SHANTHI GEARS

SHANTHI GEARS  cmp around 41-42, face value of Re 1, market cap of around 350 crores

Shanthi Gears is a company which till recently was involved in and was market leader in industrial gears. It used to make custom made gears for various industries like steel, sugar, power, aviation, cement. The company's plant is situated in Coimbatore.

From FY 03 TO FY 08 the company grew its sales and net profits at a CAGR of 34% and 46% respectively.

RESTRUCTURING:


Recently the company has decided to restructure its operations and enter into the manufacturing  of

1. material handling equipments such as bucket elevators, gravity rollers, overhead chain conveyors, cranes, hoists, slat conveyors, bag filling machines, stitching machines and all other machines used in material handling and its spares and services.

2. To carry on business of engineering, manufacturing and supply of all types of Electric Powered Screw Air compressors (EPSAC), Diesel Powered Screw Air compressors, other types of screw air compressors etc and all types of pneumatic tools, equipments, etc.

3. To carry on the business of manufacturing of all types of mining equipments, like turbo drills, cable bolters, loaders, trucks, water well drills, coal and stone breakers, washers, elevators etc.

The company has sought shareholder approval for the above purpose and the results of postal ballot would be declared at its AGM.

The company has five units at its manufacturing facility and with its restructuring, it will only be needing three units and therefore, management has sought shareholder nod to sell, lease or in some other way gainfully use the land in the remaining two units designated as "D" and "E".   If it sells the surplus land, there could be significant income in terms of land sale.


While undertaking the above restructuring exercise, the company will be utilising their expertise in industrial gears because most of the above equipment requires use of gears and will not need too much of capex from the company. The management expects to undertake mostly custom made equipments with upfront payments and hence this will entail higher margins and lesser blockage of working capital.


After showing sluggish growth for the Sep 09 and Dec 09 quarters, the company has shown sales of around 32 crores for both March 10 and June 10 quarters and net profits of 5.15 crores and 5.95 crores. Net Profit margins are very good to the tune of around 16 to 18%. 


Once the approval for restructuring comes the company is likely to show good growth in sales and maintain the current margin levels. 


There are two obvious triggers in this company:


First is the sale/rent of surplus land and from what I am informed , the land prices in and around Coimbatore have risen in last few quarters. 


Second is slightly longer term where the company is likely to achieve higher growth trajectory in view of its new business plans.


Currently Shanthi Gears has negligible debt. 
Management has been very competent and honest in all its functioning.


So taking a slightly longer term view of 1-3 years, this could be a good contrarian bet.


Technically, the stock has been consolidating in a triangular pattern with immediate support on 40-42 levels and longer term support of around 36-37.  Resistance to upmove has been observed at around 47-49 zone. Once the resistance zone is crossed, there could be a fast upmove.


Disclosure:  I have a position in the stock.

After breaking out from the falling wedge as shown above, Shanthi Gears is currently consolidating in a triangle. Green line shows the neckline of an inverted head and shoulders pattern. Breakout point for both the triangle and inv H & S pattern is around 47-50 levels above which there could be a fast good rally.