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Friday, May 23, 2014


Scrip Code: 524084 MONSANTO
CMP:  Rs. 1807.95; Buy at current levels.

Short Term Target: Rs. 1900.00; Medium to Long Term Target: Rs. 1988.00; STOP LOSS – Rs. 1662.85; Market Cap: Rs. 3,121.01 Cr; 52 Week High/Low: Rs. 2115.40 / Rs. 581.10.00.

Total Shares: 1,72,62,748 shares; Promoters : 1,24,54,044 shares –72.14 %; Total Public holding : 48,08,704 shares –27.86 %; Book Value: Rs. 236.01; Face Value: Rs. 10.00; EPS: Rs. 75.58; Dividend: 220.00 %; P/E: 23.87 times; Ind. P/E: 11.49; EV/EBITDA: 19.68.
Total Debt: ZERO Cr; Enterprise Value: Rs. 3,108.37 Cr.

MONSANTO INDIA LTD: Monsanto India Limited was founded in 1949 and is based in Mumbai, India. Monsanto India Limited operates as a subsidiary of USA based Monsanto Co. The company was previously known as Monsanto Chemicals of India Limited and later changed its name to Monsanto India Ltd in year 2000. The company came out with an IPO on February 1989 offering 3,40,500 equity shares of Rs. 10 each for Rs. 18 per share. The object of offer for sale was to reduce the equity holding in the company to 40 % or less. Monsanto India Limited engages in the production and sale of chemicals and hybrid seeds. The company operates through 100 year old brand which offers hybrid maize seeds under the Dekalb brand name acquired from Cargill in 1998; and glyphosate herbicide under the Roundup brand name. The company is also a manufacturer of Agricultural Chemicals. The Company’s segments include Seeds and Traits and Crop Protection. The Seeds and Traits segment consists of the Monsanto’s global seeds and traits business, and genetic technology platforms, including breeding, biotechnology and genomics. Monsanto India’s Dekalb is a hybrid maize seed. Dekalb has a diverse portfolio, which includes Dekalb 900M Gold, DKC 9081, Dekalb Pinnacle, Dekalb Super 900M, Dekalb Supreme, Dekalb I-lishell, Dekalb Double, Dekalb Prabal and DKC 9072. Roundup (a glyphosate-based product) is an herbicide, and the flagship brand of its Crop Protection Chemicals business. It has pioneered the chemical weed control concept in the country and is the market leader in the Rice herbicides which are marketed under the brand name MACHETE. It also markets LASSO a board spectrum herbicide and AVEDEX a herbicide used to protect wheat corp. In India, the Monsanto group operates through 3 entities i.e. (1) the listed entity Monsanto India Ltd (MIL) which is primarily involved in Maize seeds and Herbicides; (2) 50:50 JV between Mahyco and Monsanto Holdings Pvt. Ltd known as Mahyco Monsanto Biotech (MMB) which is sub-licensed to distribute Bio-Techonological cotton technology in India; and (3) Monsanto Holding. MIL’s team comprises of over 375 employees, a majority of whom are from rural backgrounds. In India the company is spread across Mumbai, Chandigarh, Eluru, Hubli, Kolkata, Coimbatore, Siliguri, Silvassa. The company’s R&D, Quality and Manufacturing Sites are: - Corn Seed Research Breeding stations at Udaipur, Bangalore and Jalandhar; A Biotechnology Research Centre at Bangalore; A Seed Processing Facility at Hyderabad; A Quality Assurance Laboratory at Hyderabad; A Chemistry Plant in Silvassa. MONSANTO INDIA Ltd is locally compared with Advanta Ltd, Camson Bio-Technologies ltd, Dhanuka Agritech Ltd, Kaveri Seeds Co Ltd, Sabero Organics Gujarat Ltd, Excel Industries Ltd, Punjab Chemicals and Crop Protection ltd, Rallis India Ltd, Insecticides India Ltd, Bayer CropScience India ltd, UPL Ltd, Bharat Rasayan Ltd, Meghmani Organics ltd and Globally compared with Monsanto Co of USA, Du Pont (E.I.) De Nemours (DD) of Delaware, FMC Corporation of Pennsylvania, Sumitomo Chemical Co Ltd of Japan, Syngenta AG of Switzerland, Vilmorin & Cie of Paris, Bayer Aktiengesellschaft of Germany, KWS SAAT AG of Germany, Sakata Seed Corporation of Japan, Yukiguni Maitake Co Ltd of Japan, Akikawa Foods & Farms Co Ltd of Japan, Hob Co Ltd of Japan, Hokuto Corporation of Japan, Kaneko Seeds Co ltd of Japan.

