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Sowmya Krishnan

FRESH exposures can be considered in Shanthi Gears, a Coimbatore-based small-cap company. It is one of the low-profile companies in the capital goods sector. It is fundamentally strong and one of the few that has withstood the recent recession and showed stable growth during the period.

Rationale: The current buoyancy in the industrial segment, coupled with the improving fortunes for the capital goods industry, could improve the fortunes of the company. . Shanthi Gears would also benefit from the recent turnaround and positive outlook for these manufacturers. The impressive first quarter performance signals the better prospects ahead. However, given the low equity base of Rs 3.8 crore and low free-float, one can accumulate the stock in small quantities.

Business profile: Shanthi Gears makes gear boxes, gear wheels and gear motors used in various industrial applications. It has a wide product portfolio and the capacity to design, according to the customer's requirements. Custom-made products contribute close to 50 per cent of its revenues. It is slowly and steadily expanding its presence in the international markets. Exports contributed 2.5 crore to a total turnover of 56 crore in 2002-03. Though a very small proportion yet, it is making attempts to increase revenues from overseas sales.

The company has customer base spread across industries such as textiles, sugar, tea, coffee, plastics and chemicals, steel, power, cement and fertilizer. None of the user industries enjoy a dominant position in its portfolio. Shanthi Gears' fortunes are directly related to the industrial activity and hence are subject to cyclicality.

Fundamental play: Over the last eight quarters, Shanthi Gears has shown steady revenue and profit growth. Generally, the first quarter is a lean period for the company and sales peak in the second and third quarters.

However, Shanthi Gears reported an impressive first quarter performance in 2003-04. Turnover for the June 2003 quarter jumped 48 per cent and net profits 52 per cent.

Although operating margins are under strain, the reduction and interest costs have improved the margins at the net level.

At the current market price of Rs 121, the stock trades at six times its trailing 12 month per share earnings of Rs 18.5. Given the potential for future earnings growth and strong fundamentals, the valuation levels could improve.

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