Gujarat Automotive Gears - Play on auto anciliary

Stock Opportunities Untested - but worth a good look
1

Direct copy-pasting from my blog - http://art-of-mental-modelling.blogspot.in/2012/10/gujarat-automotive-gears-ltd-microcap.html

This is one of the company I was tracking as a part of my “1/PEGY ratio” based stock screen. Because no one is talking about it, and I couldn’t get much info on it, I forgot about this stock. But recently while trying my hand on “Growth Stock” screens at http://www.screener.in/ I stumbled upon this stock as one of the top 20 growth stock. Further look into the financial at http://www.screener.in/company/?q=505712 point me that this stock definitely need a re-look, and further analysis. The bad part is that I couldn’t get any research report on it.

About the company (Copy Paste from Company Website):-
Established in 1973 Gujarat Automotive Gears Limited (GAGL), has today become a leading name in manufacture of auto and tractor components in domestic as well as international markets. With its head office in Baroda, the company has grown in magnitude and network both over the years. Marketed under the brand names of KAG, the products of GAGL serve the aftermarket and OEMs in India.

With consistent commitment on superior quality and robust performance of its products, GAGL has earned national and international acclaim and appreciation. Apart from this, a synergistic approach to design and execution, perfect manufacturing processes and prompt after-sales services, ensure matchless quality products & components.

Nearly four decades of industry presence and market leadership, the company has developed an organized network of reputed and loyal clientele not only India, but also in countries like Germany Italy, United Kingdom, Egypt, Sri Lanka, Singapore, Malaysia, Thailand ,Belgium, Dubai, Australia United States of America, etc.

**Positives (Awesome numbers):- **

  • Virtually debt free company with 3Yr ROE of 65%, 1Yr ROE of 39%., 3Yr Compounded Profit growth of 60+%, Sale growing at 19% compounded growth rate.
  • Dividend payout ratio of 33%, Dividend yield of 5.29%.
  • 70% Promoter shareholding, no pledging
  • NPM @ 33%
  • PE at 6.68%

Negatives (Unknown story):-

  • Small cap with MCap of 33Cr, Average trading volume is 150-200, really illiquid stock.
  • P/B ratio is at 3.3
  • Zero researched company, very difficult to get information on them, so not much idea on business moat, promoters, promoters integrity, and the stock story behind
    **
    Conclusion:-**

No doubt that this company has excellent numbers, and good past track record. If someone use magic formula, than this stock has a higher chance of coming into one’s portfolio (ROE/PE = 5+). The issue lies in not knowing the full story, and near-zero liquidity of the stock.

Alternative way to decide whether to invest in this company is to follow the steps as described in 'the little book that beats the market". Look at the risk free rate of return (bank FD @9% --> post tax 6%). So with dividend yield of 5% and earning yield (1/PE) at around 15%, we are getting around 14% extra yield for taking the risk of investing in this small cap, super-low liquidity stock (even with zero growth story).

**
** To me it seems a definite under-valuation story where Mr Market is giving it at a substantial discount to its intrinsic value. I am thinking of taking this to around 3-5% of my portfolio in a staggered manner. **
**

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** Reference:-

2

Hitesh Bhai,

Can you please do a technical analysis on this tsock and let us know its result.

3

Subhash,

I had also looked at this couple of times when I came across in the screener, but did not buy it because of the negatives you have mentioned.The figures seem to be great.Last time I had checked it, few months back when it was around 1100. On hindsight it looks wise decision to have skipped it as currently it is at 926.

Akbar

4

Hi Akbar,

In short term, looking at price drop make sense, but in long term, these price drops give us good opportunity to enter into it. GRP, Atul auto are 2 other example, which are quoting less than their peak price currently past sharp fall in price. It doesn’t make them any less desirable.

What I feel is that one should take small position (say 0.5-1%) and add more on price increase/decrease of 5%, thereby handling the price volatility that is coming because of low liquidity of the stock.

