Shanthi Gears Ltd - Rs 32.00

Established in 1969, Shanthi Gears Ltd (SGL) is a leading manufacturer of industrial gears, gearboxes, geared motors and gear assemblies. Infact, it is the second largest player in industrial gear segment with 20% market share and at the same time is the undisputed leader in the customized product segment where the manufacturing is as per clients’ requirements. Incidentally, company does not supply any of its products to the automobile sector although the name suggests being an auto ancillary company. Starting out as a gear manufacturer for the textile industry, SGL now caters to a wide range of industries like power, sugar, paper, material handling, construction equipment, steel and cement industries. Gears are the basic building blocks in the equipment which is mainly responsible for controlling movement of machine parts in any machinery and have widespread applications. Its products range includes worm gear boxes, helical & bevel helical gear box, geared motor, custom built gear box, mill gear box, open gearing, CNC machine tools and products for the textile industry. It also manufactures high-precision gears for the marine and aviation industry. Remarkably, SGL is also the only listed manufacturer of gears for helicopters and light combat aircrafts to Hindustan Aeronautics Ltd. Of late, company has even started manufacturing gearboxes of 250 KV for windmills, Besides, SGL also offers consultancy services for engineering design. Being one of the most preferred suppliers, its clientele includes Tata Steel, SAIL, BHEL, Atlas Copco, Ingersol Rand, L&T, ACC, Siemens, Mitsubishi, Elgi Equipment, Hindustan Aeronautics, Rolls Royce etc to name a few.

Perhaps SGL is the only gear manufacturing company having all processes in-house including cutter manufacturing with nothing being sub-contracted. Secondly, it has its own wind mills with capacity of 5.16 MW, which makes it nearly self sufficient in its power requirements. SGL has consistently invested in upgrading its infrastructure to improvise upon its manufacturing capabilities and churn out world-class products. At the same time, it has also integrated and augmented its production capacity to be able to meet increasing demand for its products. Hence today, SGL boasts of having six ultra modern plants in Coimbatore equipped with state-of-the-art manufacturing machines and quality control equipments. However, in order to consolidate/streamline operations, company is in the midst of shifting/relocating couple of its small unit to large unit. This is expected to complete by March 2009 and will lead to some saving in cost of production going forward. Meanwhile, to capitalize the huge opportunity in renewable energy like wind power, SGL is looking for potential tie-ups with a global technology partner for production of higher capacity gears for windmills. On the other hand, round about 10% of revenue comes from exports to countries like USA, UK, UAE, Germany, Canada, Malaysia, Singapore, Indonesia, Belgium, Netherlands, Taiwan and Nigeria. This segment is slated to contribute more in future as company has tied-up with international original equipment manufacturers like Atlas Copco Airpower (for supply of high precision gears) and GE (for supply of marine gear boxes). Whereas here in India, investments in core sectors like power, construction, steel, cement and others are likely to be the chief propellers for demand of industrial gears and gearboxes.

On the raw materials front, approximately 55% accounts for steel rods and steel forgings, 25% for foundry and the remaining 20% for bearings, etc. Hence the recent fall in steel and other metals will reduce its input cost considerably and may give a good fillip to its bottomline in coming qtrs. And secondly, SGL is expected to maintain the profit margin as its quality products command premium in the market and moreover custom made products which enjoy higher margins constitute more than 50% of total sales. In 2005, to fund its growth plan, SGL had raised around Rs 50 cr thru FCCB route to be converted into equity @ Rs 58 per share. Out of this more than 50% is it yet to be converted or else may come up for redemption in 2010. For six months ending Sept’08, it recorded nearly 15% growth in sales and NP to Rs 126 cr and 23 cr respectively. Accordingly it may end FY09 with sales of Rs 260 cr and PAT of Rs 40 cr i.e. EPS of Rs 5 on fully diluted equity of Rs 8.60 cr having face value as Rs 1/- per share. Historically, SGL has been reporting very healthy profit margin and has an uninterrupted dividend track record for last 20 years. Even for current fiscal it may maintain 120% dividend which gives a yield of 4% at CMP. Apart from above fundamentals, SGL has about 18 acres of land in prime location of Coimbatore and depending upon the opportunities available as well as the requirements of the company, SGL may unlock value by selling this land in future. Moreover if rumors are to be believed then India’s largest windmill manufacturer Suzlon, through its subsidiary Hansen Transmission (world’s fifth largest maker of gearbox), was interested in taking a stake in SGL. If it happens, this may lead to re-rating of the company and share price may see a vertical rise. Considering all the factors, investors are recommended to keep accumulating this scrip at every decline as share price can easily double in 12~15 months.

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