Investments In Automation And Robotics Will Strengthen Future Market Position

Key Takeaways

• Investments in advanced plants with robotics and automation promise improvements in cost efficiency, enhancing future gross margins and EBITDA.
  
• Strong order book and expansion alignments suggest robust future revenue growth, supported by domestic and international market strategies.
  
• Subdued demand in export markets, production disruptions, and macroeconomic challenges are negatively impacting Alicon Castalloy's revenue growth, margins, and profitability.

Catalysts

Provides design, manufacturing, engineering, casting, machining, assembly, painting, and surface treatment services for aluminum components in India and internationally.

• Alicon Castalloy is investing in new technologically advanced plants with robotics and automation; as these units scale, they expect improved cost absorption, which should enhance future gross margins and EBITDA.
  
• The company is planning to increase its capacity to align with an expansion by a European OEM, with anticipated additional volumes serving global markets, potentially boosting future revenue and earnings.
  
• Alicon has a strong order book of ₹9,000 crores, providing good visibility for future growth and supporting revenue targets over the next five years.
  
• The company’s focus on product diversification, expanding market reach, and strengthening its leadership in hybrid technologies positions it to capitalize on emerging opportunities, potentially improving future earnings and margins.
  
• Long-term growth potential is highlighted by ongoing engagements with key clients and expansion plans in domestic markets, suggesting that revenue and margin recovery may begin in the fourth quarter and continue into FY '26.

Alicon Castalloy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alicon Castalloy's revenue will grow by 14.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 6.5% in 3 years time.
• Analysts expect earnings to reach ₹1.7 billion (and earnings per share of ₹102.7) by about February 2028, up from ₹572.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, down from 24.0x today. This future PE is lower than the current PE for the IN Auto Components industry at 26.6x.
• Analysts expect the number of shares outstanding to grow by 1.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.75%, as per the Simply Wall St company report.

Alicon Castalloy Future Earnings Per Share Growth

Risks

• The decline in Alicon Castalloy's revenue from ₹406 crores in Q3 FY '24 to ₹393 crores in Q3 FY '25 is partly attributed to subdued demand in key export markets, particularly in Europe, signaling potential risks to future revenue growth.
  
• The company's gross margin fell significantly from 51.24% in Q3 FY '24 to 45.81% this quarter, impacted by a shift in sales mix with lower sales of high-margin commercial vehicle parts, which may affect overall profitability.
  
• Alicon Castalloy faced production shutdowns with key OEM customers both in India and Europe, which disrupted volumes and negatively impacted revenue, highlighting potential risks to consistent earnings.
  
• Ongoing capital expenditure on new technologically advanced plants has not yet achieved expected scale, resulting in suboptimal recovery of fixed costs and further pressuring current gross margins and profitability.
  
• Persistent macroeconomic challenges, including inflationary trends and sluggish industrial production, particularly in Europe, continue to exert pressure on demand and revenue growth, potentially undermining long-term financial targets.

Valuation

• The analysts have a consensus price target of ₹1391.0 for Alicon Castalloy 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 ₹25.5 billion, earnings will come to ₹1.7 billion, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 14.8%.
  
• Given the current share price of ₹844.45, the analyst price target of ₹1391.0 is 39.3% higher.
  
• 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.