Ideas for Profit | 4 factors that make Gujarat Ambuja Exports an attractive long term pick

On a segmental basis, cotton yarn division continues to witness cyclicity and remains a drag on bottomline as well as return ratios. However, return ratios are on a rise on the back of improving capital allocation. Recent capex activity has majorly been directed towards the maize processing division, which generates mid-teen return ratios. The agro processing segment has also delivered return ratios in excess of 20 percent even at the current capacity utilisation of 30-35 percent.

Greenfield plant in West Bengal In early 2018, the first phase of its 1,000 TPD maize processing plant at Chalisgaon (Maharashtra) started commercial operations. With this plant, GAEL has emerged as the largest maize processor in India with a total capacity of 3,000 TPD and a market share of 21-22 percent.

The Chalisgaon unit has seen a sharp ramp-up in capacity utilisation, which has moved higher to around 80 percent within 12 months of plant initiation. The second phase of expansion at Chalisgaon, Maharashtra is underway and is expected to come on-stream by Q4 FY19.

The company is planning to set-up a 1,000 TPD maize processing greenfield plant at Malda in West Bengal at an estimated cost of Rs 300 crore. The new plant will manufacture starch, liquid glucose and sorbitol and will cater to demand of eastern markets in India and other markets in Southeast Asia. The land acquisition has been complete but project execution will take 18-24 months.

Maize consumption on the rise GAEL derives more than 60 percent of its profits from the maize processing division and the segment has benefited from rise in annual maize consumption in India, which has grown at a CAGR of 10-11 percent in the last five years. Maize consumption in India can broadly be divided into three categories: feed, food and industrial/non-food products (mainly starch). Maize is an important constituent for poultry and livestock feed and this segment alone accounts for 60 percent of the consumption and remains the key driver for market expansion. Food segment, which includes direct as well processed form, constitutes around 20 percent.

Like most agro commodities, maize production in India is heavily reliant on the southwest monsoon as more than three-fourth of the maize is produced in the kharif season, which spans June to October. Although the government has implemented various agriculture and irrigation schemes to safeguard the interest of farmers, the sector remains exposed to the vagaries of nature and poor monsoon rainfall can affect the yield, production and prices of the agricultural crops as well as operational metrics of GAEL.

Trade war could turn beneficial for exporters The US and China are the first and second largest producers and consumers of maize. The ongoing trade tensions between the US and China could realign global trade activity and throw up interesting export opportunities for Indian companies in the agro commodities space. Also, there exists a significant scope for maize exports from India as it currently constitutes a small portion of around 6-7 percent of overall Indian production.

Trading at attractive valuations We remain optimistic on the long term prospects of GAEL as execution has picked up strongly in the past 12 months. While the business has been performing well, valuations seem equally attractive at current levels (9 times FY19 estimated earnings) considering the long headroom for growth and earnings visibility.