Shanthi Gears Ltd (SGL) is a small-cap company in the limousine Ancillaries sector with a market valuation of Rs 1,711 crore. On the NSE, the company's shares have climbed by more than 70% in a year, and the stock has gained by 56% year-to-date (YTD). The stock has risen by 52 per cent in the previous six months and 30 per cent in the last month. The stock has gained 22.77 per cent in the previous five trading days and is presently trading at a market price of Rs 232. HDFC Securities, a brokerage company, anticipates potential upside in the stock and has given it a buy call rating with a target price of Rs 238 in two quarters.
As per the brokerage "SGL reported strong growth for Q3FY22 with highest ever revenue of Rs 95cr, growth of 46% YoY. Focus on cost optimisation led to 65% increase in EBITDA to Rs 17cr. EBITDA margin expanded ~210bps to 18.3%. Lower tax rate led to 79% increase in PAT and PAT margin expanded ~260bps to 14.5%. During the quarter, the company registered an order booking of Rs 93cr and outstanding order book as on 31st December 2021 stood at Rs 272cr. The Board declared an interim dividend of Rs 2.5/- per share for the financial year 2021-22."
Key investment rationale
The brokerage has claimed that "Shanthi Gears Ltd. (SGL) is an Industrial Gearing Solutions company supplying gears and gearboxes to different industries. It has an in-house R&D and designing capabilities developing better products which has helped its clients to improve productivity and save on costs. It is now focussing on developing products for export market and looking to increase its exports. Strong growth in end user industries like Steel, Cement, Power, Paper, etc. is likely to increase demand for gears. Further, the company is part of the Murugappa group and exploring the possibilities of jointly marketing products with Tube Investments (TI) and CG Power (CG). This could lead to strong topline growth and lower costs resulting in margin expansion going forward."
Buy for a target price of Rs 238
HDFC Securities has highlighted that "The management has targeted sales to double between FY21-FY24E and profit to triple in the same period. We expect SGL's Revenue/EBITDA/PAT to grow at 25/39/39% CAGR over FY21-FY24E, led by increased demand from end user industries. We believe investors can buy the stock in Rs 203-207 band and add on dips to Rs 180-184 band (25.5x FY24E EPS) for a base case fair value of Rs 224 (31.5x FY24E EPS) and bull case fair value of Rs 238 (33.5x FY24E EPS) over the next 2 quarters."
The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.