Shanthi Gears Ltd.: Should you invest?

About the company: Shanthi Gears Ltd.

Shanthi Gears, a subsidiary of Tube Investments of India, is a pioneer in gear manufacturing and is currently ranked among India’s top gear manufacturers. They are in the business of designing, manufacturing, and supplying gears and gearboxes, as well as providing specialized gear reconditioning services, and have been the preferred name for some of the industry’s biggest names for over four decades. The company also serves as engineering design consultants, advisors and providers of technical know-how and applied technology, solution providers and business process outsourcers in the fields of engineering design and drawing, software programming, and so on.

The company’s rich engineering heritage dates back to 1960, when P. Subramanian, an engineer himself, laid the groundwork with a modest small gear manufacturing unit in the town of Coimbatore. Shanthi Engineering and Trading Company, the forerunner to Shanthi Gears, began with simpler processes like milling and grew steadily under visionary leadership and with the hard work of its employees to become a private limited company—Shanthi Gear Products (P) limited—in 1972.

Headquarter	Tamil Nadu, India.
Sector	Auto Ancillaries

Area of Operation:

Shanthi offers a wide range of Standard and Custom Gearboxes for power transmission needs. The product in this series includes:

• Worm Gear Box
• Helical & Bevel Helical Gear Box
• Geared Motor
• Custom-Built Gear Box
• Mill Gear Box
• Open Gearing
• Products for Textile Industries
• CNC Machine Tools

MD & CEO	Mr. M Karunakaran (Feb 2019 – Present)
Chairman	Mr. L Ramkumar (Jun 2018 – Present)

Board of Committees: Shanthi Gears Ltd.

Subsidiaries:

The Company has no subsidiaries.

Competitors:

• L G Balakrishnan & Bros Ltd (Market Cap of Rs. 1,952 Cr )
• RACL Geartech Ltd (Market cap of Rs.669 Cr)

Shareholding Pattern:

Top Shareholdings:

• Tube Investments Of India Limited – 70.46%
• Pacific Assets Trust Plc – 2.90%
• Nimesh Sumatilal – 1.27%

Industry Overview:

The global industrial gearbox market was valued at USD 24.90 billion in 2020 and is expected to reach USD 32.43 billion by 2027, growing at a CAGR of 4.20 percent between 2022 and 2027. Due to increasing demand for gearboxes in various applications such as the manufacturing sector, power industry, and so on, the Asia-Pacific region accounted for a significant share of the industrial gearbox market in 2020. Countries such as India, China, Japan, Korea, and Australia are among the region’s major contributors.

With India’s population and income levels increasing, industries such as FMCG, Steel, Cement, Power, Infrastructure, and Mining are renovating and expanding their manufacturing facilities to meet public demand. The estimated market size of industrial gearboxes in India is 2,000 crores, with a growth rate of 2,600 crores over the next four years. In addition, India is focusing on renewable energy sources to generate energy, with the goal of achieving 40% of its energy from non-fossil sources by 2030, creating an opportunity for the windmill segment.

Shanthi Gears Ltd.: Profit and Loss Statement

Consolidated P&L (in Rs. Crores):

	Mar-16	Mar-17	Mar-18	Mar-19	Mar-20	Mar-21
Revenue from Operations	164	183	214	242	242	216
Expenses	134	147	177	200	208	189
Operating Profit	31	36	37	41	35	27
Profit before tax	23	28	33	42	33	26
Net Profit	18	23	29	33	25	20
EPS (in Rs.)	2.17	2.75	3.50	4.08	3.28	2.63

Key Pointers:

1. 95% of the Revenue comes from the Sale of Products whereas just around 2% is of Sale of Services.
2. Just around 8% of the revenue is from Exports while the rest are Domestic sales.
3. Almost 50% of the company’s expense is material cost and around 20% is employee cost.
4. The last two FYs have deteriorated the company’s as well as the industry’s financials due to the global pandemic.

Shanthi Gears Ltd.: Balance Sheet

Standalone Balance Sheet (in Rs. Crores)

	Mar-16	Mar-17	Mar-18	Mar-19	Mar-20	Mar-21
Share Capital	8	8	8	8	8	8
Reserves	276	298	310	294	221	229
Borrowings	0	0	0	0	0	0
Other Liabilities	34	41	42	51	54	88
Total Liabilities	318	348	360	353	283	325
Fixed Assets	66	65	57	59	60	74
Investments	63	70	114	124	79	47
Other Assets	189	212	189	170	138	205
Cash Equivalents	2	2	1	20	2	3
Loans n Advances	68	83	68	18	27	69
Total Assets	318	348	360	353	283	325

Shanthi Gears Ltd.: Cash Flow

Standalone Cash Flow (in Rs. Crores)

	Mar-16	Mar-17	Mar-18	Mar-19	Mar-20	Mar-21
Cash from Operating Activity	46	14	42	27	56	33
Profit from operations	33	37	38	42	37	30
Working capital changes	22	-17	10	-5	26	7
Other operating items	0	0	0	0	0	0
Direct taxes	-9	-6	-6	-10	-8	-5
Cash from Investing Activity	-43	-13	-26	40	24	-20
Fixed assets purchased	-11	-6	-6	-12	-18	-15
Investment Purchases	-40	-22	-115	-193	-83	-104
Investments sold	0	8	85	231	121	94
Cash from Financing Activity	-5	0	-17	-49	-98	-12
Dividend Paid	-4	0	-14	-41	-23	-12
Proceeds from borrowings	0	0	0	0	0	0
Net Cash Flow	-2	1	-1	18	-18	1

Financial Ratios:

Stock Price:

1. Current Price	₹ 207
2. Market Cap	₹ 1,590 Cr
3. Yearly Fluctuation	₹ 128 – 219

Ratios:

	P/E	ROCE	ROE	Net Margin	Rev Growth	Dividend Yield
Shanthi Gears Ltd	40.42	11.30%	8.66%	8.98%	-11.04%	1.18%
L G Balakrishnan & Bros Ltd	8.14	21.53%	16.76%	8.21%	4.29%	3.27%
RACL Geartech Ltd	25.44	19.87%	24.32%	11.31%	-4.11%	0.41%

Strength:

1. Shanthi Gears is the leading gear manufacturer in India and is the preferred name for some of the industry’s biggest players.
2. Their Board of Directors is well experienced in this business segment and are associated with the company for a long time.
3. They are a completely debt-free company.
4. The company has been maintaining a healthy dividend payout.

Weakness:

1. The company has been registering poor profit growth of just 4.5% over the past 5 years and has below par revenue growth.
2. Their Balance Sheet and Cash Flow are not as appealing as their peers.
3. The financial ratios don’t seem good as the company reported ROE and ROCE and negative revenue growth.
4. Trading at a high P/E ratio of around 40.
5. Insufficient use of shareholders funds – ROE, ROCE, ROA continuously declined in the last 2 years.

Opportunity:

1. The Indian industrial gearbox market is expected to grow at a good pace as India is one of the major global contributors in this segment.

Threat:

1. Both the FIIs & DIIs have trimmed their holding in the company.
2. The company has been continuously registering poor EPS.

For more information, reach us at [email protected]

Team, MyGoalMySip.

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