Shanthi Gears Ltd Stock Research Report by HDFC Securities
Sector: Auto Ancillaries – Gears
CMP Rs. 419, Target Rs. 488 (16% upside potential)
Target Period: 12 Months
Shanthi Gears Ltd Stock Research Report:
Shanthi Gears Ltd. (SGL) is an Industrial Gearing Solutions company supplying gears and gearboxes to different industries. It has 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. 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.
On April 28, 2022, we had initiated coverage on the stock with a recommendation to ‘Buy in Rs 203-207 band & add more on dips to Rs 180-184 band’ for base case fair value of Rs 224 and bull case fair value of Rs 238. The bull case target was achieved on April 29, 2022.
Shanthi Gears Ltd Stock Research Report: Valuation & Recommendation:
The management has targeted sales to double between FY21-FY24E and profit to triple in the same period. Close linkage to capex cycles exposes SGL’s revenues to cyclicality in end-user industries, considerable share of revenues from the replacement segment and presence across multiple segments with no segment contributing to more than 30% of the revenues in FY2022, mitigate the risk to an extent. It has a diversified client base with its top 10 customers accounting for only one-fifth of its revenues in FY2022, thereby insulating its revenues from the customer concentration risk. We expect SGL’s Revenue/PAT to grow at 22/25% CAGR over FY23-FY25E, led by increased demand from end user industries. We believe investors can buy the stock in Rs 415-425 band and add on dips in Rs 375-380 band (27.5x FY25E EPS) for a base case fair value of Rs 460 (33.5x FY25E EPS) and bull case fair value of Rs 488 (35.5x FY25E EPS) over the next 2-3 quarters.
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