Investment Rationale:
Monsanto India is India’s largest selling hybrid maize seed brand company with 25 % market share. It operates through 100 year old brand called Dekalb acquired from Cargill in 1998. Over the last 2 years it has aggressively launched 7 to 8 hybrids seeds and is leading to regain of market share from players like Pioneer and DuPont which has market share of around 20 to 23 % each. Monsanto India currently derives 40 % of its revenues from products launched in last 2 years. This has not only helped Monsanto to gained market share in FY14, but also helped to reduce the age profile of its portfolio from 10 years in 2009 to 8 years in 2013. Monsanto has a very strong Rabi portfolio as compared to Kharif. The management plans to aggressively roll out newer hybrid products for Kharif, which was under the development since last 3 to 4 years and now driving margins. Over the last few years, operational efficiencies and consolidation measures has helped to reduced seed write off to less 7 % of revenues from average of 20 % for the last 3 years and reduction of sales returns by 15 % which in turn are driving growth. It is expected that the top-line to grow at 25 % CAGR and PAT at 30 % CAGR over FY14-16E. It is believed that the investment done in FY09-FY12 will start paying off for Monsanto India in terms of new product launches and market share gain. There is a huge potential and Scalability opportunity it has to offer over the long term from GM Food and RR Flex. Weeds are plants which can cause yield losses up to almost 60 % of the crop potential. Labour shortage, rising wages due to NREGA implementation and rising urbanization trends have accelerating demand for herbicides. Herbicides market in India is a very highly underpenetrated with its share in agro-chemicals standing at just 20 % as against global standards of 48 %. Glyphosate is a leading safest herbicide and accounts for 30 % of global herbicide sales and 70 % of Indian herbicide sales. Monsanto has around 60 % market share in the global US$ 540 Cr glyphosate industry and around 25 % market share in the Indian Rs. 800 Cr glyphosate industry selling products under the 'Roundup' brand. Monsanto enjoys a premium positioning in the market place with its glyphosate selling price at Rs. 340 per litre and competitors around Rs. 310-320 per litre. In FY14 cost for glyphosate has gone by 30 to 35 % leading to price increases of around 15 to 20 % to protect margins and drive growth.  In India, all companies can start the field trials for Genetically Modified food crops, once its approved by all bodies, thereby providing significant opportunities of newer growth avenues. Monsanto, Syngenta, Pioneer, Dow has been working on field trials across various crops prior to monotorium imposed by government and hence are much ahead of other competitors. MIL has been working on Roundup Ready® and Yieldgard® in- the-seed technologies to offer maize farmer's choice of superior insect protection, with convenient, flexible and effective weed management, to optimize maize yields. Currently Monsanto GM corn is currently at BRL2 stage and management has guided that it will take at-least 3 -4 years for commercial launch to happen. The initial research and trials suggest that Monsanto GM corn can increase yields by 20-40 %. This will lead to substantial re rating for the stock post its commercial launch. Monsanto's current technology of BT is likely to be replaced by RR Flex (BG 2 RR). RR flex has gone through RCGM and is awaiting final approval from GEAC. RR-Flex has trait of herbicide tolerance thereby negating chances of damage to crop due to usage of herbicide and also reducing labour cost. Monsanto India has 7 R&D Seed Breeding Stations, Corn Seed Drying & Processing Plant in Hyderabad, State-of-the-art QA Seed Testing Laboratory and AgroChem facility at Silvassa. It also has more than 300 acreages of farmer land available for breeding and around 40, 000 acres for seed production. It engages 21,000+ growers for seeds production.

