Semiconductor And Defense Expansion Will Strengthen Future Prospects

Key Takeaways

• Diversification into tech-agnostic, xEV, aerospace, and semiconductor sectors boosts revenue growth and enhances net margins through high-margin, high-value projects.
  
• Strategic pricing, cost-saving initiatives, and diversification are driving efficiency, improved ROCE, and consistent margin improvements, propelling overall earnings growth.
  
• Sansera Engineering faces revenue challenges due to dependency on key clients, market demand fluctuations, and ambitious investment plans, impacting growth and financial stability.

Catalysts

Engages in the manufacture and sale of precision engineered components for automotive and non-automotive sectors in India, Europe, the United States, and internationally.

• Sansera's focus on emerging businesses like tech-agnostic, xEV, and non-auto sectors, which contributed 24.2% to their revenue and have a robust order book, is expected to drive strong revenue growth and improve net margins due to higher-margin products.
  
• Expansion into the Semiconductor sector with a strategic order from a global leader in wafer fabrication equipment is poised to meaningfully grow revenue over the next three years, impacting both revenue and net margins positively due to the high precision and high-margin nature of this sector.
  
• Entry into the Aerospace and Defense market, further supported by winning direct orders from large European players, predicts significant revenue momentum, which should also enhance net margins due to the high-value nature of these projects.
  
• The continued diversification strategy towards non-auto and export markets is expected to lead to higher asset turnover and efficiency improvements, driving improved ROCE and earnings growth.
  
• Cost-saving initiatives and strategic pricing actions have led to consistent EBITDA margin maintenance, with further forward projections of year-on-year margin improvements of at least 0.5%, contributing positively to net margins and overall earnings growth.

Sansera Engineering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sansera Engineering's revenue will grow by 15.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 10.3% in 3 years time.
• Analysts expect earnings to reach ₹4.8 billion (and earnings per share of ₹78.89) by about March 2028, up from ₹2.0 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, down from 37.0x today. This future PE is greater than the current PE for the IN Auto Components industry at 27.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.43%, as per the Simply Wall St company report.

Sansera Engineering Future Earnings Per Share Growth

Risks

• The decline in revenue from the off-road and aerospace business, due to labor issues with key customers, highlights a dependency on specific clients that could negatively impact overall revenue growth if similar issues arise in the future.
  
• The decline in the PV business by 19% year-on-year, attributed to lower demand and inventory pile-up, reflects vulnerability to fluctuations in consumer demand, which may adversely affect revenue and earnings.
  
• The 2% revenue growth during the third quarter is relatively muted, indicating potential challenges in scaling operations efficiently, which could limit revenue and profitability growth in the near term.
  
• The international market reliance, with over 60% of the order book coming from export markets such as North America and Europe, exposes the company to exchange rate fluctuations and geopolitical risks, potentially affecting revenue and net margins.
  
• The company's substantial CapEx plans and focus on new sectors like semiconductors require significant upfront investment, which may not yield immediate returns and could impact cash flow and return on capital employed (ROCE) during the transition phase.

Valuation

• The analysts have a consensus price target of ₹1565.667 for Sansera 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 ₹2000.0, and the most bearish reporting a price target of just ₹1330.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹46.3 billion, earnings will come to ₹4.8 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 ₹1208.15, the analyst price target of ₹1565.67 is 22.8% 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.