Gujarat Ambuja Exports Limited (GAEX) is one of India’s leading manufacturers of agro-processed products and cotton yarn. Over the last decade, GAEX has increased focus on maize processing given its better and consistent returns. Maize segment’s revenues have grown 10 times, from just Rs 1.23bn in FY07 to Rs 13.05bn in FY17 (28% CAGR), led by debt-free capacity addition and market share gains. With the new maize processing plant set to commission soon, GAEX will become India’s largest maize processor and will be all set to ride the next wave of growth. Also, its legacy solvent extraction business should see consistent growth post duty hikes on imported oils. We expect 17%/20% revenue/EPS CAGR over FY17-FY20E. Initiate coverage with LONG and a SOTP-based Mar’19 TP of Rs 310.
Earning its corn! Capacity addition, value addition to drive growth, profits: Due to its better and consistent returns, maize processing has over a period become GAEX’s focus area. Most cash flows generated over the last decade have been ploughed back into this business. Segment revenue/EBITDA contribution has increased from 9%/25% in FY07 to 39%/67% in FY17. With its new plant (1000 MTPD) coming on stream in 4QFY18, GAEX shall become the largest maize processor in India with an installed capacity of 3,000 MTPD and a market share of ~22%. We expect the company’s maize processing revenue/EBITDA to grow at 17%/24% CAGR over FY17-FY20E.
Slip resistant – Scope to treble oil revenues without capacity addition: Indian oilseed crushing companies have been struggling with lower utilization levels due to lack of price parity between raw materials and finished product prices. Recently, the government increased import duty on soybean oil to 30% (from 18%), which should give a level-playing field to Indian farmers; domestic production may begin to improve, in turn helping Indian oilseed crushing companies. With 25-30% utilization at present, GAEX can potentially increase its oil revenues 3-4 times from current levels without setting up any new capacity.
Initiate with LONG, Mar’19 TP Rs 310: GAEX’s performance in the maize segment over the last decade has been underappreciated due to a volatile scoreboard of its legacy businesses. With commencement of its new plant, we expect growth momentum in the maize segment to continue; besides, the oil business would also benefit from import duty hikes. In this backdrop, we feel the stock is attractively valued at 19x/13x/10x our FY18/FY19/FY20 EPS estimates. We initiate coverage on GAEX with a LONG rating and a SOTP-based Mar’19 TP of Rs 310.
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