Outlook and Valuation:

Monsanto India Limited is a subsidiary of Monsanto Company, USA and is the only publicly listed Monsanto entity outside USA. With a presence of more than six decades in India, Monsanto India is committed to help the Indian farmer produce more while conserving sustainably and be successful. Monsanto focuses on Maize under the brand name Dekalb, India’s largest selling hybrid maize seed brand and agricultural productivity products and India’s largest selling glyphosate herbicide. The company tries to boost crop productivity through its advance research in maize cultivation, access to a wide library of global maize germplasm, breeding technology and techniques, new high yielding hybrids seed, best in class manufacturing facilities extensive agronomic activities and on farm technology development. Monsanto India restructured its business in order to focus on seeds business in 2008. Post consolidation, the company had branded seed products, paddy hybrids and herbicides covering wide range of market segments. This consolidation also resulted in promoters share increasing in listed Monsanto India from 40 % to 72 %. Today, Monsanto had made Dekalb corn seeds and Roundup herbicide as its core business in India, in addition to the biotech traits business. Monsanto India is a now a market leader with 25 % market share with its 100 year old branded product Dekalb® which is also the India’s largest selling hybrid maize seed brand and the market share of other players like Pioneer has 22 % and DuPont having 23 %, Kaveri has market share of 14 % and Nuziveedu at 10 %. Monsanto currently has 17 to 18 hybrids and sells across in 18 major states of India. Around 90 % of the Corn is produced in 6 to 7 States namely TN, AP, Maharashtra, Gujarat, MP, UP, Rajasthan, Bihar for Rabi. Monsanto India started launching its own product line from FY08 onwards under the DeKalb brand. The revenues from herbicide business of Monsanto India now stand at 35 % which is expected to be 65 % for FY14. It is expected that the company’s topline can grow at 25 % CAGR and PAT at 30 % CAGR over FY14-16E. And the investments done in FY09-FY12 will start paying off for Monsanto India in terms of new product launches and market share gain. The company also a huge potential and scalability opportunity & it has many more to offer over the long term from GM food and RR Flex. At the current market price of Rs. 1807.95, the stock is currently trading at 17.28x FY15E and 13.45x FY16E EPS respectively. The company can post Earnings per share (EPS) of Rs. 104.60 in FY15E and Rs. 134.40 in FY16E. One can buy MONSANTO INDIA LIMITED with a target price of Rs. 1988.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 1900.00

SALES ( Crs)442.40581.90741.10910.80
NET PROFIT (₹ Cr)67.30137.90180.60231.90
EPS ()39.0079.90104.60134.40
PE (x)41.0020.0015.3011.90
P/BV (x)6.805.504.303.30
EV/EBITDA (x)37.1016.8012.409.10
ROE (%)17.0030.4031.7031.70
ROCE (%)19.1033.8035.3035.30

I would buy MONSANTO INDIA LTD for Medium to Long term for target of Rs. 1988.00 and for the shorter term the target would be Rs. 1900.00. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 1662.85 on every purchase(Why Strict stop loss of 8 % ?) - Click Here



Tuesday, May 13, 2014


Scrip Code: 517385 SYMPHONY

CMP:  Rs. 841.00; Accumulate at every dips.

Short Tem Target: Rs. 883.00; Medium to Long Term Target: Rs. 925.00; STOP LOSS – Rs. 773.75; Market Cap: Rs. 2,941.69 Cr; 52 Week High/Low: Rs. 878.40 / Rs. 263.15.
Total Shares: 3,49,78,500 shares; Promoters : 2,62,33,870 shares –75.00 %; Total Public holding : 87,44,630 shares –25.00 %; Book Value: Rs. 53.48; Face Value: Rs. 2.00; EPS: Rs. 26.31; Dividend: 325.00 %; P/E: 31.96 times; Ind. P/E: 28.06; EV/EBITDA: 30.62.
Total Debt: ZERO Cr; Enterprise Value: Rs. 2,935.80 Cr.

