Shanthi Gears ICR - Myirisbreport.myiris.com/MR1/SHAGEARS_20140414.pdfShanthi Gears Ltd ‐ Geared...
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INITIATING COVERAGE REPORT: SHANTHI GEARS LTDRECOMMENDATION: BUY
CMP: INR 69
TARGET PRICE: INR 86
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Microsec Research 14th April 2014
Investment Highlights
Shanthi Gears Ltd ‐ Geared up to capitalize on the uptick in investment cycle
BUY Sector ‐ Engineering
We recommend Shanthi Gears Ltd (SGL) a “BUY”. Headquartered in Coimbatore, Shanthi Gears is
leading organized player in the industrial gear segment in India. It manufactures wide range of
critical components involved in power transmission like Gears, Gear boxes, Gear motors and
Gear assemblies. The company is strongly positioned in the custom made gears and gear boxes
with ~70‐75% of revenues from customized products catering industries like steel, textiles,
power, chemical, rubber, paper, mining, cement, sugar etc. It operates from five fully integrated
manufacturing units and one foundry division located in Coimbatore.
Fully integrated modern facilities, high presence in customized gears (non‐standard gears),
fewer dependence on imported raw materials, investments in wind mills and power linkages
to aid margins: We believe that with company’s fully integrated facilities which caters to
individual needs of clients and ensures timely delivery of products, high presence in customized
products, fewer dependence on imported raw materials as compared to industry’s 50%
dependence, investments in wind mills and power linkages to save power costs, the company
has the prospects of commanding higher margins in future.
Exposure across various industries, management’s effort to bring back old niche clients and
introduction of new standard products to lead in diversity of clientele: The company’s
exposure across an array of industries helps company to not depend on single client for a
significant portion of revenue, mitigates the risk associated with down turn in any particular
sector and helps retain pricing power. Also, management’s effort to bring back old niche clients
is likely to enhance the clientele base. We believe that with introduction of new products the
company is likely to 1) take benefit of an additional high profile clientele across industries and 2)
earn higher revenue.
Uptick in investment cycle to provide the company ample opportunities to grow: With revival
in economy to uplift investment cycle, the demand for gears is set to surge.
Tube Investments of India’s acquisition to create synergies between both companies: Tube
investments acquiring Shanthi Gears is likely to benefit the company: 1) has headroom for
growth and tap the opportunities in engineering sector 2) foray into sectors like aerospace,
defense and mining equipments and 3) get access to stronger hands i.e. Murugappa group.
Import substitution to take place – positive for Shanthi Gears: With Indian industrial gear
sector’s heavy dependence on imports and the recent sharp rupee depreciation, import
substitution is expected to take place, which is positive for Shanthi Gears.
Scrip ID Shanthi Gears Ltd
Scrip Code (NSE) SHANTIGEAR
Scrip Code (BSE) 522034
Bloomberg Ticker SG IN
Reuters Ticker SHNT.BO
Industry Engineering
Face Value ( INR) 1.00
Equity Share Capital ( INR Cr) 8.17
Avg 5 years P/E 15.14
Avg daily volume (Last 1 Year) 24,875
Beta Vs Sensex 0.35
Dividend Yield 0.87%
Stock Scan
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Shanthi Gears Ltd Sensex
Analyst: Neha Majithia
+033 66512100
Current Market Price (CMP) 69
Target Price 86
Upside Potential 25%
52 Week High Low 75.90 / 47.55
Market Cap (INR in Crores) 564
Valuation Data
Particulars FY09A FY10A FY11A FY12A FY13A FY14E FY15E FY16E
Net Sales 252.48 121.39 160.36 173.00 145.65 156.25 175.00 210.00
Growth 3.4% ‐51.9% 32.1% 7.9% ‐15.8% 7.3% 12.0% 20%
EBITDA 104.85 50.37 70.94 68.95 43.29 44.81 54.00 67.40
EBITDA Margin 41.43% 40.70% 43.07% 38.83% 29.54% 27.86% 30.00% 31.13%
Net Profit excl Exceptional Items 46.38 16.20 27.85 28.11 15.47 19.72 26.59 35.46
Net Profit Margin (excl Exceptional Items) 18.33% 13.09% 16.91% 15.83% 10.56% 12.26% 14.77% 16.38%
Net Profit Growth 5.03% ‐65.07% 71.91% 0.93% ‐44.97% 27.46% 34.87% 33.34%
Basic EPS 5.39 1.98 3.41 3.44 1.89 2.41 3.25 4.34
Adjusted EPS excl Exceptional Items 5.68 1.98 3.41 3.44 1.89 2.41 3.25 4.34
P/E(x) 4.74 19.16 10.97 11.18 29.87 28.59 21.20 15.90
Adjusted P/E(x) excl Exceptional Items 4.50 19.16 10.97 11.18 29.87 28.59 21.20 15.90
P/BV(x) 1.03 1.47 1.33 1.27 1.79 2.12 2.03 1.90
ROE 22.93% 7.68% 12.15% 11.34% 6.01% 7.42% 9.56% 11.96%
EV/EBITDA(x) 2.37 6.10 3.69 3.74 9.44 10.54 7.99 5.75
Financial Performance of Shanthi Gears Ltd (All figures in INR Crores except % and per share data)
Source: Microsec Research, Company Data
Promoters70.12%
FIIs1.90%
DIIs3.23%
Non‐Institutions24.75%
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Microsec Research 14th April 2014
Investment rationale
1. Fully integrated modern facilities, high presence in customized gears (non‐standard gears),
fewer dependence on imported raw materials, investments in wind mills and power linkages to
aid margins:
A) Fully integrated and the largest modern facilities: Shanthi Gears has fully integrated and the
largest modern gear making facilities in India with infrastructure for fabrication and engineering,
in‐house foundry and forging facilities and tool room for gear cutting. It also has 7 windmills
which have a total power generating capacity of ~6.66MW. The company has power linkages
with total sanctioned power of 6500 kva and own diesel gensets with a capacity of 8500kva. The
facilities of the Shanthi Gears has are a step up when compared to its peers: CAD work stations,
state‐of‐the‐art manufacturing and quality control machines and equipment, in‐house pattern
making, castings including bronze wheel rings, forgings, fabrication, heat treatment, etc. This
along with a consistent thrust on R&D, technology up gradation and skill up gradation of its
manpower has enabled the company to maintain its designing and manufacturing edge over its
competitors.
