Shanthi Gears is one of those Mittelstand Enterprises which intrigue prudent Owners. Shanthi is tucked in the hill country of Coimbatore, far away from the glamour of Hydrabad's office parks and the posh lifestyle of Gurgaon. Shanthi traditionally supplied gears and gear boxes primarily for the textile industry. Shanthi has attempted diversification beyond its dependence on the textile industry. Starved of capital and influence during the License Raj, Shanthi learned to do much with very little. Shanthi is vertically integrated to an extreme extent - not only does Shanthi have its own foundry, it developed the capability of designing and producing its own machine tools.
Shanthi's culture of autarky is contrary to the fashionable business theory of specialization. Specialization attempts to wring every last drop of Comparative Advantage from a Enterprise's know-how. Owner's need to be comfortable with Shanthi's unusual methods. Gudovac views Shanthi's vertical integration as a sign of cultural strength. The ability to boot strap growth and operations is desirable. Shanthi has embarked on a rationalization program designed to eliminate some less critical operations such as the foundry. It intends to consolidate its core activities into 2 facilities. Gudovac has visited most of these 6 facilities and believes Management is acting wisely.
Coimbatore is certainly experiencing economic turmoil these days. Workstoppages, layoffs, and near riots among the population are the result of the decline in India's textile industry as well as the global credit crisis. Shanthi received its share of Coimbatore's trouble. Management even was forced to lock out its facilities for a few days in late July until calmer heads prevailed among the workers.
The turmoil shows in Shanthi's latest quarterly results.
Financial Results:
Shanthi's rationalization began in the First Quarter. The dislocations showed up in top line revenues which were down almost 50% from the prior quarter. Managers appeared to be disciplined about the rationalization. They reduced overhead in direct line with the revenue drop. This resulted in EBITDA % of revenues consistent with the prior quarters. This result is impressive beyond description.
Gudovac has, 30 years of experience, never seen a industrial Enterprise with the ability to eliminate overhead directly in line with revenue declines in the course of a few weeks. The fact that Shanthi's managers are able to achieve this speaks to their first rate skills and abilities.
Shanthi's 5 year record is precisely what one would expect of a prudently run Enterprise of middling size in India today. Healthy top line growth, Maharajah level margins, coupled with sleep-like-a-baby interest coverage.
Gudovac believes the recent quarter is a aberration brought on by a wise move to rationalize the Enterprise.
It is anyone's guess when Shanthi will return to business as usual. Gudovac believes Shanthi will return to revenue and EBITDA numbers more in line with the boom period within 9 months. However, for the purposes of prudent pricing, Owners should value Shanthi based solely on its 30.June results.
How much to Pay for Shanthi ?
Gudovac believes Shanthi is a prudent purchase at today's market prices. Annualizing the most recent (dismal) quarter one arrives of five times Enterprise Value/EBITDA. Five times EBITDA is a sensible price to buy a Enterprise.
In addition to the sensible price, Shanthi pays Owners a 3% dividend.
Gudovac continues to hold fast to his earlier calculation - Buy Shanthu at below 40 Rs.
-------------------------
Don't Get Massacred !
Gudovac1941@gmail
A reader sent Gudovac a note describing a series of wild rumours surrounding Shanthi. Summary of these rumours:
ReplyDelete1) Not booking Orders for 'last 3 months'
2) Closing down all sales staff
3) Bought by Reliance
4) Bought by Sulzon
------------------------
Gudovac response:
Shanthi is most certainly booking orders, just at a much lower pace than the boom years. Shanthi is supposedly consolidating its 6 plants into 2 plants. This is a massive effort and will divert resources from production. Nothing to get too excited about - as long as Shanthi completes the consolidation in a disciplined fashion.
I would be surprised if Sulzon buys Shanthi. There are bound to be some personality differences between the 2 owners. Shanthi's would find it difficult to build the all the gears Sulzon needs. Shanthi's largest machine tools would be so incredibly bottlenecked that Sulzon would not get much supply for the first 24-36 months. It may happen - It may not.
Shanthi will have these succession questions swirling around for quite a while. Patriarch is now at time big decisions need to be made. The Daughter seems to have left the picture and I am unaware of any Sons. (If anyone knows more details, please send me a note).
I am less concerned about succession at Shanthi, then elsewhere. Shanthi's middle management team is first rate and can run the business.
As an Owner, what matters is buying a well managed company at a sensible price. Shanthi is just such a company.
Shanthi Gears has now axed it's distributor/delership network (Advt was in the newspapers 10 days ago i am told). Any idea what's happening ? Can you get through to your contacts & get the real picture ?
ReplyDelete- Bosco
treatment for mild fatty liver treatment for
ReplyDeletemild fatty liver treatment for mild fatty liver
Visit my website :: how treat fatty liver disease
Kevin rosacea doctor
ReplyDeleteMy page :: Evesham rosacea treatment