Buy Shanthi Gears - Target of Rs 54: SPA Research

Shanthi Gears has reported Net Sales of INR 429 mn, up by 18.4% on YoY basis & almost flat on QoQ basis. PAT at INR 59 mn was down by 2.8% YoY & 17.8% on QoQ basis. Results were below our estimates. We expect SGL to report better results in Q4FY12 as traditionally it has been the strongest quarter. With restructuring process yielding results, diversification into new products, technological advancement coupled with cash-rich balance sheet, we retain our BUY recommendation.

Disappointing set of numbers

Q3FY12 results were below our expectations. Net Sales went up by 18.4% YoY to INR 429 mn from INR 362 mn in the corresponding period last year but was almost flat on a sequential basis. Net profit stood at INR 59 mn, down by 2.8% YoY & 17.8% QoQ.

Product Mix

In FY11, the 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 FY12E & FY13E, 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%. On account of increase in share of low margin standard gears, we expect blended margins of the Company to come down.

Wage costs hit EBITDA Margin

EBITDA margin at 36% contracted by 619 bps on YoY basis & 429 bps on QoQ basis. Higher than expected employee costs is attributed for such contraction. Wage hike to the extent of 35% given during Q1FY12 as well as recruitment of skilled staffs especially in R&D has inflated the wage bill. In 9MFY12, employee costs stood at 16.2% of net sales vis-à-vis 12.7% in the same period last year.

February 01, 2012 RESULT UPDATE - Q3FY12

Expansion plans on track

SGL is diversifying into manufacturing of screw air compressors, with its prototype in the testing phase. Commercial production of the same is expected to start by FY13. It has commissioned its facilities for production of higher tonnage wind-mill gear boxes and expects new orders to flow in from the forthcoming quarters.

Gradual increase in capacity utilization

SGL is in the process of increasing its capacity utilization, which got hampered due to operational hazards faced by the Company. In 9MFY12, its capacity utilization was at 56.4% vis-à-vis 46.9% in the same period last year. We expect capacity utilization to gradually increase to 63.1% in FY12E & 82.0% in FY13E vis-à-vis 53.4% in FY11.

Outlook

SGL currently has an order book of INR 600-INR 700 mn to be executed over the next 3-4 months. We expect SGL to report better results in Q4FY12 as traditionally it has been the strongest quarter. We have lowered our bottom-line estimate by 15.0% for FY12E & 7.1% for FY13E to incorporate higher employee costs. We retain our "BUY" recommendation and target price of INR 53.6 in 15 months at 3.7XFY13E EV/EBITDA.

Source : Equity Bulls

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