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
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. **