5

subash,

technically there is no specific pattern to the charts. stock seems on a strong unptrend and is taking support above its 200 dema which currently is placed around 840.

fundamentally it seems a value pick but i usually avoid them bcos they tend to involve opportunity costs. Plus its too small to get noticed by markets. and the field it is in is auto ancillaries which usually has poor market fancy most of the times.

6

Yeah, though the stock has good fundamentals but we need some pointers on the growth prospects. Please do share, if there is some details on future growth.

7

Nopes, I couldn’t find much on the growth prospectus. GAG reported a pretty decent quarterly result.

8

Hi Subash

GujAuto consists 24 % of my portfolio.

Kindly request you to advice me.

Still feel the stock is undervalued.

Or is the market trying to convey something, which i am unable to comprehend.

Regards

9

There is hardly any info from the company side in the AR which is a bit disappointing as it becomes difficult to analyse.

10

Hi Mallikarjun,

I have sold GujAuto long back, mostly because of lack of interest by seniors at valuepickr. I feel safe in investing stocks where some positive discussion happening, and people are constantly tracking it.

Having said that, I still feel that GujAuto is a undervaluation play, with solid fundamntal ratios, so it has a higher probability of positive balck swan event. But again as Hitesh bhai has told, currently there is not much market fancy is auto component stocks and hence there is a chance of opportunity cost in remaining invested in it.

Regards,

-Subash

11

Dear Ayush

Few days back had mailed them asking about their future growth prospects.

Didn’t get any reply. Worried from then.

Some information regarding a person who holds more than 1 % and has indulged in bulk deals are below.

Holds more than 1%

1). http://www.moneycontrol.com/bse/shareholding/shp_public_shares.php?sc_dispid=GAG#GAG

Bulk deals

2.http://www.moneycontrol.com/stocks/marketstats/blockdeals_query.php?sc_id=GAG&post_flg=1&myexchg=Both#GAG

He has got into it @ 251 in 2009.

Regards

Mallikarjun

12

Hi Mallikarjun,

I’m not tracking this co hence can’t comment much on it. Like I mentioned above, the co does has good fundamental ratios and can do well but being a very small co, we need some insights into their future plans to take a call otherwise we may have to face high opportunity costs if they don’t grow.

Do share if you get some insights.

Regards,

Ayush

13

Hi Subash

Ya Hitesh paaji has mentioned about opportunity costs. Will try to trim the %, if there are some negatives.

If you get some info, please inform us

Regards

14

Ayush

Dear Ayush

In screener.in Gujarat Auto has G factor = 7. Can you please elaborate on that

Regards

15

Dear Ayush,

The link below is about Director’s Report 2012

In Operations Part, the Director has indicated about future growth prospects.

The extract

During the coming year focus on export will be primary with regular
 visits to customers for providing better service and also visiting
 various fairs and exhibitions for taping of new customer.
 
 Europe being our single largest market, we expect a little slow down
 from our customers and hopefully would be able to cover any decline in
 European market by enhancing and finding new customers in other market
 specially more focused on North America and Far East Market.


http://www.moneycontrol.com/annual-report/gujaratautomotivegears/directors-report/GAG#GAG
16

Ayush have uploaded the latest Q3 results. Can you go through it and alert me if there are any red flags

Regards

Mallikarjun

Gujarat_Automotive_Gears_Q3-2012-results.pdf (65.6 KB)

17

G Factor is a internal formula to give rating out of 10 based on several parameters. (Sorry, can’t disclose the formula as of now). So higher the no (nearer to 10), better the stock may be.

Q3 nos do look good, however topline growth is lacking. Haven’t been tracking this co, so can’t comment much.

Ayush

18

Ayush

Its ok Ayush… Was confused since it had 7 & other stocks had 2, but most of them were talking about higher growth visibility for the stock which had G factor 2.

Regards

Mallikarjun

19

Ayush

Its ok Ayush… Was confused since it had 7 & other stocks had 2, but most of them were talking about higher growth visibility for the stock which had G factor 2.

Regards

Mallikarjun

20

Hitesh bhai/Hemant bhai,

Recently while looking at delivery volumes, I am observing some huge spikes in GAG’s stock chart. What exactly does it implies? Does it implies some value buy happening at such mouth watering valuations?