GEE Ltd: Lowest Valuation in Welding Industry (with Real Estate Potential) 

GEE Ltd: Rationale for Recommendation:

1.  Stock trading at  PERatio of 12.70 (FY16Eeps) as against PERatio of 30+ of Esab India

2. High promoter stake at 74.70%

3. High growth potential

4. Gee Ltd has 3 Acres of Vacant plot at prime location in Thane. Market price of this plot is Rs 100+ crores (which is 50% more than current market cap of GEE) 

5. GEE is planning to enter into a JV with some leading/branded developer for constructing IT Park with carpet area of nearly 5 lac s f on the plot. This project can fetch to GEE more than Rs 200 crores PBT (over a period of 5-7 years) as GEE's revenue share from envisioned JV (presuming that entire space is sold)

6. If IT Park space is not sold and is leased out, lease amount could be Rs 60-80 per s . f. Even in such a scenario, GEE's share of lease rental could be Rs 12-15 crores each year

7. As per latest guidelines relating to IT Park in this area, mix use development is allowed permissible. If GEE goes for this model of development, then around 20% space could be developed into residential,a segment where market price is at least 50% higher than commercial/IT space.

8. TP Rs 100+ in 15-18 months. Appreciation to be much steep if held for 3-5 years

BACKGROUND:

Originally known as General Electric and Equipment Ltd in German collaboration, later on, existing promoters had bought out German collaborator and was named as GEE Ltd.  GEE Ltd is amongst the leading manufacture and supplier of WELDING CONSUMABLES, having its plant at Kalyan and Calcutta.

GEE is producing wide range of welding consumables, namely:

Shielded Metal Arc Welding

Gas Tungsten Arc Welding

Gas Metal Arc Welding

Flux Cored wires

Brazing Wire and Flux

Submerged Arc Welding

GEE is supplying its products to big indian corporates like:

NTPC, EIL,HINDUSTAN PETROLEUM,BHARAT PETROLEUM,ONGC,TATA STEEL,TATA MOTOR,SAIL, JSPL,ESSAR,BHEL, RELIANCE  INDIAN OIL etc

FINANCIAL TRACK RECORD:

                     2014-15      2013-14   2012-13    2011-12

Sales              180            167         186         173

PAT                2.37          4.28       4.64        7.14

Equity               4.72

For FY15, GEE had witnessed substantial decline in its profits which were 2.37 crores as compared to 4.28 crores in FY14. In the past, GEE has been reporting excellent nos as its PAT for FY11 was Rs 9.21 crores and Rs 7.14 crores in FY12.  Sharp decline in profits for FY15 was due to some special one-time provisioning.

CURRENT PROSPECTS:

                               Q u a r t e r  E n d e d

                            30-06-2015       31-03-2015

Sales                      42                49

PAT                       1.50             -0.10

GEE has already made strong turnaround in Q1 wherein its PAT is Rs 1.50 crores as against LOSS of Rs 10 lacs in Q4 of FY15.

GEE WILL CONTINUE TO REPORT SIMILAR PERFORMANCE IN EACH OF FY16 QUARTERS.  PAT FOR Q2 IS LIKELY TO BE 1.48 CRORES.

                         2015-16E

Sales                 195

PAT                   6.50

Equity                4.72

EPS Rs             2.75

At Cmp , GEE is trading at PE Ratio of 12.70 (FY16Eeps) although industry leader Esab is getting PERatio of 30+. With GEE regaining lost ground, its valuations are bound to be much higher

BIG TRIGGER: REAL ESTATE:

GEE Ltd owns vacant plot admeasuring 3 acres at prime location in Thane City. Market value of this plot should be Rs 100+ crores.However, GEE is not interested to sell the plot as it does not such huge funds for its core business of welding consumables. Hence, GEE is intending to induct a leading/branded real estate company as JV

Partner who shall be responsible for construction/development and market of proposed IT Park. As per MIDC policy, IT Park is entitled for 100% extra FSI. As a result, approx 5 lac s f of carpet area can be developed as IT Park on this plot. As industry norm, Developer (who bears all construction costs) normally gets 60% of total saleable space (or 60% of total revenue being realised from sale of space) and land owner gets 40%.

SCENARIO 1:  If entire space is outright sold, it can fetch total revenue of roughly Rs 500 crores.  Presuming that GEE gets 40% as revenue share, GEE SHOULD BE GETTING  Rs 200 crores (of course, spread over period of 5-7 years). Since construction expenses to be borne by developer, ENTIRE REVENUE of GEE should be PBT.

SCENARIO 2: If entire space is leased out and not sold on outright basis, it may fetch Rs 60-80 per sqft as monthly rental. It will translate into total lease income of Rs 3+ crore per month. Thus, GEE's share of lease revenue COULD BE Rs 12-15 CRORE PER ANNUM

Development of IT Park on this location will be highly successful as Thane has emerged amongst fastest growing cities of Maharashtra and is now densely populated. And MIDC has come out highly encouraging policy for IT Parks wherein:

FSI is 100% Extra 20% allowed for Recreational, Residential, Sports and other facilities Exemption from electricity duty Electricity will be available at Industrial rate (and not commercial rate which is significantly higher) 100% stamp duty exemption 90% stamp duty exemption in lease Exemption from Octroi/Entry tax/LBT and other cess

Relaxation under Labour Laws  Hence, development of vacant plot into IT Park will completely change fortunes of GEE Ltd as it will have MULTIPLIER effect on its earnings after 2-3 years. Further, core business of welding consumables will also get better valuations with higher earnings current year onwards.

GEE Ltd has potential to deliver  OUTPERFORMER/MULTIBAGGER appreciation. Under normal market conditions, GEE share price can cross Rs 100 mark in 15-18 months and appreciation can be much steep if held for 5-7 years. Equity is small and high promoter stake means low floating stock which can fuel stock price faster and higher.

Only risk could be delay in finalising JV Partner.