Gearing for growth

INVESTMENT COUNTER/ PENNY WISE

Shanti Gears' scrip may not ring a bell when it comes to instant recall. However, the fact that it grew by a whopping 455 per cent to Rs 339 from lowly levels of Rs 61 in May 2003 would certainly qualify for being a remarkable feat.

Add that to the fact that the company's sales and profits have been perking up year after year (it has netted 35 years of continued profits since its inception in 1969). SGL posted revenues of Rs 56 crore for fiscal 2002-2003 and Rs 85 crore for fiscal 2003-2004.

Coimbatore-based SGL is the second largest industrial gear manufacturer in the organised sector in India. It manufactures gears, gear boxes, geared motors and gear assemblies (both standard and custom built) to global players in critical industries such as cement, power, steel, sugar, passenger lifts and medical electronics.

The company is the only aviation gear manufacturer approved by the Indian government. Its gears meet ISO (international), DIN (German) and AGMA (American) standards. Shanti Gears was established in 1969 by P Subramanian, an entrepreneurial engineer.

The company reported handsome numbers for FY04, with its revenues jumping by 52.5 per cent while its net profit zoomed by 103 per cent. "The manufacturing sector is certainly seen as a crucial driver of the gear industry's performance," says P K R Kurup, senior vice president, SGL.

"The last six months have seen a turnaround in the manufacturing sector and a buoyant growth performance in the industry with the index of industrial production (IIP) registering a y-o-y increase. This, in turn, has seen SGL benefiting in terms of increasing the order book size, which recently crossed the Rs 100 crore mark," he adds.

SGL's state-of-the-art machinery makes it capable of manufacturing even DIN Class 3 standards consistently whilst the general application calls for accuracy levels of Class 6 and 5.

Heavy plans ahead
SGL has also recently moved into the heavy gears segment. It had earmarked a chunk of the proposed Rs 40 crore capital investment this year to prop up capacities tuned to turn out heavy gears.

The initiative proved fruitful as SGL bagged a Rs 5-crore speciality heavy gear project order from Tisco and a Rs 1.5-crore supply deal from a sugar mill.

This move would allow it to increase its stake in the Rs 450 crore industrial gear segment - of which the company presently controls 20 per cent - though it has a negligible presence in the heavy segment.

The domestic heavy gears market, servicing cement, paper, chemicals, thermal and sugar sector, is valued at Rs 100 crore and is mostly controlled by a clutch of international manufacturers.

The company hopes that the entry into this segment would also increase the share of project orders on turnover. In fact, the 65 per cent growth in turnover for the fiscal ended March 2004 is attributed to the increased focus on project orders last year.

Project orders in the original equipment manufacture (OEM) line and replacement market, presently account for around 20 per cent of the company's revenues, from virtually nil two years ago.

The company would initially target the heavy gears replacement market and then consider competing for sugar, paper, cement and chemical machinery OEM deals.

"All these factors along with the anticipated continued buoyancy in the manufacturing industry would be the future growth driver for our business," says Kurup.

Export push In terms of future growth, the company is confident that its products are globally competitive and hence will focus more on exports. The company plans to continue managing and increasing its market share while trying to find new markets beyond the domestic one.

SGL exports to countries including Germany, Belgium, USA, UK, the Netherlands, Singapore and UAE. The company's clientele includes stalwarts like Ingersoll-Rand, ABB, Bhel, Siemens, Mitsubishi, Rolls Royce, Tisco and SAIL.

Exports during the current fiscal (2003-2004) are estimated to be around Rs 3 crore and SGL aims to achieve a growth of 50 per cent in its export revenue this year.

Concerns persist
However, there are some concerns. First, the growth in share price from here on is not expected to be on the same magnitude. "The cream of the rally is over," says an analyst.

"At Rs 287, the stock presently trades at around 10 times FY04 earnings. So it is definitely not undervalued," he adds.

Another concern is the advent of multinationals like Bonfiglioli, who have successfully reduced the weight of their gears by substituting gear parts with lighter materials like aluminium. Among Indian players, Greaves and Elecon are SGL's main competitors.

However, analysts say it is the international competition that Shanti Gears should watch out for, especially in the heavy gear segment which is the domain of international players likes Flander and Bonfiglioli.

Analysts, however, say the exalted position SGL enjoys among domestic players would ensure decent revenue flows.

They feel that in the highly working capital intensive industry that SGL operates in, the company's order book has shown positive signals. They say SGL has a very strong brand equity in the south and would need to beef up its distribution network in the north.

Besides, the company stands to reap rich dividends if it increases its presently minuscule volumes in the aviation sector, for which the competition is limited.

Analysts expect SGL to do well in the next two-three years and feel that an earnings growth of 25 per cent is very much possible. As far as valuations are concerned, analysts feel that a fall below the Rs 300 levels would be a good accumulation opportunity.