of maize. Means topline going to be affected drastically in next two quarters so pass on will not work much. It also clarifies that raw material availability remain uncertain going forward if they don’t jump in contract farming for sustainability
GAEL and other industries which are dependent on agri commodity as their raw material will have tough time due to lower production and higher MSP set by GOI.
Let us see how this impacts GAEL. GAEL has proven over time that its maize business is not a commodity business and that it has pricing power. This raw material issue will lead to further consolidation in the industry with the remaining players struggling as it is.
In this case we have a business:
- Lowest Cost producer in a tough industry.
- Competition struggling, winding up & heavily leveraged.
- GAEL is debt-free and expanding
- Pricing power that has shown in the numbers over the years.
- A business mistaken as a commodity business and quoting at commodity kind of valuations.
- Big optionality in HFCS, where GAEL has a first mover advantage.
- An FMIG product that is used in multiple forms of industries from FMCG to Pharma.
Once the maize business starts gaining further as a % of numbers we should see ROCE’s improving as well, since the maize business has rather high ROCE’s if im not wrong.
If GAEL can show that it can pass on RM prices and tide through this supply crunch in maize, it would further solidify the idea. Lack of instituitonal holding is another plus point. Valuations are another big factor here.
However if this RM issue does hit them it would mean that one would have to reevaluate the idea in my view. Lets see!
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Take every brokerage report wíth pinch of salt… in what basis they are giving target when raw material is scarce in industry?
Disc: invested… position halved around 200
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I think market is treating the company as if it is going to be bankrupt soon .
Total asset = 1750 cr
Market cap = 1618
Of course there are scarcity of RM , it will force the leveraged weaker players out . They probably will have a hit on profit and margins .They will have higher fixed cost for some time due to new facilities coming up. But at least for me it is hard to imagine a scenario where all the corn farmers in India moves out of corn cultivation . Even if this happens won’t they be able to run profitably with imported corn
Major corn producers in the world
USA (377.5 million metric tons)
China (224.9 million metric tons)
Over the past 25 years, corn production has undergone a significant increase of 125%
Brazil (83.0 million metric tons)
India (42.3 million metric tons)
Disc : Invested … increasing the position ,
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Unfortunately archaic Indian govt rules dont allow import of GM Maize so that rules out huge supply from US & Argentina leaving only smaller supplier like Ukraine in the fray.
Real danger is Armyworm & may be farmers are afraid to plant maize specially in Ktk TN & Maharashtra which has suffered from it IMHO. Crop from Bihar & MP so far has escaped its wrath and RM availability may improve in Sep Oct when fresh arrival takes place.
But Still its no 1 co in maize value add sector & may benefit from consolidation.Also Ridhi Sidhi old promoters hv acquired EI Clay the Thapar owned co at yamunanagar further intensifying competition for RM. No option but to wait it through.It remains a quality co run by a hardworking promoter .
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This is a plus point for strong players in the industry. Companies like GAEL can capitalise on this through their low-cost structure and bulk procurement due to proximity. I think one should carry out a bottoms up approach on GAEL as they are perhaps the only company in India who are doing very well in this space.
They have an agro business that basically needs no capex. Generates free cash that is used to expand the maize business. So you have a company that is doing well and expanding while other players are in distress and the industry is in distress. They are probably the only company who procure in one shot and cover their supply. This bulk procurement also enables them to get an upfront cost advantage over their competitors. They also have been able to pass on RM cost as has been evident in the past, let us see how it pans out in this FY. This does give more validity to the fact that the maize business of theirs is not a commodity business.
It needs to be viewed from a bottoms up perspective as there is no doubt that the industry is in distress and this supply issue has created further chaos.
There are two big optionalities, not just one. One being of course the imminent use & approval of HFCS (even a small shift can have a big impact on industry size I guess). The second one is that they have a branded starch business, this is the first of its kind in the country I believe. This could end up giving a further fillip to margins.
The contribution from the agro oil business to the bottom line can over time become less than 10%. Currently it is around 25% and 75% from the maize business if my info is not wrong. Re-rating can also occur once % of maize business on top line grows further. Currently it is around 50%.
At these valuations downside seems rather limited.
Disc. Tracking position taken in last 2 weeks.
Let us see how this business pans out in the following year!
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how you view Gulshan Polyol as rival
Looking at results it seems that company has not pricing power and now at 50 percent utilisation revenue is going to reduce drastically… expansion in such a scenario may lead to deterioration of balance sheet
As stated in above article, maize production will remain low in next year too so its going to test the patience of investor
How much company can import and how much it can pass on will be a key question here…
Next quarter is quite significant to come to any conclusions
Last quarter they had to cater to past export contracts for which they could not pass on the price increase. This quarter would indeed be significant to check this hypothesis. Their utilization in maize is high and, given past record, the new plant should get utilized in no time. Maize prices going higher will not affect them much because they will create contracts accordingly (like they have done in the past when prices fluctuated)
They operate at 90% plus and new plant is operating already at 80% if im not wrong. What the industry does is no secret. All players are in distress and performing poorly. Gulshan is okay with but they arent close to the scale of GAEL and only mainly do Sorbitol 70% so they arent really a fully integrated player.