Shanthi Gears currently has five Units which carry out following operations:
Unit A&B – Manufacture of components & gears for the textile industry (these units account for
10% of the sales)
Unit C – Engineering Unit (this unit accounts for 90% of the sales)
Unit D – Currently vacant
Unit E – CSR
Unit F – Foundry
B) Investments in Wind mills and power linkages to provide leverage to margins: Shanthi Gears
has seven wind mills in one of its manufacturing unit with an Agreement with Tamil Nadu
Electricity Board (TNEB). The seven wind mills have a total power generating capacity of
~6.66MW. The power generated through the wind mills is used for captive purpose and the
surplus is sold to Tamil Nadu Electricity Board (TNEB). The company also has power linkages with
total sanctioned power of 6500 kva and own diesel gensets with a capacity of 8500kva. We
believe that the possession of captive wind mills and power linkages is likely to help company
save on power cost and fuel costs. Currently, power and fuel cost comprises of ~8% of the total
costs. Please find below the details of Wind mills owned by Shanthi Gears.
Particulars Wind Mill 1 Wind Mill 2 Wind Mill 3 Wind Mill 4 Wind Mill 5 Wind Mill 6 Wind Mill 7
Make Bonus Bonus NEPC Suzlon Suzlon Suzlon Suzlon
Output Power 320KW 2*320MW 2*225MW 1250KW 1250KW 1250KW 1250KW
Installed Mar‐97 Mar‐97 Aug‐95 Mar‐06 Sep‐06 Aug‐06 Sep‐07
Location Unit D Unit D Unit D Tirunelvelli, TN Tirunelvelli, TN Tirunelvelli, TN Tirunelvelli, TN
PPA with TNEB TNEB TNEB TNEB TNEB TNEB TNEB
PPA rate (INR / unit) 2.9 2.9 2.9 2.9 2.9 2.9 2.9
Units Generated * 422,545 868850 493448 2546298 2588796 3017070 3736152
PLF % 15.10% 15.50% 12.50% 23.20% 23.60% 27.60% 28.40%
Note: * During FY 2011; Recent Figures not available / Source: Company Presentation
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Microsec Research 14th April 2014
We believe that the fully integrated facilities which the company possesses are likely to
benefit Shanthi Gears in many ways. It would enable Shanthi Gears to a) help reduce its
dependence on imports for raw materials which is likely to impact margins positively b) help
control costs and have greater control over production process c) help synergize and focus more
on customized gears which accounts for ~75% of its revenue pie e) ensure meeting the stringent
timelines demanded by customers.
C) High presence in customized gears to uplift margins: The product range of the company is
segmented into standard (non‐customized) and non‐standard (customized) gears and gear boxes.
The standard (non‐customized) gears account for ~35% of the total revenue with an operating
margin between the levels of 10‐15% and the rest is customized gears, which constitutes ~75% of
the revenue with high operating margins between the levels of 30‐35%. Unlike other domestic
gear manufacturers, Shanthi Gears focuses on the customized gears and ensures that its factory
utilization is not more than 85% to take advantage of urgent and emergency orders. Unlike most
of its competitors, Shanthi Gears has been able to maintain operating margins at all times due to
its product mix, and the relatively lower raw material costs incurred for custom built gearboxes.
SGL is a market leader in the customized gears space with operating margins in excess of 25‐30%,
as compared to 15‐17% for Elecon Engineering which is the biggest player in the overall gears
industry. The table given below shows that Elecon engineering despite having a market share of
~30% is commanding lower operating margins due to reasons like 1) lower presence of ~20% in
customized products which usually yield higher margins and 2) higher raw material imports.
D) Fewer dependence on imported raw materials – To act as a saviour: The cost of raw material
composes ~50% of the total cost, out of which merely 2‐3% is imported and rest is indigenous.
Similarly, for its domestic peer company – Elecon engineering, the raw material cost accounts for
~65‐70% of the total cost and 17‐20% of it is imported. Shanthi Gears dependence on imports of
raw materials has significantly reduced from 12% in FY06 to 2% in FY13. On the contrary, the
import of raw materials in case of Elecon engineering has reduced by just 1% from 18% in FY2006
to 17% in FY13.
Hence, we believe that with above mentioned positive factors, the company has the prospects of
commanding higher margins in future. We expect the operating margins to improve from the
current levels of 28% to 31‐32% in future.
