Buy Gujarat Ambuja Exports: Kotak Sec

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Buy Gujarat Ambuja Exports: Kotak Sec

Broking house Kotak Securities is bullish on Gujarat Ambuja Exports and has given buy rating with a target price of Rs 35.

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Broking house Kotak Securities is bullish on  Gujarat Ambuja Exports  and has given buy rating with a target price of Rs 35.

The Kotak Securities report on Gujarat Ambuja Exports:

Margins intact despite mounting input prices

"Recently, there have been reports about the possible shortage of maize supply in India, which is the key raw material for the maize-based starch processing business of the company."

"As per the industry reports the demand for maize in the domestic market has
been rising mainly due to higher demand from the poultry and livestock sectors. Also, ethanol producers are expected to place large orders for the coming few months. The break up of the demand is around 1.45 MMTPA for the starch sector, 7.1 MMTPA for poultry, 1.45 MMTPA for livestock and 3.6 MMTPA for human consumption, thereby, taking the total demand to 13.6 MMTPA. Against this demand, maize production has actually fallen from 12.4 MMTPA in FY05 to 11.5 MMTPA in FY06."

"Also, there has been a drop in maize output in the US, which is the world's
biggest maize exporter. Out of the total global demand of 600 MMTPA of maize, US supplies around 50% i.e. 299 MMTPA. The US has recorded a fall in crop output by 30 MMTPA, thereby leading to a 5% supply gap in the global markets. "

"Lower exports are likely from the US and, thus, there could be more export from India to other countries where the US, traditionally used to supply. This is well supported by the fact that South Africa, which has traditionally imported maize from the US has for the first time, signed a supply agreement from India. n In order to check the export of maize, the all-India Starch Manufactures Association has sent a proposal to the government to take immediate steps to curtail exports and allow duty-free import of maize. Currently, import of maize attracts 15% import duty."

Valuation and recommendation

"We are maintaining FY07E EPS estimate at Rs.2.8 and increasing the EPS
estimate of the company from Rs.4.5 to Rs.4.7 in FY08E."

"We estimate the revised CEPS at Rs.7.5, as against our earlier estimate of Rs.7.3 for FY08E."

"At Rs.27, the stock trades at 1.3x for FY07E and 1.0x FY08E to book value.
It discounts FY07E and FY08E earnings at 9.7x and 5.7x, respectively."

"The stock looks very attractive on cash earnings basis. It discounts FY07E and FY08E cash earnings at 5.5x and 3.6x, respectively."

"We remain positive and reiterate our BUY with an increased price target of
Rs.35, which is based on DCF method of valuation with WACC of 10.3% and
terminal growth rate of 4%."

"From the current levels of Rs.27 the stock provides upside potential of 30%.
We recommend Buy."