SYMPHONY LIMITED: Symphony Limited was founded in 1988 and is headquartered in Ahmedabad, India. The company was formerly known as Sanskrut Comfort Systems Pvt Ltd and changed to Symphony Comfort Systems Ltd in 1995 and it again changed its name to Symphony Limited in 2010. The company came out with an IPO on February 1994 with a premium of Rs. 35 per share and announced splits of its face value from Rs. 10 to Rs. 2 per share in February 2012. The company engages in manufacturing of consumer durables under the brand name “Symphony”. Symphony Limited manufactures and sells consumer durable products in India. The company offers domestic, commercial, and industrial air coolers. It provides desert, tower, room, and personal coolers for residences, shops, showrooms, and offices and various industrial coolers for factories, offices, schools, malls, assembly halls, warehouses, and metro stations. The company also exports its products to approximately 60 countries. Its products are already being sold in U.S.A, Europe, Middle East, Africa, and South–East Asia & shortly will be available in many other countries. It offers its products through a network of distributors and dealers. Symphony coolers have plastic bodies unlike conventional metallic air coolers manufactured by the unorganised sector, are UV Cooling pads which combine cooling effects with elegant looks. The company has wide range of products which includes Evaporative Air Coolers, Air Conditioners and Water Heaters. The company offers products under Evaporative Air Coolers are Desert Coolers, Room Coolers and Personal Coolers. The products offered in Air Conditioners are Window Air Conditioners and Split Air Conditioners. The product offered under Water heaters is only Sauna Heaters. Symphony Limited subsidiaries include Symphony Air Coolers Inc, USA. Symphony Limited is locally compared with Bajaj Electricals Ltd, Havells India Ltd, Khaitan India Ltd and globally compared with Daikin Industries Ltd of Japan, Gree Electric Appliances Inc of China, Lennox International Inc. of USA, Tabreed alias National Central Cooling Company PJSC of UAE, Aaon Inc. of USA, Johnson Controls Inc. of Wisconsin USA, Denso Corporation of Japan, Ingersoll-Rand Plc of Ireland, Dover Corporation of Illinois, Mitsubishi Electric of Japan.

Investment Rationale:
Symphony Limited has established itself as a world leader in evaporative air coolers. Symphony is globally popular because of the sensitivity to good design which is a universal phenomenon. In its history of more than two decades, Symphony has gone through various stages of development. The company was a pioneer in introducing cooler as a lifestyle product for the first time in India and launched plastic body coolers compared to the then available metal coolers and was a market leader in the air cooling market in the early 1990s when its fortunes took a dramatic turn due to the aggressive launch of new products between mid ’90s and early 2000. During this period, the company launched various consumer durable products including air conditioners, geysers, fans and washing machines. Although the company did well in coolers but it failed to successfully establish itself in any other product and this led to huge losses and as a result, it had to file a reference with BIFR in 2002 and was declared as a sick industrial unit. But backed by the confidence in its air cooler range, the management restructured the organization and turned the company from a Sick Unit into a fantastically financially sound company with Zero debt in 2007 and in 2009 BIFR de-registered Symphony from the provisions of SICA. From then on, Symphony has no looking back. Symphony’s products are designed to give very high air delivery at very low power consumption. This has been achieved by a combination of several design parameters using latest engineering and computerized techniques and further analysed and tested at a very high–tech state of the art validation centre which is one of its kind in the world. Symphony is very high on Innovation, it has Intellectual property comprising 8 patents, 49 designs, 108 trademarks and 7 copyrightsIndia’s air cooler market is growing at 20 % p.a. with the organised segment growing faster at 25 %, given low penetration levels of 5 % for the air cooler segment and a consumer shift away from the unorganised market. Symphony Limited is a clear leader in the air cooler market with 50 % share in the organised segment and which is 30 % of the Rs 2,000 Cr air cooler market (organised + unorganised). Kenstar and Bajaj Electricals are the second and third largest players, with 30 % and 15 % value market share respectively. Symphony’s market share in value has improved from 40 % to 50 % over the past five years, with a volume share of 40 % in the organised segment. The company is ideally positioned to tap into the growing market opportunity, backed by a wide product range, strong brand equity and hence premium pricing power, an extensive distribution network, product innovation and a sharper focus on the industrial cooling market. In India, the demand for air coolers is high, especially among mid-income consumers, given the lower cost of ownership vis-à-vis air conditioners (AC) – an AC costs anywhere between Rs. 23,000 and Rs. 35,000 whereas branded air coolers cost between Rs. 4,500 and Rs. 17,000. Another key factor that often clinches the buying decision is that air coolers consume 90 % less electricity than ACs. If a 1.5t AC were operated through the month without a break, it would consume 9 times more electricity than an air-cooler of similar tonnage; the cost differential alone would make it possible for the air-cooler to be ‘paid back’ in just months. The result of this cost positioning is that the air cooler market has grown faster than the AC market in FY13. India’s industrial cooler market is estimated at Rs 2,000 Cr+ and Symphony has, over the last couple of years, trained its focused on this business, especially targeting factories, office spaces, malls and hotels. Company’s initiatives to build its presence include strengthening its leadership team, widening its distribution network from 15 in previous year to present 44 dealers and collaborating with 10 large opinion-driving HVAC consultants, and focusing on brand building in media. As a result, installations in the industrial cooler business increased from 56 in FY12 to 109 in FY13. Symphony has installed cooling solutions in verticals such as paints, logistics, moulding and foods. Its key clients include Asian Paints, DHL, Dixon Technologies, Swaminarayan Temple, ISKCON Temple and Marico, among others. The company has also received orders from the Indian Railways to install air coolers in the waiting rooms at Kota (Rajasthan) and Godhra (Gujarat) railway stations. The industrial coolers business does not account for a meaningful portion of Symphony revenues at present; however, given the huge market potential which is largely untapped, it is expected that the low single-digit market share for Symphony will be doubled over the next 4-5 years. Symphony has maintained a sound growth trajectory showing 20 % earnings CAGR over FY10-FY13 with consistent market share gains, backed by its comprehensive range of coolers in different variants and price points from Rs. 5,500 to Rs. 17,000. Apart from residential air coolers, the company also has a presence in the commercial and industrial air cooling space, with a total range of 23 plastic and 64 metal air coolers. The company’s advanced models such as Storm, Diet and HiCool are offered as a range of intelligent air coolers – this ‘i-range’ generated 25 % of company’s revenues in FY13. Notably, its strong brand equity enables Symphony Limited to garner around 10 % price premium for its products over competitors in the organised market. The company have scaled up to 16,400 dealers across India as on Jun’13, up from 14,000 in Jun’12. Urban India (cities with 1o lakh+ population) accounts for 30 % of total sales, whereas semi-urban and rural areas account for the balance. North and West India together bring in 60-65 % of sales with the balance coming from the East and South.

