Is G G Engineering a Good stock to Buy?

G G Engineering Ltd. has drawn attention in recent times, particularly with its right issue launched in August 2022. While the company initially made headlines for its innovative reverse vending machines and pandemic-related pathogen protection products, a closer examination reveals a deeper concern about its financial performance and management. Let’s take a closer look at the company's trajectory and the potential risks associated with investing in GGEL.

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The Business Model:Uncertain business model 

GGEL is known for manufacturing and marketing heavy steel products, including custom-built enclosure generator sets, steel pipes, industrial engines, and marine engines. In a push toward environmental sustainability, GGEL also introduced India's first fully automated reverse vending machines to promote eco-friendly waste disposal. However, despite these ambitious projects, GGEL has struggled to maintain financial stability, raising red flags about its future prospects.

Poor Financial Performance

GGEL’s financial performance paints a less-than-encouraging picture. For the fiscal years 2021 and 2022, the company reported consolidated turnover and net profits as follows:

• FY21: ₹37.51 crore in turnover with a net loss of ₹0.82 crore.
• FY22: ₹22.97 crore in turnover with a marginal net profit of ₹0.44 crore.

While the company's revenue has fluctuated, its profitability has been inconsistent. In fact, GGEL posted standalone losses for both FY22 and the first quarter of FY23, raising questions about the sustainability of its business model. The company appears to have employed some financial window dressing, as its consolidated figures show a profit, while standalone numbers indicate ongoing losses.

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Concerns about their Right Issue

GGEL's recent right issue, designed to raise ₹49.96 crore, further underscores its financial challenges. The funds are intended to cover working capital needs and general corporate expenses, but the company's weak financials suggest that this may be a desperate attempt to stay afloat rather than a strategic growth move. 

The right issue offered shares at ₹1.80 each, with a ratio of 35 shares for every 13 shares held, but with the company's track record, investors should be wary of participating in this offer.

Promoters' holding has dropped alarmingly, from 43.28% in December 2021 to a mere 1.88% by June 2022. Such a significant reduction in promoter stakes signals a lack of confidence from those who should be most invested in the company’s future success.

Extreme Volatility in Stock price and Promoter Selling

GGEL’s stock performance has been volatile, with the share price moving from ₹3.09 (cum-right basis) in August 2022 to a low of ₹2.36. The company’s stock has been managed by vested interests, leading to price manipulation that could deceive uninformed investors. The promoters’ near-total exit from the company has contributed to significant concerns about the stock’s future performance.

As of June 2024, the company's

• Low Return on Equity (ROE): GGEL’s ROE stands at just 3.85%, reflecting poor profitability relative to shareholders’ equity.
• High Debt-to-EBITDA Ratio: With a ratio of 3.98, GGEL has a low capacity to service its debt, making it a risky investment.
• Negative EBITDA: The company’s negative EBITDA further emphasizes its financial struggles, as it indicates that the business is not generating sufficient operating income.

Despite a high return of 111.58% in the last year, GGEL’s profits have actually decreased by 20%, suggesting that the stock’s high return is not backed by solid fundamentals.

Conclusion: Steer Clear of G G Engineering Ltd.

While GGEL may have attracted attention with its reverse vending machines and pandemic-related products, its financial performance and the drastic reduction in promoter confidence tell a different story. The company's high debt levels, negative profitability, and heavily managed stock raise serious concerns for potential investors. The right issue may appear enticing at a low price, but the underlying risks make GGEL a stock to avoid.

In conclusion, G G Engineering Ltd. has a lot of concerning issues. Investors should exercise extreme caution.

Also Read: Free Cash Flow: A Key Indicator of Financial Health