Company Name
Market
Share
Standard Gears Customized Gear Domestic Exports Imported Indigenous
Shanthi Gears 35% 75% 93% 7% ~5% 2% 98%
Elecon Engineering 80% 20% 62% 38% ~30% 17% 83%
Segment‐wise revenue contributionGeoghraphic‐wise
contribution
Raw Material
Imports/Indigenous
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Microsec Research 14th April 2014
2. Exposure across various industries, management’s effort to bring back old niche clients and
introduction of new standard products to lead in diversity of clientele:
A) Exposure across various industries leads to diversity in clientele: Due to company’s high
presence in customized gears, which caters to individual needs of companies ensuring timely
delivery to clients across industries, the company has mixer of clientele. It has exposure across all
sectors like steel, power, mining, Infrastructure, textiles, sugar, etc. It had ~4000 active clients in
2006 which reached the peak level of ~10,000 clients in 2009, with no single customer
accounting for over 5% of the total revenue. Hence, servicing over a large base of customers
across industries helps Shanthi gears in different ways like 1) expand its clientele 2) helps the
company not to depend on single sector/single customer for a significant portion of revenue
3)mitigates the risk associated with down turn in any particular sector and 4) helps retain pricing
power.
B) Management’s efforts to bring back old niche clients to enhance the clientele base: During the
process of management and operational restructuring, the company went through tough times.
This resulted in labour issues and dealer problems just when the industrial cycle was at its low.
During the turbulent phase, the company had to forego its existing clients and opportunities
which lead to plunge in sales. With the company’s nature of business having high presence in
customized products, it couldn’t adhere to the guidelines of timely delivery of products and lost
its clients. Presently, the new management is focusing on bringing back those clients which we
believe is likely to enrich its old client portfolio. According to the management, as mentioned in
Q3FY14 concall, the company has been approaching its lost clients since May ‐ June’13. With
most of the old clients still having lot of confidence in the company’s facilities and products, it is
sure of bringing back most of clients in next couple of month’s time. Pre‐restructuring, the
company had clients like BHEL with requirements for its power plants, giants like GE Electric and
Atlas copco, Jindal group, SAIL, Reliance, etc.
8.4% 6.8% 4.5%
21.4%18.2%
15.3%
30.3%28.3%
24.8%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
FY2010 FY2011 CY2012
Top Customer Top 5 Customers Top 10 Customers
Customer Major Products Valus (INR Cr)
Customer 1 Non standard gear box 7.81
Customer 2 Helical, Bevel helical gear box 6.01
Customer 3 ISO Items 4.4
Customer 4 Worm gear box 4.32
Customer 5 Non standard loose gears 3.89
Customer 6 Non standard loose gears 3.86
Customer 7 Non standard gear box 3.79
Customer 8 Helical gear box, Geared motor 3.07
Customer 9 Non standard gear box 2.83
Customer 10 Non standard loose gears 2.78
Total 42.76
Note: This represents the figures of FY11, Recent figures not available
Top 10 Customers
The graph shows the progressive broad basing in customer base and decline in concentration amongst the top customers
leading to lower dependence on single customers. Largest customer contribution reduced to only ~4.5% of the revenues.
Note: FY11 Net sales is INR160.36 crore, out of which 25% (i.e. INR42.76 crore) represents the Top 10 customers.
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Microsec Research 14th April 2014
C) Introduction of new products in standard segment for sectors like compressors, aerospace to
help increase dominance among its peers: The Company which has lower contribution from
standard products segment is planning to introduce new products for sectors like compressors,
aerospace, to help increase its dominance among its peers who have larger market share in this
products segment. We believe that with introduction of new products, the company is likely to 1)
take benefit of an additional high profile clientele across industries and 2) earn higher revenue.
3. Uptick in investment cycle to provide the company ample opportunities to grow:
With the company’s existence in various industries, it is all set to take advantage of the uptick in
the investment cycle. Way back in 1998‐99, with the downturn in economy, the company’s
turnover fell, but in 2000, when the industry revived, the first to benefit was the gear industry
with all sectors outlaying expansion. With the uplift in investment cycle, where companies start
outlaying capex for expansion, which mainly include setting up of plant & machinery, the
demand for gears is set to surge and benefit companies like Shanthi Gears.
Shanthi’s prospects are closely linked to
the fortunes of the heavy engineering
sector. With India’s GDP to improve to 6%
by FY16 and key user industries being in
investment mode, Shanthi is expected to
be a key beneficiary of capital spending
across its user set.
The pie chart below shows the comparison of Shanthi Gears and its domestic peer Elecon
Engineering with respect to their exposure across an array of industries.
Power25%
Chemical &
Fertilizer2%
Mining
4%
Plastic & Rubber6%
Cement7%
Marine8%
Sugar
9%
Steel Conversion 12%
Sponge Iron
3%
Others19%
Elecon Engineering ‐ Industry wise Sales segmentation
General Engineering
40%Machine Tools2%
Mining & Constructions
1%
Steel10%
Textiles7%
Chemicals & Plastics1%
Conveyor & Material Handling
3%
Windmill3%
Earthmoving 3%
Paper & Rubber2%
Lift & Elevators 2%
Cement2% Sugar
1%
Others21%
Shanthi Gears‐ Industry wise Sales segmentation
Capex Outlay for key user industries for XIIth 5 year plan
Particulars Capex (INR Cr)
Heavy Industry 17543
Steel 90975
Mines 18221
Textiles 25931
Fertilisers 15437
Source: Planning Commission of India
Source: Company Presentation
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Microsec Research 14th April 2014
4. Tube Investments of India’s acquisition to create synergies between both companies:
Tube investments of India is a diversified company deriving 60% of revenue from insurance and
other financial services, ~18% from engineering, ~15% from metal formed products, ~15% from
cycles/components and 2% from Gear business. Tube investments acquired Shanthi Gears mainly
for reasons like 1) to take itself to a higher level of engineering 2) to synergize the transmission
business with its chain business 3) to create an opportunity for both exports and supply for offset
requirements which is expected to become huge in India 4) Shanthi Gear’s strong balance sheet,
cash, surplus land, engineering skills 5) to foray into sectors like defense and aerospace 6) reduce
its reliance on auto sector which is facing various challenges 7) get access to company’s large
customer base. On the contrary, Shanthi Gears is likely to benefit like1) has headroom for growth
and trap the opportunities in engineering sector 2) foray into sectors like aerospace, defense and
mining equipments and 3) access to stronger hands i.e. Murugappa group.