Outlook and Valuation:

Symphony Limited is a India’s largest selling Air Cooler Company with a market of more than 50 % in Indian cooler segment. Symphony operates through an asset light model wherein it outsources manufacturing of air coolers to about nine exclusive vendors in India and uses the cash and carry model for sales. However, the company retains the rights for product development, design and marketing function to maintain the exclusivity of products and technologies of Symphony from its vendors. The company pays on a cost plus fixed margins basis to its contract manufacturers who have a cumulative capacity of 1o lakh units. Its own Surat SEZ is used for exports and has a capacity of 200,000 units. Symphony together with its subsidiaries offers 87 models of air coolers for almost all categories of customers. Outsourcing of products to nine different vendors and not sharing intellectual rights creates a strong entry barrier for other players creating a deep Economic Moat. Also, it helps the company to concentrate on its core competence i.e. “innovation” in product development and feature evaluation. The company has maintained its return ratios i.e. RoCE at 39 % and RoE at 33 % in FY13. Symphony’s last three year’s RoCe average comes at 42 % and three year’s RoE comes at 34 % mainly due to an asset light model and almost debt-free status since 2007. This Zero Debt status provides adequate room to fund Symphony’s organic and inorganic growth opportunities whenever required. Symphony’s second strongest point is its business model. Symphony operates on a cash and carry model with almost 95 % of domestic sales coming as advance payments as per the terms with dealers and distributors with the remaining i.e. 5 % through large format stores. In the international business, about 40 % is through large format stores while 60 % is through dealers and distributors. Trade through dealers and distributors (domestic and international) happens with zero credit. This cash and carry model and higher supplier days help the company to maintain its lower working capital requirements throughout the season. On Financial side, Symphony recorded 33 % YoY growth in standalone revenue to Rs. 113.3 crore largely supported by 33.5 % YoY volume growth in Q3FY14. Domestic sales volumes increased by 25 % YoY driven by strong demand of window and diet range of coolers. Export sales volumes increased 65.5 % YoY led by good demand from South African and Latin American countries. For the industrial segment, the company has added new clients such as Havells, Pepsi, Yamaha, etc. Company’s EBITDA margin increased by 3.00 % YoY to 29.6 %. This was due to a dip in selling & marketing expenses and other expenses. An expansion in margin and lower tax outgo (onetime benefit) led to a sharp growth in PAT by 50 % YoY to Rs. 27 crore. The company has continuously recorded a stellar performance in the last 11 quarters with sharp volume growth. Historically, during FY11-13, the stock has commanded average one year forward PE multiple of 15 x with revenue, earning CAGR of 14 %, 8 %, respectively, and average RoE of 30%. With the strong performance during 9MFY14, the company could post strong revenue CAGR of 25 % and profit CAGR of 33 %, led by strong volume growth of 24 % for FY13-16E. At the current market price of Rs. 841.00, the stock is currently trading at all time high PE of 25.40 x FY15E and 21.02 x FY16E EPS respectively. The company can post Earnings per share (EPS) of Rs. 33.10 in FY15E and Rs. 40.00 in FY16E. One can buy SYMPHONY LIMITED with a target price of Rs. 925.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 883.00.

