International Expansion And New Partnerships Will Strengthen Future Prospects

Key Takeaways

• Expansion into international markets and new product introductions are expected to drive growth, enhancing revenue streams and operational efficiencies.
  
• Partnerships and new contracts, especially in the EV sector, could significantly boost earnings and top-line growth starting from FY '26.
  
• Declining revenues and challenges in key segments threaten profitability, with risks in global expansion and execution impacting future revenue and margin recovery.

Catalysts

Engages in the manufacture and sale of transfer cases, automatic locking hubs, and synchronizers and components to automotive OEMs in India, the United States, China, Mexico, the United Kingdom, Germany, Sweden, Thailand, South Korea, and internationally.

• Expansion into international markets and introduction of new transfer case variants are expected to drive medium
• and long-term growth, potentially enhancing revenue streams.
  
• The widening of the EV transmission portfolio and securing contracts for new models are anticipated to bolster revenues significantly starting in FY '26.
  
• Growth in the components business through export opportunities, projected to achieve a significant impact from Q1 FY '26, may lead to increased revenue and improved net margins from international markets.
  
• Strategic partnerships and collaborations, such as the new agreement with BorgWarner and feasibility studies for next-gen transmissions, could lead to innovative product offerings and potentially boost earnings by enhancing operational efficiencies.
  
• The takeover project for manual transmissions for an Indian OEM represents a new revenue stream and could contribute significantly to top-line growth in the near future.

Divgi TorqTransfer Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Divgi TorqTransfer Systems's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.5% today to 17.4% in 3 years time.
• Analysts expect earnings to reach ₹548.4 million (and earnings per share of ₹17.92) by about April 2028, up from ₹282.5 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 38.2x on those 2028 earnings, down from 49.8x 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 grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.61%, as per the Simply Wall St company report.

Divgi TorqTransfer Systems Future Earnings Per Share Growth

Risks

• Revenue from the transfer case business has been declining, with a 32% reduction year-on-year due to lower sales volumes and shifts in demand, potentially impacting future revenue unless these issues are resolved.
  
• The EV transmission segment failed to meet expectations, with challenges around original business plans and letters of intent, leading to uncertainty in revenue and margin recovery in the near term.
  
• Operating profit has been negatively affected by lower fixed cost absorption and higher expenditure, impacting net margins and overall profitability.
  
• Export contributions remain minimal, and although growth is anticipated, any delay in international market expansion could hinder revenue diversification.
  
• The company faces potential risks from reliance on future global opportunities and partnerships, with uncertainty in execution possibly affecting anticipated revenue streams and long-term earnings.

Valuation

• The analysts have a consensus price target of ₹476.0 for Divgi TorqTransfer Systems 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 ₹544.0, and the most bearish reporting a price target of just ₹408.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹3.2 billion, earnings will come to ₹548.4 million, and it would be trading on a PE ratio of 38.2x, assuming you use a discount rate of 13.6%.
• Given the current share price of ₹460.15, the analyst price target of ₹476.0 is 3.3% 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.