Moroccan Integration And Operational Efficiencies Will Drive Future Success

Key Takeaways

• Suprajit Engineering's global strategy and operational efficiencies have strengthened revenue growth and improved margins, positioning the company for future earnings expansion.
  
• Strategic investments and geographic diversification, including the Morocco plant, offer potential cost advantages and risk mitigation in a volatile global market.
  
• Economic challenges in key markets, operational inefficiencies, and tariff issues could pressure Suprajit's revenue and net margins across regions and segments.

Catalysts

Manufactures and sells automotive cables, halogen lamps, speedometers, and other automotive components in India, the United States, the United Kingdom, Germany, and Luxembourg.

• Suprajit Engineering's Indian cable exports demonstrated a robust 35% growth, emphasizing the strength in their global strategy, which is beneficial for future revenue and earnings expansion.
  
• The restructuring efforts, particularly within the Suprajit Controls Division (SCD), have led to a notable improvement in EBITDA margins, driven by operational efficiencies and new contracts, projecting a sustainable enhancement in net margins.
  
• The integration and turnaround plans for the newly acquired SCS operations in Morocco are aimed at cutting costs and improving operational efficiencies, which should positively impact future earnings.
  
• The Electronics division is experiencing growth headwinds due to investments and fixed cost structures but anticipates increased margins as volumes build, indicating potential future improvements in net margins.
  
• The strategic geographic positioning of the Morocco plant offers potential cost advantages and diversification that could mitigate risks and enhance revenues in the face of global political and tariff uncertainties.

Suprajit Engineering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Suprajit Engineering's revenue will grow by 14.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 8.7% in 3 years time.
• Analysts expect earnings to reach ₹4.1 billion (and earnings per share of ₹29.99) by about March 2028, up from ₹1.3 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 23.0x on those 2028 earnings, down from 40.9x today. This future PE is lower than the current PE for the IN Auto Components industry at 27.1x.
• Analysts expect the number of shares outstanding to decline by 1.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.49%, as per the Simply Wall St company report.

Suprajit Engineering Future Earnings Per Share Growth

Risks

• The Indian automotive market growth was below expectations, with flat passenger vehicle sales and moderate two-wheeler growth, which could impact future revenue prospects.
  
• Challenges in the European market, characterized by political indecisiveness and economic instability, might affect Suprajit's revenue and profitability in that region.
  
• The ongoing restructuring costs and operational inefficiencies related to the SCS acquisition could lead to continued pressure on net margins for the coming quarters.
  
• Tariff issues in the U.S., particularly affecting the Matamoros, Mexico operations, may add to cost pressures and impact earnings if not resolved or compensated adequately by customers.
  
• The softness in the non-automotive market, such as in the construction and agriculture sectors, along with economic uncertainties, could suppress revenue and profitability from those segments.

Valuation

• The analysts have a consensus price target of ₹478.222 for Suprajit Engineering based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹565.0, and the most bearish reporting a price target of just ₹364.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹47.5 billion, earnings will come to ₹4.1 billion, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 14.5%.
• Given the current share price of ₹390.75, the analyst price target of ₹478.22 is 18.3% 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.