Subsequent edit: I don't know if there's anyone other than me that actually reads these, but before reading below read this.
GATA is small relatively young, unlisted company, with high insider ownership. It helps firms in India obtain FDA approval for pharmaceuticals, medical products and devices for export to America. They help their clients pass FDA inspection by assisting them from concept through development, with consultation through all the regulatory requirements, filings, and processes to achieve FDA compliance and approval.
GATA is a profitable net-net, with a negative enterprise value. Shares currently trade at $0.20.
Below is the latest balance sheet, and the last several years of income statements. "Adj inc" in the below table is defined as net income plus depreciation less capital expenditures.
| (000s) |
9/30/2013 |
Per Share |
| Cash & Equivalents |
226.9 |
0.00 |
| Deposits and Invest. |
11,890.1 |
0.25 |
| Accounts Receivables |
1,009.7 |
0.02 |
| Prepaid exp |
0.8 |
0.00 |
| Inventories |
27.7 |
0.00 |
| Total Current Assets |
13,155.3 |
0.28 |
|
|
|
| Gross PP&E |
12,320.4 |
|
| Depreciation |
-8,094.4 |
|
| Net PP&E |
4,226.0 |
0.09 |
|
|
|
| All Liablities |
76.8 |
0.00 |
|
|
|
| NCAV |
13,078.5 |
0.28 |
| NCAV + PP&E |
17,304.6 |
0.37 |
| Price |
9,427.4 |
0.20 |
|
Year ended June 30, |
|
|
| (000s) |
2013 |
2012 |
2011 |
2010 |
2009 |
|
|
| Revenue |
56,457.4 |
44,571.4 |
25,112.6 |
12,119.1 |
7,754.4 |
|
|
| COR |
-37,651.2 |
-30,090.4 |
-17,174.0 |
-8,035.1 |
-5,078.3 |
|
|
| Margin % |
33.3% |
32.5% |
31.6% |
33.7% |
34.5% |
|
|
| Selling exp |
-7,656.4 |
-6,009.9 |
-3,228.6 |
-1,410.9 |
-865.5 |
|
|
| G&A |
-2,193.1 |
-1,470.0 |
-960.2 |
-343.2 |
-201.0 |
|
|
| Total Op Exp |
-47,500.7 |
-37,570.3 |
-21,362.8 |
-9,789.2 |
-6,144.8 |
|
|
| Op Income |
8,956.7 |
7,001.1 |
3,749.8 |
2,329.9 |
1,609.6 |
|
|
| Margin % |
15.9% |
15.7% |
14.9% |
19.2% |
20.8% |
|
|
| Dep/Amort |
-2,491.1 |
-1,778.5 |
-1,240.5 |
-1,037.5 |
-1,012.5 |
|
|
| Interest |
0.0 |
0.0 |
-1.2 |
-10.6 |
-44.9 |
|
|
| EBT |
6,465.6 |
5,222.6 |
2,508.2 |
1,281.7 |
552.3 |
|
|
| Taxes |
-1,025.0 |
-805.6 |
-401.4 |
-199.8 |
-91.1 |
|
|
| NI |
5,440.7 |
4,417.0 |
2,106.8 |
1,081.9 |
461.2 |
|
|
| Margin % |
9.6% |
9.9% |
8.4% |
8.9% |
5.9% |
|
|
| Effective tax rate |
15.9% |
15.4% |
16.0% |
15.6% |
16.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
Averege |
| NI |
5,440.7 |
4,417.0 |
2,106.8 |
1,081.9 |
461.2 |
13,507.7 |
2,701.5 |
| CFO (does not incude Dep) |
5,170.4 |
4,382.2 |
1,645.4 |
1,254.3 |
350.6 |
12,803.0 |
2,560.6 |
| Dep/Amort |
-2,491.1 |
-1,778.5 |
-1,240.5 |
-1,037.5 |
-1,012.5 |
-7,560.0 |
-1,512.0 |
| Capex |
-1,442.5 |
-4,656.4 |
-1,515.8 |
-2,206.2 |
-3,291.7 |
-13,112.7 |
-2,622.5 |
| Adj Inc |
6,489.2 |
1,539.1 |
1,831.5 |
-86.7 |
-1,818.0 |
7,955.0 |
1,591.0 |
| FCF |
6,219.0 |
1,504.2 |
1,370.1 |
85.7 |
-1,928.6 |
7,250.4 |
1,450.1 |
|
|
|
|
|
|
|
|
WAVG
Shares
(adj for 2009 split) |
47,136.9 |
47,136.9 |
47,136.9 |
47,136.9 |
47,136.9 |
|
|
|
|
|
|
|
|
|
|
| EPS |
0.12 |
0.09 |
0.04 |
0.02 |
0.01 |
|
|
| Adj Inc/Share |
0.14 |
0.03 |
0.04 |
0.00 |
-0.04 |
|
|
| FCF/Share |
0.13 |
0.03 |
0.03 |
0.00 |
-0.04 |
|
|
Quantitatively GATA looks extremely cheap, and the balance sheet is quite clean.
From my perspective, GATA is qualitatively similar to PDRX written up
previously. That is, I don't have much in particular to say about the future of the business itself. Other things I would note:
- Insiders own 88% of the stock with the biggest percentage of that held by a single director. I consider this to be a positive because, while incentivized with 5% of the equity, the CEO cannot control the board and pick the pockets of shareholders so easily.
- Subjectively, the situation seems slightly speculative to me because (a) I have never invested in India (albeit, incorporated in the United States with upper management in New Jersey), and (b) the level of disclosure is less than desired.
- The nature of the work seems to provide management reasonably good insight into the their pipeline. Below are revenue forecasts (mostly as of Q1 of each FY), which can be compared to the actual performance presented above.
| Mgmt Rev Est as
of/for |
FY2014 |
FY2013 |
FY2012 |
FY2011 |
| 9/30/2013 |
65mm |
|
|
|
| 9/30/2012 |
|
55-57mm |
|
|
| 9/30/2011 |
|
|
40mm |
|
| 12/31/2010 |
|
|
|
20mm |
Valuation
Using a very simple and rough method, I estimate GATA's value to be at least $0.54 calculated as follows:
| Earnings
measure (5y Avg Adj Inc) |
0.03 |
| Discount rate |
10% |
| Earning power value |
0.34 |
| Excess Cash est. |
0.20 |
| Value estimate |
0.54 |
I think this valuation is conservative, given the rapid growth in recent history and management revenue estimates. For example, using managements $65mm revenue estimate, one could estimate 2014 earnings roughly as:
| (000s,
except per share) |
2014 est |
| Revenue |
65,000.0 |
| COR |
-20,547.8 |
| Min(5Y Margin %) |
31.6% |
| Op Income |
9,705.8 |
| Min(5Y Margin %) |
14.9% |
| 5YR Avg Capex |
-2,622.5 |
| Interest |
0.0 |
| EBT |
7,083.3 |
| Taxes (35%) |
-2,479.2 |
| Adj Inc |
4,604.2 |
| Per share |
0.10 |
| Discount rate |
10% |
| Earning power value |
0.98 |
| Excess Cash est. |
0.20 |
| Value estimate |
1.18 |
Conclusion
While perhaps slightly speculative qualitatively, I think a basket of such stocks at similar levels would perform quite well and so I have initiated a position in the 2-3% of capital range.
I have inquired to management certain questions to better understand the nature of their business and the correspondent risks, as well as certain specific questions (e.g., regarding their tax rate). I may post a follow up if I'm able to get additional color regarding these items.
Disclosure: Long GATA
