VALUE PICK - GUJARAT AUTOMOTIVE GEARS LTD.

About The Company

  Gujarat Automotive Gears Ltd. established in 1973 at Vadodara (Baroda) is a fast growing auto and tractor components export oriented manufacturing company.

 The company initially founded by Kotharis is now owned by HIM Teknoforge Ltd (HIM GROUP), Headquartered in Baddi, Himachal Pradesh, The company's manufacturing unit is located at Kalali, Vadodara equipped with the latest technology to take on increasing chinese exports to the global after-market.

 

The Ace Investor - Value Pick

(BSE:505712) GUJARAT AUTOMOTIVE GEARS LTD.

Debt-Free company listed on BSE, Currently trading around 290 at a P/E of 10 with a Market Cap of about 50 crores, With consistent topline growth, consistent dividend paying record and strong promoter holding of 65.44%.

 GAGL is engaged in the manufacturing and export of tractor and auto components (i.e. Transmission Gears, Pins, Axle Shaft, Propeller Shaft Components, Wheel Spanners.) under the brand name "KAG"

Exports form about 97% of the total sales of the company, The company is actively exporting to Europe, North America, South Asia, Middle East, & Sri Lanka, The Indian market forms only 3% of total sales.

GAGL has been recently acquired by HIM Group along with Globe Precision Industries Pvt Ltd., HIM TEKNOFORGE LTD is a forging manufacturer and gear manufacturing company supplying to major OEMs like Ashok Leyland, Swaraj Mazda, Escorts, Bharat Gears, Mahindra & Mahindra, It also supplies to the Indian Railways and Defense sector.

HIM Teknoforge with the acquisition of GAGL is bullish on the exports market and now planning to tap the markets of Africa & South America and other untapped countries.

Another positive factor for future is a merger with HIM Teknoforge, Immediately after GAGL takeover, in Nov 2013 GAGL board approved the proposal to evaluate/explore potential merger/amalgamation of HIM Teknoforge with GAGL hinting at things slated to come in the future, Merger with listed companies is often a route taken by unlisted companies to tap the bourses.

Coming to the financials, Gujarat Automotive has been showing consistent topline growth with excellent operating profit margins, See the annual results table below.

Particulars	FY05	FY06	FY07	FY08	FY09	FY10	FY11	FY12	FY13	FY14
Sales	6.99	8.27	10.13	10.71	12.91	14.48	17.63	22.40	24.10	28.63
Operating Profit	0.67	0.73	0.96	1.08	2.11	2.62	2.39	5.14	5.64	6.05
OPM	9.59%	8.83%	9.48%	10.08%	16.34%	18.09%	13.56%	22.95%	23.40%	21.13%
Other Income	0.19	0.08	0.00	0.10	0.00	0.09	0.52	0.61	0.90	1.35
EBIDT	0.86	0.81	0.96	1.18	2.11	2.71	2.91	5.75	6.54	7.40
Interest	0.25	0.24	0.28	0.19	0.38	0.09	0.08	0.04	0.04	0.03
Depreciation	0.22	0.19	0.18	0.22	0.27	0.27	0.29	0.36	0.45	0.44
Profit before tax	0.39	0.37	0.50	0.77	1.46	2.34	2.55	5.35	6.05	6.92
Tax	0.14	0.21	0.21	0.25	0.64	0.73	1.86	1.76	1.97	2.28
Net profit	0.25	0.21	0.33	0.52	1.14	1.34	5.90	3.59	4.08	4.65
Adjusted EPS in	1.39	1.17	1.83	2.89	6.33	7.44	32.78	19.94	22.67	27.35
Dividend Payout	0.00%	28.57%	18.18%	17.31%	7.89%	6.72%	24.92%	40.95%	2.21%	1.94%

With zero debt, good reserves, consistent topline growth since last 10 ten years, great operating profit margins, consistent dividend paying record, Strong promoter holding of 65.44% and plans of merger with a reputed forging parent company, GAGL looks highly undervalued at a P/E of 10 as Bharat Gears is trading at a P/E of 85, Hi-Tech Gears is trading at P/E of 38, Shanthi Gears is trading at a P/E of 83 and only Raunaq Automotive like GAGL is trading at a P/E of 10, Whereas Raunaq Auto unlike GAGL has debt on the books and no dividend paying history, Gujarat Automotive Gears Ltd (GAGL) should command a P/E of atleast 20 which means the fair value minus growth should be around 600, And if you add the growth factors for future it should easily again be trading at 1000+ which it was trading at before the stock split.

 

As the above inputs have made it clear that GAGL is highly undervalued pick, Value investors should latch on to this remaining opportunity in an already expensive auto component sector where Indian companies are now ready to take on the Chinese with good technology and product pricing.

Note: Stock can hit upper circuit of 20%, Don't mind buying it at 20-30% higher levels.