5. Import substitution to take place – positive for Shanthi Gears: The Indian industrial gear
market depends heavily on imports i.e. ~40% imports, especially for high – end gears. The rupee
depreciated to INR68.8/US$ in H2FY14 and is now stable at the levels of INR60‐61/US$. We
believe that rupee which has depreciated almost ~15% from the levels of INR47‐48/US$ more
than two years back, is not expected to reach those levels soon. We expect that with rupee
depreciation making imports costlier, import substitution is likely to take place. Other companies
are likely to prefer buying gears domestically from branded companies like Shanthi Gears. Also,
on raw material front, other companies which import its high amount of raw materials are
expected to pass on the costlier import’s price on their final products to customers, whereas
Shanthi Gears which imports merely 2% of its raw material is likely to pass on no/marginal price
hike on its final products. This makes Shanthi gears again a customer’s preferred choice.
Other Rationales:
Ample land bank leaving huge scope for expansion: During the process of restructuring in 2008‐
09, the company had closed down two factory locations from the six units and had shifted to the
other four operating location. This resulted in surplus land of 70 acres at one unit and 7.5 acres
at other unit. At present, Unit A & B continue their operation of manufacturing textile gears. Unit
C remains the main manufacturing unit, Unit D is currently vacant. Unit E is used for social
services and Unit F is the foundry unit. The company has total of 80‐100 acres of surplus land
which leaves much scope for expansion. The company has no intentions to dispose the land in
near future.
Capacity Unitization to improve gradually: The current capacity utilization is ~35%. This has
reduces from the levels of 60‐65% as the production got hampered during the process of
restricting. As the company gets back its old clients and uptick in investment cycle, the capacity
utilization is expected to improve gradually.
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Microsec Research 14th April 2014
Industry Overview:
The Gear Industry is segmented into Automotive and non‐automotive (Industrial) gear industry.
The automotive gear segment consumes the largest size of the industry pie. The Industrial Gear
industry usually includes manufacturing of Gears, Gear boxes, Gear Motors and Gear assemblies.
The Gears and gear boxes are categorized as Standard (non‐customized) and Non‐standard
(Customized) which are manufactured by organized, unorganized and international players.
Industrial gear caters mainly to the needs of sectors like steel, cement, Textiles, Power, Sugar,
Paper, Mining, etc. Notably, non‐standard segment includes custom built gears and loose gears
as well. The Indian industrial gear market is mostly dominated by manufacturers of Standard
(non‐customized) Gears and Gear boxes as manufacturing of non‐standard (customized) gears
requires high end expensive technology, skills and facilities to deliver to the specific needs of
different clients in a short span of time. According to FY13 Annual report of Shanthi Gears, the
Standard gearboxes constitute about ~35% of the market and are growing approximately at over
10% CAGR, while the non‐standard (customized) gear boxes constitute over ~75% and is growing
below the Industry average.
The global Gear industry is estimated to be at US$169 billion, out of which industrial gears
constitute 30%, while the rest is consumed by automotive industry. This means the global
industrial gears market size is ~US$50.7 billion and the automotive industry market size
US$118.3 billion. Region‐wise, Asia Pacific is the largest contributor in the gear industry with a
market size of US$68 billion i.e. ~40% of the total gear market. Followed by Asia Pacific, the
second largest region contributing to the overall industry is North America (NA). NA accounts for
~24% of the total industry i.e. US$40 billon. In the US$68 billion Asia Pacific market, China makes
up for ~43% of the pie and rest are Japan and Other Asia Pacific. Similarly, in the US$40 billion NA
market, US adds up to ~75% and rest represents Canada and Mexico. Also, Western Europe
comprises of US$36 billion i.e.
~21% of the global industry
size.
Presently, Indian Gear
industry is estimated to be
INR10,000 crore (US$1.67
billion) out of which ~30% is
Industrial gears and rest
being the Automotive gears.
The Indian Industrial gear
industry is pegged at INR3000
Market Size
(INR2811 cr)
Domestic Sales
(INR2626 cr)
93% of total size
Exports
(INR185 cr)
7% of total size
Market Size
(INR2811 cr)
Domestic Consumption
(INR1744 cr)
62% of total size
Imports
(INR1067 cr)
38% of total size
Particulars 2003 2008 2013 2018e
Gear Industry Size 97.8 134.5 169.5 217
North America: 29.9 32.6 40.4 48.8
United States 23.7 24.8 30.1 36.1
Canada & Mexico 6.2 7.8 10.4 12.7
Western Europe 27.2 32.2 36.2 41.1
Asia/Pacific: 30.9 51.1 68.4 94.6
China 6.7 17.3 29 45.6
Japan 15.2 19.5 19.8 21.9
Other Asia/Pacific 8.9 14.3 19.7 27.1
Central & South 2.9 5.5 7.1 9.3
Eastern Europe 4.6 8.8 11.8 15.7
Africa/Mideast 2.3 4.3 5.6 7.5
World Gear Market Size
Source: The Freedonia Group, Inc.
