Shanthi Gears updates from ICRA

The News below highlights Shanthi Gears Change of Focus to High Margin Business. Read below:

Credit rating agency, ICRA has revised the rating assigned to the Rs 301.3 million term loans, the Rs 500.0 million fund based limits, the Rs 250.0 million fund based sub-limits and the Rs 50.0 million non-fund based limits of Shanthi Gears (Q,N,C,F)* (SGL) from LAA to LAA-, indicating high-credit-quality; the rated instruments carry low credit risk.

ICRA has reaffirmed the A1+ rating, indicating highest-credit-quality in the short term, assigned to the Rs 75.0 million fund based sub-limits, the Rs 150.0 million non-fund based limits and Rs 20.0 million non-fund based sub-limits of SGL; instruments rated in this category carry the lowest credit risk in the short term.

The rating revision reflects the steep decline in SGL`s revenues during the quarter ended June 30, 2009, largely reflecting its decision to exit from the low-margin gears segment (predominantly comprising standard gears).

This is also expected to result in subdued revenues for SGL over the medium term and loss of market share in the industrial gears segment.

SGL intends to focus on the high-margin orders and also forward integrate into manufacture of engineering equipment (of which industrial gears form a major component). Towards this objective, SGL is presently consolidating its manufacturing facilities and has also rationalized its manpower by downsizing the number of trainees / apprentices.

This process however has resulted in temporary disruptions in output. The Company expects minimal incremental investment in machinery since significant additions have already been made over the last 2-3 fiscals.

Though the management estimates the order flows from the new business lines to start from the last quarter of the current financial year, SGL`s ability to execute will depend on the pace of consolidation.

While the forward integration plan is likely to diversify the Company`s product portfolio, ICRA expects that the exit from low-margin segment, consolidation of manufacturing facilities and the forward integration plans are likely to have an adverse impact on the Company`s revenue growth and margins in the short-to-medium term.

Foray into manufacture of engineering equipment is also expected to result in SGL competing with its existing customers, entailing additional challenges to future revenue growth.

While revenues have declined sharply in the last quarter, the operating margin was intact on account of focus on the high-margin customized gears segment. The net margin during the quarter ended June 2009 was however intact on account of exchange gain of Rs 17.1 million against exchange loss of Rs 56.3 million in the fiscal 2008-09.

Despite an increase in margins, the decline in revenues led the fall in return on capital in the last quarter to 15.4%.

The capital structure is sound with low gearing of 0.28 times as on June 30, 2009; on the same date, SGL has cash and bank balance of Rs 429.2 million, thereby providing adequate comfort on liquidity.

The inventory period has surged in the last quarter on account of the steep decline in scale of operations. The ratings also consider the long standing presence of promoters in the industry, SGL`s strong and diversified customer base and its diversification across various customer segments, which mitigate the concentration risk.

Further, the current economic slowdown is expected to have an adverse impact on the Company`s revenue growth and margins in the short-to-medium term.

source: myiris