SALES ( Crs)377.80488.10607.50730.10
NET PROFIT (₹ Cr)60.1088.20115.80140.00
EPS ()17.2025.2033.1040.00
PE (x)49.0033.4025.4021.00
P/BV (x)13.3010.908.707.20
EV/EBITDA (x)36.8025.5019.4016.00
ROE (%)27.1032.7034.4034.00
ROCE (%)33.7040.6042.9042.30

I would buy SYMPHONY LTD for Medium to Long term for target of Rs. 925.00 and for the shorter term the target would be Rs. 883.00. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 773.75 on every purchase(Why Strict stop loss of 8 % ?) - Click Here



Saturday, May 3, 2014


Scrip Code: 522034 SHANTIGEAR
CMP:  Rs. 72.10; Buy at current levels.

Short Term Target: Rs. 80.00; Medium to Long Term Target: Rs. 100.00; STOP LOSS – Rs. 66.30; Market Cap: Rs. 590.40 Cr; 52 Week High/Low: Rs. 75.90 / Rs. 47.55.

Total Shares: 8,17,15,853 shares; Promoters : 5,73,02,913 shares –70.12 %; Total Public holding : 2,44,12,940 shares –29.88 %; Book Value: Rs. 33.33; Face Value: Rs. 1.00; EPS: Rs. 2.04; Dividend: 60.00 %; P/E: 32.03 times; Ind. P/E: 20.85; EV/EBITDA: 9.65.
Total Debt: ZERO; Enterprise Value: Rs. 497.75 Cr.

SHANTHI GEARS LTD: Shanthi Gears Limited was founded in 1969 and was incorporated in 1972. It was earlier known as Shanthi Engineering and Trading Company. The company is headquartered in Coimbatore, India. Form, November 19, 2012, Shanthi Gears Limited operates as a subsidiary of Tube Investments of India Limited. The company came out with an IPO on May 1986 offering 5,32,000 equity shares of Rs. 10 each issued at par. Shanthi Gears Limited engages in designing, manufacturing, and supplying custom and standard gears and gearboxes in India and internationally. The company offers standard worm gear boxes; helical and bevel helical gear boxes; geared motors; cooling tower, extruder, and rolling mill gear boxes; and textile gears and gear assemblies. It also offers custom loose gears, including spur/helical gears, pinion shafts, internal gears, worm and wheel products, straight bevel gears, and spiral bevel gears; and special gearboxes for steel, power, cement, sugar, mining, paper, and marine sectors. The company has two divisions: Gears Division and Gear Box Division. Its Gear Division caters to the needs of textile and other industries as the supplier of the original equipment and Gear Box Division undertakes the design and manufacture of gear boxes for various industries. Shanthi Gears Ltd is locally compared with Elecon Engineering Ltd, Cummins India Ltd, L.G. Balakrishnan Ltd, Suzlon Energy Ltd, Kirloskar Brothers, Premier Ltd, Birla Machining and Tooling Ltd, Dynamatic Technology Ltd, AIA Engineering Ltd, HMT Ltd and globally compared with Caterpillar Inc of USA, Cummins Inc of USA, Eaton Corporation Plc of Ireland, Navistar International Corporation of USA, WABCO Holdings of Belgium, Howden Africa Holding Ltd of Africa, Industrial Holdings Bulgaria, China Automation Group of China, Trinity Precision Technology Company Ltd of Taiwan, Focus Dynamics Technologies Berhad of Malaysia and Woorim Machinery Company limited of South Korea, Fuji Hensokuki Co., Ltd of Japan.

