Capacity Expansions In Alloy Wheels And Aluminum Knuckles May Boost Future Revenue, But Geopolitical Risks Could Impact Exports

Key Takeaways

• Capacity expansions in alloy wheels and aluminum knuckles suggest potential revenue and market share growth in high-demand segments.
  
• Improved geopolitical conditions and strategic cost optimizations are expected to enhance exports, revenue, and margins.
  
• The company's revenue faces risks from tax changes, weak demand in key segments, execution challenges, and geopolitical factors affecting exports.

Catalysts

Engages in the design, manufacture, and sale of automotive wheel rims and other auto components in India and internationally.

• The company is experiencing a strong performance in the alloy wheel segment for passenger cars, with planned capacity expansions expected to boost revenue in this high-demand market.
  
• The anticipated growth in the tractor business with substantial sales increases, both domestically and for export, suggests increased revenue potential.
  
• The new aluminum knuckle segment recently commenced commercialization, and plans to double its capacity indicate potential future revenue growth and market share expansion among major OEMs.
  
• Recovery in export volumes, driven by improved geopolitical conditions and the favorable impact of potential US tariffs against Chinese imports, is expected to enhance revenue and margins.
  
• Strategic investments in cost optimization and efficiency improvements are likely to result in improved net margins, supporting better earnings in the future.

Steel Strips Wheels Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Steel Strips Wheels's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.2% today to 3.5% in 3 years time.
• Analysts expect earnings to reach ₹1.9 billion (and earnings per share of ₹12.38) by about January 2028, down from ₹6.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.7x on those 2028 earnings, up from 4.7x today. This future PE is greater than the current PE for the IN Auto Components industry at 27.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.4%, as per the Simply Wall St company report.

Steel Strips Wheels Future Earnings Per Share Growth

Risks

• The company experienced a slight decrease in revenue and profit compared to the previous year, with the revenue for the past nine months slightly down from the year before and Profit After Tax declining, primarily due to the impact of the transition to a new tax regime, which could impact overall earnings.
  
• Performance in the CV segment saw a decline due to lower demand, which may affect company revenue projections if the segment doesn't recover as anticipated from increased government spending on infrastructure.
  
• Although the tractor segment showed high sales growth, export volumes were adversely impacted by supply chain disruptions, geopolitical conflicts, and geopolitical events like U.S. elections, which could disrupt future export revenues.
  
• The company acknowledges potential execution risk related to increasing the commercialization capacity of its aluminum knuckle segment and meeting anticipated growth targets, which could impact future revenue and margins.
  
• External geopolitical factors, such as ongoing conflicts in the Middle East and Europe, could continue to impact export performance and revenue if geopolitical conditions don't improve, limiting market access and demand.

Valuation

• The analysts have a consensus price target of ₹305.0 for Steel Strips Wheels based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹55.7 billion, earnings will come to ₹1.9 billion, and it would be trading on a PE ratio of 36.7x, assuming you use a discount rate of 14.4%.
• Given the current share price of ₹194.4, the analyst's price target of ₹305.0 is 36.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.