Expansion In C-EPS And CVJ Will Strengthen Future Product Portfolio

Key Takeaways

• Favorable policy and infrastructure developments forecast positive revenue impact, supported by localization and new export opportunities.
  
• Expansion plans and advanced product improvements aim at increased capacity and profitability through higher technological value and cost efficiency.
  
• Declining EBITDA margins and product recall provisions may pressure JTEKT India's profitability, while stagnant exports indicate challenges in diversifying revenue sources.

Catalysts

Manufactures and sells steering systems and auto components for the passenger car and utility vehicle manufacturers in the automobile sector in India.

• Favorable policy environment and infrastructure development are expected to boost growth in the auto sector, likely impacting future revenues positively for JTEKT India.
  
• Expansion plans, including a new facility in Gujarat set for completion by 2027-2028, indicate potential for increased production capacity and revenue growth.
  
• Localization efforts, such as reducing import content and localizing parts for cost savings, are anticipated to enhance net margins by lowering manufacturing costs.
  
• Securing new export orders, like the one from a group entity in Brazil, suggests potential revenue growth and diversification beyond the domestic market.
  
• Product mix improvements and capacity expansion in advanced products like C-EPS and CVJ could lead to enhanced margins and profitability given the higher technological value and pricing of these segments.

JTEKT India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming JTEKT India's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 3.4% in 3 years time.
• Analysts expect earnings to reach ₹1.1 billion (and earnings per share of ₹3.47) by about September 2028, up from ₹712.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 61.5x on those 2028 earnings, up from 55.5x today. This future PE is greater than the current PE for the IN Auto Components industry at 29.3x.
• Analysts expect the number of shares outstanding to decline by 0.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.64%, as per the Simply Wall St company report.

JTEKT India Future Earnings Per Share Growth

Risks

• The automotive sector experienced flat growth due to unforeseen events such as elections, heatwaves, and heavy rains, which could result in lower-than-expected revenue growth.
  
• The company's EBITDA margins declined from 9.5% last year to 8.2% in the current quarter due to lower sales growth and rising fixed costs, potentially impacting net margins adversely.
  
• A provision of ₹50 million was made for a product recall, which negatively affected profitability by 0.8%, indicating potential risks to future earnings if quality issues arise again.
  
• Exports decreased from 4% to 3% of total revenue, highlighting a challenge in diversifying revenue streams and potentially affecting overall revenue growth.
  
• Capital expenditure on new facilities without immediate returns may pressure cash flows and profitability, as the expected completion of projects like the Gujarat facility is still years away, impacting earnings during the investment phase.

Valuation

• The analysts have a consensus price target of ₹151.0 for JTEKT India 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 ₹31.4 billion, earnings will come to ₹1.1 billion, and it would be trading on a PE ratio of 61.5x, assuming you use a discount rate of 16.6%.
• Given the current share price of ₹142.4, the analyst price target of ₹151.0 is 5.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.