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Microsec Research 14th April 2014
crore (US$0.5 billion), which is merely 1% of the global industrial gear market size. The INR3000
crore Indian industrial gear sector is growing at a rate of about 6% p.a. and is expected to touch
about INR4000 crore in the next five years (according to Shanthi Gears Annual Report of FY13).
This means it is expected to grow by approximately INR200 crore p.a.
The Indian industrial Gear Industry depends heavily on imports especially for high‐end gears.
Almost ~35‐40% of it is imported and ~7‐10% is exported.
Company Profile
Shanthi Gears Ltd, now a subsidiary of Tube Investments of India (post acquisition in November,
2012), is one of the largest organized industrial gear manufacturer in India. Headquartered in
Coimbatore, It commenced operations in 1969 and got listed on Indian Stock exchange in 1986.
The company has been promoted by a technocrat entrepreneur named Mr. P Subramanian
having over four decades of experience in the industry. It manufactures wide range of critical
components involved in power transmission products like Gears, Gear boxes, Gear motors and
Gear assemblies. The company is strongly positioned in the custom made gears and gear boxes
with ~70‐75% of revenues from customized products catering across industries like steel, textiles,
power, chemical, rubber, paper, mining, cement, sugar etc. The company has fully integrated
operations with strong in‐house R&D and design. It operates from five manufacturing units and
one foundry division located in Coimbatore.
Key Milestones
C
o
m
• Established as Shanthi Engineering & Trading Co manufacturing small gears
1969
• Converted to a private limited company and started manufacturing gears for textile industry
1972
• Initiated manufacturing of worm gear boxes
1980
• Equity shares listed on stock exchanges
1986
• Started manufacturing industrial and special gear boxes
1987
• Certified ISO 9001
2002
• Certified AS 9100 C: the only gear company in India with such certification
2008
• Internal re‐structuring of management. Professional CEO brought on board
2011
• Started R&D activities in‐house
2011
• Acquired by Tube investments of India Ltd
2012
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Microsec Research 14th April 2014
pany’s Power Transmission Products – An array of Gears, Gear Boxes and Gear assemblers
Manufacturing Process
Products
•Worm Gear Boxes
•Helical & Bevel Helical Gear Boxes
•Geared Motors
•Cooling Tower Gear Boxes
•Extruder Gear Boxes
•Rolling Mill Gear Boxes
•Textile Gear & Gear Assemblies
Standard Gear &
Gear Boxes Special Gear Boxes for industries like:
•Cement
•Mining
•Power
•Paper•Steel
Special Gear Boxes
•Spur / Helical Gear
•Pinion Shaft
•Internal Gear
•Worm and Wheel
•Straight Bevel Gear
•Spiral Bevel Gear
•Spares for imported machines
Loose Gears
•Capable of designing gears/ gear boxes for standard and customized applications
•CAE and Gear calculation software are used for design
•60 design personnel
1. Design
•Over 20,000 wooden,
aluminum patterns available
•Cast iron foundry with mechanized sand plant
•Centrifugal casting of
phosphor bronze rings
•Steel fabrication upto 10 T
single piece2. Foundry –Ferrous / Non‐Ferrous
•Hot open forging
•Open forging facility upto
500 kg single piece
•Max 500 mm dia
3. Forging
•Capability to go upto a max
diameter of 3,300 mm
4. Turning
•Provides a key way for the
locking of shaft / gear
•Machines available for milling and keyway milling / broaching / slotting
5. Key Way Milling
•Gear hobs and milling cutters upto 30 module
•In‐house gear hobbingmachines
•In‐house cutter manufacturing facility
6. Gear Hobbing / Cutting
•Heat treatment for hardening the surface
•Most modern computer controlled heat treatment plant. 5 nos. pit furnaces including 2,400mm diafurnace
•Surface treatment including nitriding7. Heat Treatment
•Increases accuracy and improves surface finish
•Gear grinders including state of the art ‘Reishauer’ “Gleason Pfauter and Kappgear grinding machines
8. Profile Grinding of Spur Helical
•Gear tooth profile grinding
•In‐house thread/ worm profile grinding machines
•Specialized machines & set‐up for Rotor Grinding
9. Worm Profile Grinding
•Assembling the gear for delivery
•Testing of the gear before packing
10. Assembly
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Microsec Research 14th April 2014
Shanthi Gears Select Clientele
Shanthi Gears – Sales Segmentation: Domestic and Exports
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Microsec Research 14th April 2014
Key Financials
Peer Comparison
Key Risks
Volatility in raw material input prices: Volatility in prices of raw material’s input like steel
and aluminium alloy, which make up 50% of their input costs is likely to pressurize
margins.
Delay in investments: Delays in investments in the sectors served by Shanthi Gears could
adversely affect its revenues and profits going forward. However, with a diversified
profile with none of the sectors contributing more than 10‐12% of its revenues,
company has a broad‐based scope of growth going forward.
Increase in competition: Increased competition from unorganized as well as foreign
players can prove to be a risk to its market share.
