Analysis: Gujarat Automotive Gears Limited

Modified on July 1, 2018

This article provides in-depth fundamental analysis of Gujarat Automotive Gears Ltd, an Indian manufacturer of auto and tractor gear parts.

I thank Venkatasubramaniyan Natarajan for sharing his analysis of Gujarat Automotive Gears Ltd with the readers of the website. Venkatasubramaniyan has done a very detailed analysis of Gujarat Automotive Gears Ltd covering important aspects of stock research like financial, business, management and valuation analysis and has presented his findings as key pointers. His observations would serve as a great help for any reader/investor planning to analyse Gujarat Automotive Gears Ltd from investment perspective.

I believe that presenting a summary of financial data of Gujarat Automotive Gears Ltd beforehand is essential so that all the readers can understand the analysis conducted by Venkatasubramaniyan and benefit from it.

Gujarat Automotive Gears Ltd 

Gujarat Automotive Gears Ltd equity analysis research report

Q: Hi Vijay,

Thanks for your reply. Here is my analysis of Gujarat Automotive Gears Ltd; I want to know your views (specifically on the management part).

Financial Analysis of Gujarat Automotive Gears Ltd:

  • Sales Growth: – Top line growth 10 Yrs = 17%, 5 Yrs = 17.25%, 3 Yrs = 17.5%. Gujarat Automotive Gears Ltd is maintaining a healthy growth rate of 17% and penetrating new markets and new clients.
  • Profitability:- Gujarat Automotive Gears Ltd is maintaining operating profit margin (OPM) of around 23% & net profit margin (NPM) of around 15%. Margins have surged from 15% to 23% OPM due to weak Rupee against Euro (Dec’13 to Dec’14). Margins may return to about 15% OPM & 8% NPM when Rupee gains strength against Euro. For long-term perspective, the surge in the last year can be averaged out with previous years’ performances. Net margin suffered a huge drop in 2011, except that company is improving its efficiency. No loss in last 10 years.
  • Gujarat Automotive Gears Ltd is regularly paying tax around 30%. In 2011 it paid taxes around 73% (I cannot dig the reason behind that – need your guidance) which pulled the CFO to (–) ve values. Gujarat Automotive Gears Ltd is having a pending income tax case for a meager amount of INR 95k.
  • The company is nearly a debt-free company and has a high interest coverage ratio.

Operating Efficiency of Gujarat Automotive Gears Ltd:

  • Current ratio of the Gujarat Automotive Gears Ltd stays above 2, while last year the company made a long term deposit of 9cr (Can’t understand the reason behind that – need your guidance) (Refer notes 9).
  • Receivable days is 59 (Improved from 80-85days), and payables is 85 days. This looks the management is very conscious about the working capital.
  • Asset turnover has been reduced from 3 to 1.75, which makes the business capital intensive.
  • Cash flow is (+) ve for the last ten years, except 2011 – reason stated above.
  • Gujarat Automotive Gears Ltd has not raised any new loans and has invested for expansion from its own fund and repaid its debts.

Relative Valuation:

P/E < 10, PEG = 0.25, EY% = 15.89%, P/B = 1.84 (Not much worry for a non-banking company), P/S = 1.26, DIV Y% = 0.22. Dividend yield is comparatively low but the value creation for shareholders with its retained profits is 2.57, which is a good sign the company is utilizing the funds retained.

Companies compared: Bharat Gears, Hi-Tech Gears, Lumax Automotive, ANG Industries

Business analysis of Gujarat Automotive Gears Ltd:

  • No significant moat found over competitors.
  • Gujarat Automotive Gears Ltd is only manufacturing automotive spares (niche business).
  • Scalability of the business depends on the penetration to new markets and new clients; Gujarat Automotive Gears Ltd is already doing the same.
  • Conversion of sales to profit: Cumulative PAT = INR 17cr, Cumulative CFO = INR 15Cr, Gujarat Automotive Gears Ltd is keen in converting its sales in to cash.
  • Sales improved 17% CAGR and profit improved 38% CAGR.
  • There is no data available on production capacity or cost per product to analyze pricing power of the Gujarat Automotive Gears Ltd with its peers. – Need your guidance.

Management Analysis of Gujarat Automotive Gears Ltd:

  • Management has improved sales and profits.
  • Management’s remuneration is stayed flexible with the profit, but last year it spiked up.
  • Gujarat Automotive Gears Ltd is regularly paying dividend.
  • Promoter’s shareholding is 67.1% (Individuals =9.92%, Corporate = 57.19%)
  • FII holding is 0%.
  • Sales to Europe constitute 82% of the revenue. Gujarat Automotive Gears Ltd is increasing its market share in Middle East countries.
  • Government influence – 98% of the revenue comes from export of products, any increase in excise duty & currency exchange rates will affect the margins.
  • Insider buy/sell – Naresh Kothari 10% public shareholder of the Gujarat Automotive Gears Ltd, offloaded heavily this month.
  • HIM Technoforge already holding 41.5% shares of the Gujarat Automotive Gears Ltd, is having talks with the promoter to buy the balance shares of the promoters.
  • There is no clear information regarding the succession plans.

