Shanthi Gears up 9%, hits record high in a weak market on healthy outlook

With no major debt-funded capex plans in the medium term, rating agency ICRA expects the company's debt coverage metrics and liquidity to remain strong

Shares of Shanthi Gears (SGL) hit a record high of Rs 347.90, as they rallied 9 per cent on the BSE in Monday's intra-day trade in an otherwise weak market. The stock of the industrial machinery company surpassed its previous high of Rs 344.05, touched on September 20, 2022, on the back of healthy business outlook. In comparison, the S&P BSE Sensex was down 1.2 per cent at 57,428 points at 01:40 PM.

In the past five weeks, the market price of SGL has soared 47 per cent, as against 1 per cent decline in the benchmark index. In the past six months, the stock zoomed 86 per cent, as compared to an unchanged Sensex.

A subsidiary of Tube Investments of India, and part of the multi-billion dollar Murugappa Group, SGL is an industrial gearing solutions company that designs and manufactures gears, gearboxes, geared motors, and gear assemblie.

Last month, Shanthi Gears had said that no information/announcement having a bearing on the price/volume behavior of the security of the company is pending for disclosure to the Stock Exchanges.

For the financial year 2021-22 (FY22), Shanthi Gears reported 56 per cent year- on-year (YoY) revenue growth at Rs 337 crore, while net profit jumped 111 per cent to Rs 42.5 crore. The company's operating margins for FY22 were also healthy at 17.9 per cent aided by operating leverage and cost optimisation initiatives, despite the impact of commodity inflation.

For April-June quarter (Q1FY23), the company posted 48 per cent YoY growth in revenue at Rs 99 crore, and net profit of Rs 13.44 crore, as against Rs 8.58 crore in the year-ago quarter.

The company's pending order book, as of June 30, 2022, was Rs 274 crore as against Rs 235 crore in the previous year. In Q1FY23, the company had booked orders worth Rs 105 crore, a growth of 25 per cent over the previous year. The healthy order book provides revenue visibility for the next few quarters.

"While SGL's margins are exposed to volatility in raw material prices and competitive pressures, it would benefit from better absorption of costs as revenues scale going forward. With no major debt-funded capex plans in the medium term," rating agency ICRA said in a report. It expects the company’s debt coverage metrics and liquidity to remain strong.

"SGL has extensive presence in the industrial gears segment for five decades and caters to a reputed clientele from diversified sectors such as general engineering, steel, cement, railways, power and material handling, among others. It has a diversified client base with its top 10 customers accounting for only one-fifth of its revenues in FY2022, thereby insulating its revenues from the customer concentration risk," ICRA said in rating rationale.

The company has remained debt free and the fund-based working capital utilisation has been nil over the last nine years. In relation to these sources of cash, SGL has moderate capex plans for FY2023 and FY2024 and does not have any debt repayment obligations. Further, it enjoys strong financial flexibility and lender comfort as a subsidiary of TIIL and as part of the well-established Murugappa Group. This is expected to continue going forward as well, the rating agency said.