ParticularsCMP Mcap
TTM Net
Sales
TTM
EBITDA
EBITDA
Margin
TTM
PAT
PAT
Margin
TTM
EPSP/E EV/EBITDA P/BV BVPS ROE
Net
Worth
Total
DebtD/E
Shanthi Gears 69 564 151.0 40.7 27.0% 16.6 11.0% 2.0 33.8 12.5 2.1 32.8 6.2% 267.7 0.0 0.0
Elecon Engineering 40 371 514.8 91.4 17.7% 27.7 5.4% 2.5 15.7 6.8 0.7 59.8 5.7% 488.2 253.4 0.5
121.7 162.3 201.4 244.1
252.5
121.4 160.4
173.0
145.7
156.3
175.0 210.0
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
0.0
50.0
100.0
150.0
200.0
250.0
300.0
FY05A
FY06A
FY07A
FY08A
FY09A
FY10A
FY11A
FY12A
FY13A
FY14E
FY15E
FY16E
INR Cr
Net Sales EBITDA Margin PAT Margin
115.5
153.2 183.5 220.4
218.9
112.0
149.8
152.9
134.8
143.8
160.1 190.1
6.2 9.1 17.9
23.7
33.5
9.4 10.5
20.1
10.9
12.5
14.9
20.0
0.0
50.0
100.0
150.0
200.0
250.0
FY05A
FY06A
FY07A
FY08A
FY09A
FY10A
FY11A
FY12A
FY13A
FY14E
FY15E
FY16E
INR Cr
Domestic sales Exports
Source: Microsec Research, Company data Source: Microsec Research, Company data
Source: Microsec Research, Company data
- 13 -
Microsec Research 14th April 2014
Valuation
Going forward, the outlook for Shanthi Gears looks positive with fully integrated modern
facilities, high presence in customized gears (non‐standard gears), fewer dependence on
imported raw materials, investments in wind mills and power linkages to aid margins. Also, with
exposure across various industries, management’s effort to bring back old niche clients and
introduction of new standard products to lead in diversity of clientele, Uptick in investment cycle
to provide the company ample opportunities to grow and Tube Investments of India’s acquisition
to create synergies between both companies, the company financial prospects look bright.
Adding to the above triggers, the company has strong balance sheet, cash, surplus land,
improving ROE.
We followed consolidated approach to value Shanthi Gears Ltd based on Discounted Cash Flow
(DCF) and P/E Valuation. In addition to arrive at final valuation, we provided equal weights to
each of our valuation methods. A description of the valuation is given below:
Discounted Cash Flow (DCF)
We utilized Weighted Average Cost of Capital (WACC) of 10.08% to arrive at the future earnings
of Shanthi Gears Ltd. In addition, we applied a terminal growth rate of 2.50% for the earnings
beyond FY2017E. We arrived at the WACC with a Cost of Equity of 10.08%, post tax Cost of Debt
of 0.00%, and Debt‐to‐Equity as nil. By adopting Capital Asset Pricing Model (CAPM), we arrive at
Cost to Equity based on Market Return of 12.18%, Risk Free Rate of 8.95% and Beta of 0.35x.
With this, our DCF valuation reflects a target price of INR84 for the stock, which reflects an
upside of 22% from the CMP of INR69.
Price‐to‐Earnings (P/E)
Based on target P/E multiple of 20.18x on FY16e EPS of INR4.34 per share, we arrived at a target
price of INR88 per share, an upside of 27% from the CMP of INR69 per share.
Consolidated Valuation
Considering future earnings growth visibility and current industrial gear market scenario, we
have assigned 50% weightage each to DCF and P/E methodologies. With this, we arrived at a
consolidated target price of INR86 per share for Shanthi Gears Ltd, an upside of 25% from the
CMP of INR69 per share.
- 14 -
Microsec Research 14th April 2014
Profit & Loss Statement
Particulars (INR in Crores) FY09A FY10A FY11A FY12A FY13A FY14E FY15E FY16E
Net Sales 252.48 121.39 160.36 173.00 145.65 156.25 175.00 210.00
Growth (%)‐YoY 3.42% ‐51.92% 32.10% 7.88% ‐15.81% 7.28% 12.00% 20.00%
Other Operating Income 0.58 2.36 4.33 4.59 0.88 4.58 5.00 6.50
Total Income 253.06 123.75 164.69 177.59 146.53 160.83 180.00 216.50
Growth (%)‐YoY ‐51.10% 33.08% 7.83% ‐17.49% 9.76% 11.92% 20.28%
TOTAL EXPENDITURE 148.21 73.38 93.75 108.64 103.24 116.02 126.00 149.10
as % of sales 58.57% 59.30% 56.93% 61.17% 70.46% 72.14% 72.00% 71.00%
EBITDA 104.85 50.37 70.94 68.95 43.29 44.81 54.00 67.40
EBITDA Margin (%) 41.43% 40.70% 43.07% 38.83% 29.54% 27.86% 30.00% 31.13%
Other Income 0.68 2.78 0.54 0.35 7.64 10.25 13.00 15.00
Operating Profit 105.53 53.15 71.48 69.30 50.93 55.06 67.00 82.40
Depreciation 25.77 26.93 26.85 27.1 28.57 26.63 29 31
EBIT 79.76 26.22 44.63 42.2 22.36 28.43 38.00 51.40