Investment Rationale:
SHANTHI GEARS LTD was founded in 1962 and is a part of Rs. 22,314 Crores Murugappa Group, one of India's leading business conglomerates. The Group has 28 businesses including eight listed Companies. Shanthi Gears is leading organized player in the industrial gear segment in India. It manufactures wide range of critical components involved in power transmission like Gears, Gear boxes, Gear motors and Gear assemblies. The company is strongly positioned in the custom made gears and gear boxes with about 7075 % of revenues coming from customized products catering industries like steel, textiles, power, chemical, rubber, paper, mining, cement, sugar etc. It operates from five fully integrated manufacturing units and one foundry division located in Coimbatore. The Gear Industry is segmented into Automotive and NonAutomotive (Industrial) gear industry. The Automotive gear segment consumes the largest size of the industry pie. The Industrial Gear industry usually includes manufacturing of Gears, Gear boxes, Gear Motors and Gear assemblies. The Gears and gear boxes are categorized as Standard (noncustomized) and Nonstandard (Customized) which are manufactured by organized, unorganized and international players. Industrial gear caters mainly to the needs of sectors like steel, cement, Textiles, Power, Sugar, Paper, Mining, etc. Notably, nonstandard segment includes custom built gears and loose gears as well. The Indian industrial gear market is mostly dominated by manufacturers of Standard (noncustomized) Gears and Gear boxes as manufacturing of nonstandard (customized) gears requires high end expensive technology, skills and facilities to deliver to the specific needs of different clients in a short span of time. According to FY13 Annual report of Shanthi Gears, the Standard gearboxes constitute about 35 % of the market and are growing approximately at over 10 % CAGR, while the nonstandard (customized) gear box constitute over 75 % and is growing below the Industry average. Shanthi Gears has fully integrated and the largest modern gear making facilities in India with infrastructure for fabrication and engineering, inhouse foundry and forging facilities and tool room for gear cutting. The facilities of the Shanthi Gears are up to the mark step-up when compared to its peers. These contains CAD work stations, stateoftheart manufacturing and quality control machines and equipment, inhouse pattern making, castings including bronze wheel rings, forgings, fabrication, heat treatment, etc. This along with a strong R&D, technology up gradation and skill up gradation of its manpower has enabled the Shanthi Gears to maintain its designing and manufacturing edge over its competitors. Shanthi Gears currently has five Units out of which one is vacant and others carry out operations such as Manufacture of components & gears for the textile industry these units account for 10 % of the sales; Engineering Unit which accounts for 90 % of the sales; CSR Unit; Foundry unit. The product range of the company is segmented into standard (noncustomized) and nonstandard (customized) gears and gear boxes. The standard (noncustomized) gears account for 35 % of the total revenue with an operating margin between the levels of 10 % 15 % and the rest is customized gears, which constitutes 75 % of the revenue with high operating margins between the levels of 3035%. Unlike other domestic gear manufacturers, Shanthi Gears focuses on the customized gears and ensures that its factory utilization is not more than 85 % to take advantage of urgent and emergency orders. Unlike most of its competitors, Shanthi Gears has been able to maintain operating margins at all times due to its product mix, and the relatively lower raw material costs incurred for custom built gearboxes. Shanthi Gears Ltd is a market leader in the customized gears space with operating margins in excess of 2530 %, as compared to 1517 % for Elecon Engineering which is the biggest player in the overall gears industry. Elecon engineering despite having a market share of 30 % is commanding lower operating margins due to lower presence of 20 % in customized products which usually yield higher margins and higher raw material imports. Shanthi Gears has Seven wind mills in one of its manufacturing unit with an Agreement with Tamil Nadu Electricity Board (TNEB). The seven wind mills have a total power generating capacity of 6.66 MW. The power generated through the wind mills is used for captive purpose and the surplus is sold to Tamil Nadu Electricity Board (TNEB). The company also has power linkages with total sanctioned power of 6500 kva and own diesel gensets with a capacity of 8500kva. The possession of captive wind mills and power linkages is likely to help company save on power cost and fuel costs. Currently, power and fuel cost comprises of 8 % of the total costs.

