Hold Shanthi Gears; target of Rs 64: SPA Research

SPA Research has recommended hold rating on Shanthi Gears (SGL) with a target of Rs 64, in its August 1, 2012 research report.

“Shanthi Gears reported below than expected set of numbers led by slower capex cycle. Net sales de-grew by 21.9% YoY to Rs 314 mn in Q1FY13. EBITDA margins contracted by 574 bps YoY & 193 bps QoQ to 34.1%, led by deferment of projects, which effected sales of Rs 100 mn in Q1FY13. PAT in Q1FY13 stood at Rs 36 mn, down by 48.9% YoY & 56.1% QoQ. We expect leanness to continue in the current quarter with expected improvements from H2FY13. We retain our hold recommendation on the stock.”

“SGL reported net sales of Rs 314 mn, down by 21.9% YoY & 36.3% QoQ. PAT stood at INR 36 mn, down by 48.9% YoY & 56.1% QoQ. In Q1FY13, revenue mix between customized and standard gears stood at 60:40. We expect ~50-55% of SGL revenues to be generated from manufacturing of customized gears in FY13E & FY14E, which have high operating margin of 55-60% while the balance is expected to be generated from standard gear boxes, geared wheel, geared motors and loose gears, having operating margin of 15-20%. EBITDA margins contracted by 574 bps YoY & 193 bps QoQ to  34.05%, led by deferment of projects effecting sales of INR 100 mn  in Q1FY13. Operating expenses as a percent of sales also surged due to poor economies of scale. We expect margins to contract by 63 bps by FY14E to 36.87% vis-à-vis 37.51% reported in FY12, led by increase in share of low margin standard gears.”   

“SGL's current order book stands at INR 750 mn vis-à-vis 500 mn in the sequential quarter (likely to be executed over the next 3-4 months). With expectation of improving capex cycle, diversification into new products, technological advancement coupled with cash-rich balance sheet and new & sound management taking control, we expect capacity utilization to gradually increase to 84.7% (57.8% in FY12) in FY14E. We expect revenues & profit to register a CAGR of 21.2% & 29.7% respectively over FY12-FY14E. We recommend a hold on the stock with a revised target of Rs 63.6 in 18 months at a P/Ex of 11xFY14E EPS of Rs 5.78, says SPA Reseach report.

Non-Institutions holding more than 90% in Indian cos

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