EBIT Margin (%) 31.52% 21.19% 27.10% 23.76% 15.26% 17.68% 21.11% 23.74%
Interest 8.63 1.88 0.88 0.62 0.29 0.02 0.01 0.01
PBT 71.13 24.34 43.75 41.58 22.07 28.41 37.99 51.39
Exceptional items ‐2.33 0 0 0 0 0.00 0.00 0.00
PBT after exceptional items 68.80 24.34 43.75 41.58 22.07 28.41 37.99 51.39
PBT Margin (%) 27.19% 19.67% 26.57% 23.41% 15.06% 17.66% 21.11% 23.74%
Tax 24.75 8.14 15.9 13.47 6.6 8.69 11.40 15.93
Tax (%) 34.80% 33.44% 36.34% 32.40% 29.90% 30.59% 30.00% 31.00%
PAT 44.05 16.2 27.85 28.11 15.47 19.72 26.59 35.46
PAT Margin (%) 17.41% 13.09% 16.91% 15.83% 10.56% 12.26% 14.77% 16.38%
Exceptional Items ‐2.33 0 0 0 0 0 0 0
PAT ( excl EI) 46.38 16.2 27.85 28.11 15.47 19.72 26.59 35.46
PAT Margin (%) (excl EI) 18.33% 13.09% 16.91% 15.83% 10.56% 12.26% 14.77% 16.38%
PAT Growth (%) ‐ YoY 5.03% ‐65.07% 71.91% 0.93% ‐44.97% 27.46% 34.87% 33.34%
Basic EPS 5.39 1.98 3.41 3.44 1.89 2.41 3.25 4.34
Adjusted EPS excl exceptional items 5.68 1.98 3.41 3.44 1.89 2.41 3.25 4.34
Equity Capital 8.17 8.17 8.17 8.17 8.17 8.17 8.17 8.17
Face Value 1 1 1 1 1 1 1 1
No. of Outstanding Shares 8.17 8.17 8.17 8.17 8.17 8.17 8.17 8.17
Source: Company data, Microsec Research
- 15 -
Microsec Research 14th April 2014
Balance Sheet
Cash Flow Statement
Particulars (INR in Crores) FY09A FY10A FY11A FY12A FY13A FY14E FY15E FY16E
SOURCES OF FUNDS
Share Capital 8.17 8.17 8.17 8.17 8.17 8.17 8.17 8.17
Reserves & Surplus 194.12 202.68 221.04 239.67 249.41 257.67 269.93 288.20
Shareholder's Funds 202.29 210.85 229.21 247.84 257.58 265.84 278.10 296.37
Secured Loans 54.83 15.71 3.86 0.00 0.00 0.00 0.00 0.00
Unsecured Loans 34.43 9.92 0.00 0.00 0.00 0.00 0.00 0.00
Total Debt 89.26 25.63 3.86 0.00 0.00 0.00 0.00 0.00
Finance Lease Liability 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total 291.55 236.48 233.07 247.84 257.58 265.84 278.10 296.37
APPLICATION OF FUNDS
Gross Block 338.59 344.13 353.45 360.21 361.09 363.59 366.59 370.59
(‐) Accumulated Depreciation 142.45 169.20 195.54 222.01 245.34 271.97 300.97 331.97
Net block 196.14 174.93 157.91 138.20 115.75 91.62 65.62 38.62
Capital Work ion Progress 7.07 5.17 7.54 5.59 3.62 2.50 2.00 2.00
Goodwill 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Investments 0.00 0.00 0.00 0.00 37.99 37.99 37.99 37.99
Net Deferred Taxation ‐20.09 ‐17.50 ‐14.26 ‐10.73 ‐6.88 ‐6.88 ‐6.88 ‐6.88
Fixed Assets & Investments 183.12 162.60 151.19 133.06 150.48 125.23 98.73 71.73
Inventories 60.33 46.09 43.54 57.00 42.03 43.40 43.75 44.21
Sundry Debtors 35.42 14.87 25.87 25.62 25.16 25.00 25.00 25.45
Other Current assets 0.95 0.50 0.26 0.79 5.24 5.24 5.24 5.24
Cash & Bank balance 49.01 29.00 47.56 55.93 53.31 91.28 132.07 175.88
Loans & Advances 9.98 6.57 6.04 6.05 5.27 4.69 4.81 5.25
Total Current Assets,Loans & Advances 155.69 97.03 123.27 145.39 131.01 169.61 210.87 256.03
Current Liabilities & Provisions 47.26 23.15 41.39 30.61 23.91 29.01 31.50 31.39
Net Current Assets 108.43 73.88 81.88 114.78 107.10 140.61 179.37 224.64
Miscellaneous Expenditure 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
TOTAL 291.55 236.48 233.07 247.84 257.58 265.84 278.10 296.37
Source: Company data, Microsec Research
Particulars (INR in Crores) FY09A FY10A FY11A FY12A FY13A FY14E FY15E FY16E
A. Cash Flow From Operating Activites
Net Profit Before Tax 68.80 24.34 43.75 41.58 22.07 28.41 37.99 51.39
Depreciation 25.77 26.93 26.85 27.1 28.57 26.63 29.00 31.00
Interest expense 8.62 1.83 1.03 0.62 0.29 0.02 0.01 0.01
Operating Profit before WC changes 102.62 52.7 68.96 64.86 43.7 55.06 67.00 82.40
(Increase)/Decrease in Inventories ‐5.53 14.25 2.54 ‐13.46 14.97 ‐1.37 ‐0.35 ‐0.46
(Increase)/Decrease in Sundry Debtors 1.94 24.4 ‐10.26 ‐0.29 ‐1.63 0.16 0.00 ‐0.45
(Increase)/ Decrease in loans and advances 0.00 0.00 0.00 0.00 0.00 0.58 ‐0.13 ‐0.44
(Increase)/ Decrease in Other Current assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Increase/ (Decrease) in Current & Liabilities 10.93 ‐24.11 12.37 ‐8.84 3.31 5.10 2.50 ‐0.11
Cash generated from operations 109.96 67.24 73.61 42.27 60.35 59.52 69.02 80.94
Direct taxes paid 23.72 10.74 19.14 17 11.29 8.69 11.40 15.93
Net Cash from Operating Activities 86.24 56.5 54.47 25.27 49.06 50.83 57.63 65.01