Conclusion:

Financial position, efficiency & business of GAGL seem to be good.

Thanks & regards,

 

Author’s Response

Thanks for writing to me!

I appreciate the time & effort that you have put while analyzing Gujarat Automotive Gears Ltd and sharing it with the readers and author of this website. You have read the annual report of the company including all the notes to accounts, which has helped you to make a very important observation about long-term deposit. It indicates the importance of reading annual report in detail, for every investor.

You have done good analysis of financial, valuation, management & business aspects of the company.

All the important parameters have already been covered by you in the write-up and I have no different opinion. However, the data of receivables collection provided by screener, presents a different picture to me.

Cumulative profit after tax (PAT) for last 10 years (FY2005-14) of the company is INR 22 cr. whereas cumulative cash from operations (CFO) for the same period is INR 15 cr. This impact is visible in increasing receivables days over last 3 years (FY2012-14). Receivables days have increased from 53 days in FY2012 to 59 days in FY2014.

Rest all the parameters like increasing sales, profitability, decreasing debt, creation of market value from retained earnings are fine.

Let us now look into the specific concerns raised by you with regard to Gujarat Automotive Gears Ltd:

Very high tax rate of 73% for FY2011:

The relevant details are given in the annual report of Gujarat Automotive Gears Ltd for FY2011. Tax of about INR 1.9 cr. seems high when looked in light of operating income of about INR 2.5 cr. However, there is a one-time exception income from profit of sale of land of INR 5.2 cr. Tax paid by the company in FY2011 includes the tax paid on the profit from land sale as well.

Long-term deposit of INR 9 cr. (Note 9 of FY2014 annual report):

I appreciate you for finding out this entry as it gives us information about management quality. This long-term deposit of INR 9 cr. has been paid to HIM Teknoforge Ltd. An investor can find this information in related party disclosures in Note 27 at page 28 of the annual report for FY2014. HIM Teknoforge Ltd became the holding company of Gujarat Automotive Gears Ltd after acquiring it in 2013.

Upon gross level analysis of the balance sheet of Gujarat Automotive Gears Ltd at March 31, 2014 and comparing is with the financial data at March 31, 2013, an investor can notice the following things:

  • Increase in reserves of INR 4.6 cr. (from INR 13.6 cr. in FY2013 to INR 18.2 cr. in FY2014), which has come from the profits for FY2014 (see note 3)
  • Decrease in cash & bank balance of 5.1 cr. (from INR 6.2 cr. in FY2013 to INR 1.1 cr. in FY2014)

This means that the money required for the deposit of INR 9 cr. given to HIM Teknoforge Ltd has come from the entire profits of FY2014 and existing cash balance of Gujarat Automotive Gears Ltd. This is not a good sign. Effectively, the new management (HIM Teknoforge Ltd) has taken away all the profits of FY2014 and almost all the cash balance of the company and is using it for its own purposes rather than using it for the benefit of shareholders of Gujarat Automotive Gears Ltd.

Management might argue that they would receive interest from HIM Teknoforge Ltd on this deposit. However, Gujarat Automotive Gears Ltd is not in the business of acting as a lender and extending loans to others for earning interest income. It should either invest the money in its own operations or distribute it to all the shareholders by dividend.

The action of advancing loan to HIM Teknoforge Ltd does not seem good from perspective of minority shareholders of the company.

Data on the production capacity & utilization:

If you are not able to get this data from public sources, then you may contact the company and they should provide you this information.

Overall, I feel that data for the company reflects that it is growing its business at a moderate pace of 15-18% while maintaining its profitability. However, recently it seems to be facing certain challenges in realizing cash from its customers in time. An investor should keep a check on change in receivables days in future.

The fact of being a debt free company, funding its growth through internal accruals is a good sign. However, the recent incidence of controlling shareholders using resources of the company for its own benefit does not sound well for minority shareholders. I would be wary of ignoring this incidence. An investor should analyse it in detail and convince herself before taking any investment decision regarding the company.

 

Margin of Safety in the market price of Gujarat Automotive Gears Ltd:

Gujarat Automotive Gears Ltd is currently available at a P/E ratio of about 10, which offers low margin of safety as described by Benjamin Graham in his book The Intelligent Investor.

Read: 3 Simple Ways to assess the Margin of Safety in a Stock

These are my views about Gujarat Automotive Gears Ltd. However, you should do your own analysis before taking any investment related decision about the company.

You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company

Hope it helps!

Regards,

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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