Outlook and Valuation:
Shanthi Gears is the unique gateway to a wide range of power transmission products which includes gears, gear boxes, geared motors and gear assemblies both standard and custom-made. With headquarters at Coimbatore, South India, we are in the business of designing, manufacturing and supplying various kinds of gears, gearboxes to almost all industries and applications for the past four decades. Nearly, two years back, Tube Investment of India Ltd a flagship company of Murugappa group acquired 3.6 Cr equity shares or 44.12 % stake in Shanthi Gears for Rs. 292 Cr at Rs. 81 per share. Tube Investment further acquires 2,12,46,122 equity shares or 26% of Shanthi gears via open offer price of Rs. 81, with this addition Tube Investment of India Ltd now holds 5,72,96,413 or 70.12 % of Shanthi Gears. Tube investments acquired Shanthi Gears mainly for reasons like : to take itself to a higher level of engineering; to synergize the transmission business with its chain business; to create an opportunity for both exports and supply for offset requirements which is expected to become huge in India; due to Shanthi Gear’s strong balance sheet, cash, surplus land, engineering skills; to foray into sectors like defense and aerospace; to reduce its reliance on auto sector which is facing various challenges; to get access to company’s large customer base. On the contrary, Shanthi Gears benefited from this acquisition like now shanthi gear has headroom for growth and trap the opportunities in engineering sector; it can now access to stronger hands i.e. Murugappa group. The Indian industrial gear market depends heavily on imports i.e. 40 % imports, especially for highend gears. The rupee depreciated to Rs. 68.8/US$ in H2FY14 and is now stable at the levels of Rs. 6061/US$. It is believed that rupee which has depreciated almost 15 % from the levels of Rs. 4748/US$ more than two years back, is not expected to reach those levels soon. So it is expected that with rupee depreciation making imports costlier, import substitution is likely to take place. Other companies are likely to prefer buying gears domestically from branded companies like Shanthi Gears. Also, on raw material front, other companies which import its high amount of raw materials are expected to pass on the costlier import’s price on their final products to customers, whereas Shanthi Gears which imports merely 2 % of its raw material is likely to pass on no/marginal price hike on its final products. This makes Shanthi gears again a customer’s preferred choice. Going forward, the outlook for Shanthi Gears looks positive with fully integrated modern facilities, high presence in customized gears (nonstandard gears), fewer dependence on imported raw materials, investments in wind mills and power linkages to aid margins. Also, with exposure across various industries, management’s effort to bring back old niche clients and introduction of new standard products to lead in diversity of clientele, Uptick in investment cycle to provide the company ample opportunities to grow and Tube Investments of India’s acquisition to create synergies between both companies, the company financial prospects look bright. Adding to the above triggers, the company has strong balance sheet, cash, surplus land, improving ROE. At the current market price of Rs. 72.10, the stock is trading at a PE of 29.91 x FY14E and 22.18 x FY15E respectively as against the Indusrty PE of 21x. The company can post Earnings per share (EPS) of Rs. 2.41 in FY14E and Rs. 3.25 in FY15E. One can buy SHANTHI GEARS LIMITED with a target price of Rs. 100.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 80.00.

SALES ( Crs)173.00145.65156.25175.00
NET PROFIT (₹ Cr)28.1115.4719.7226.59
EPS ()3.441.892.413.25
PE (x)11.1829.8728.5921.20
P/BV (x)1.271.792.122.03
EV/EBITDA (x)3.749.4410.547.99
ROE (%)11.346.017.429.56
ROCE (%)19.3311.8111.6312.61

I would buy SHANTHI GEARS LTD for Medium to Long term for target of Rs. 100.00 and for the shorter term the target would be Rs. 80.00. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 66.30 on every purchase(Why Strict stop loss of 8 % ?) - Click Here


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