B. Cash Flow From Investing Activities
Net Cash used in Investing Activities ‐31.1 ‐3.39 ‐9.53 ‐0.93 0.03 ‐1.38 ‐2.50 ‐4.00
C. Cash Flow From Financing Activities
Net Cash from/(Used) in financing activities ‐23.62 ‐73.11 ‐26.4 ‐15.92 ‐13.72 ‐11.48 ‐14.34 ‐17.20
Net (Increase)/Decrease in cash & cash equivalents 31.52 ‐20 18.54 8.42 35.37 37.97 40.79 43.80
Cash & Cash Equivalents at beginning 17.49 49.01 29.01 47.51 55.93 53.31 91.28 132.07
Cash & Cash Equivalents at End 49.01 29.01 47.55 55.93 91.3 91.28 132.07 175.88
Source: Company data, Microsec Research
- 16 -
Microsec Research 14th April 2014
Ratio Analysis
Particulars (INR in Crores) FY09A FY10A FY11A FY12A FY13A FY14E FY15E FY16E
Profitability Ratios
Return on Assets (ROA) 29.79% 16.70% 22.59% 19.33% 11.81% 11.63% 12.61% 13.85%
Return on Capital Employed (ROCE) 15.91% 6.85% 11.95% 11.34% 6.01% 7.42% 9.56% 11.96%
Return on Equity (ROE) 22.93% 7.68% 12.15% 11.34% 6.01% 7.42% 9.56% 11.96%
Per Share
Basic EPS 5.39 1.98 3.41 3.44 1.89 2.41 3.25 4.34
Adjusted EPS excl Exceptional Items 5.68 1.98 3.41 3.44 1.89 2.41 3.25 4.34
Dividend Per share 1.20 0.80 1.00 1.00 0.60 1.20 1.50 1.80
Cash Earning Per Share 2.52 ‐1.31 0.12 0.12 ‐1.60 ‐0.85 ‐0.29 0.55
BVPS 24.76 25.81 28.06 30.34 31.53 32.54 34.04 36.28
Valuation Parameters
P/E (x) 4.74 19.16 10.97 11.18 29.87 28.59 21.20 15.90
Adjusted P/E(x) excl Exceptional Items 4.50 19.16 10.97 11.18 29.87 28.59 21.20 15.90
P/CEPS(x) 10.13 ‐28.93 305.56 311.03 ‐35.27 ‐81.56 ‐234.20 126.42
P/BV(x) 1.03 1.47 1.33 1.27 1.79 2.12 2.03 1.90
Market Cap/Sales(x) 0.83 2.56 1.91 1.82 3.17 3.61 3.22 2.68
EV/EBITDA(x) 2.37 6.10 3.69 3.74 9.44 10.54 7.99 5.75
Liquidity Ratios
Current Ratio 3.29 4.19 2.98 4.75 5.48 5.85 6.69 8.16
Acid Test Ratio 2.02 2.20 1.93 2.89 3.72 4.35 5.31 6.75
Debt‐Equity Ratio 0.44 0.12 0.02 0.00 0.00 0.00 0.00 0.00
Efficiency Ratios (%)
Asset turnover Ratio 0.14 0.06 0.10 0.10 0.05 0.07 0.09 0.11
Working Capital Turnover Ratio 0.43 0.22 0.34 0.24 0.14 0.14 0.15 0.16
Inventory Turnover Ratio 0.77 0.35 0.64 0.49 0.37 0.45 0.61 0.80
Margin Ratios (%)
EBITDA Margin 41.43% 40.70% 43.07% 38.83% 29.54% 27.86% 30.00% 31.13%
EBIT Margin 31.52% 21.19% 27.10% 23.76% 15.26% 17.68% 21.11% 23.74%
PBT Margin 27.19% 19.67% 26.57% 23.41% 15.06% 17.66% 21.11% 23.74%
Net Profit Margin 18.33% 13.09% 16.91% 15.83% 10.56% 12.26% 14.77% 16.38%
Source: Company data, Microsec Research
Microsec Research14th April, 2014
Microsec Research: Phone No.: 91 33 66512100 Email: [email protected]
Ajay Jaiswal: President, Investment Strategies, Head of Research: [email protected]
Fundamental
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Technical & Derivative Research
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Research‐Support
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Recommendation
Strong Buy >20%
Buy between 10% and 20%
Hold between 0% and 10%
Underperform between 0% and ‐10%
Sell < ‐10%
Expected absolute returns (%) over 12 months
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Microsec Research14th April, 2014
- 17 -
Microsec Research 14th April 2014
Disclaimer: This document is prepared by the research team of Microsec Capital Ltd. (hereinafter referred as “MCL”) circulated for purely information purpose to the authorized recipient and should not be replicated or quoted or circulated to any person in any form. This document should not be interpreted as an Investment / taxation/ legal advice. While the information contained in the report has been procured in good faith, from sources considered to be reliable, no statement in the report should be considered to be complete or accurate. Therefore, it should only be relied upon at one’s own risk.
MCL is not soliciting any action based on the report. No indication is intended from the report that the transaction undertaken based on the information contained in this report will be profitable or that they will not result in losses. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors, as they believe necessary. Neither the Firm, nor its directors, employees, agents nor representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.