Shanthi Gears (SHNT - Bombay) - Buy at 40 Rs. UPDATED

Enterprise Value approx. 3,700 million Rs. share price approx. 40 Rs. (Enteprise Value 1.5x revenue or 5x EBIT)

Buy Now at approx 40 Rs.


Background:

Shanthi gears is a small company which I have been following for a number of years. I was first introduced to Shanthi while searching for a gearbox supplier for some Asian projects. The trek to Coimbatore was worth it. Shanthi's operations were simply the most impressive of any gear manufacturer I had ever seen - ever. Shanthi follows its home grown version of lean manufacturing which would humble most Toyota plant managers.

Shanthi's lean approach shows in its numbers. It consistently generates 30% PBT year in and year out. 30% PBT in the commodity gear businss. !

In line with all Indian companies, Shanthi has had orders canceled and slow paying customers. due to the economic crisis of the last 18 months. Shanthi also has been hit hard by the decline of Indian textiles. However, despite these severe negative influences, Shanthi's most recent quarter (end March 2009) shows a 25% PBT. This indicates a pro-active management team able to quickly adjust in a crisis.

Shanthi pays a modest 1.2 Rs dividend, a roughly 20% payout ratio of net income. Shanthi's debt to equity ratio falls under a 50/50 range appropriate for an industrial enterprise.

Shanthi's founder, Chairman Subramanian, is starting to get too old to run the enterprise. However, the managers I saw and spoke with, were more than capable of keeping Shanthi moving forward. Chairman Subramanian has created a powerful corporate culture which will outlast him. There have been rumours of a strategic buyer, but that will not change the fundamentals of Shanthi.

At 40 Rs., one would be buying Shanthi for less than the liquidation value of the machinery I saw during my inspection tour. Buying a highly profitable enterprise for liquidation value of the machinery is a good investment, even if the multiple of EBITDA is a bit high at 5 times.

Please note, some readers were kind enough to inform me that my Enterprise Value was incorrect. It has been corrected.

Don't get Massacred !

Gudovac1941