Acquisition Of TGPEL Precision Engineering And EV Investments Will Drive Future Market Expansion

Key Takeaways

• Strategic acquisitions and expansion in high-tech and EV sectors are positioned to drive revenue growth and operational scaling.
  
• Innovative development in hydrogen pistons and market penetration bolsters long-term revenue potential and market leadership.
  
• Geopolitical tensions, market flatness, slow EV adoption, and acquisition risks challenge revenue growth and profitability in key segments.

Catalysts

Manufactures and sells automotive components in India.

• Shriram Pistons & Rings' strategic acquisition of TGPEL Precision Engineering Limited is expected to diversify the company's portfolio in high-tech precision molds and components for various sectors, potentially driving revenue growth.
  
• The company is aligning itself with the Indian government's push towards electric vehicles and greener alternatives, indicating a potential long-term increase in both revenue and net margins due to the broader market of coexistence of powertrain technologies.
  
• The ongoing development of hydrogen pistons positions Shriram Pistons & Rings as a leader in innovation, aiming to boost future revenue and earnings as these technologies mature and are adopted widely.
  
• The expansion of touchpoints and penetration into new geographic and product markets in India enhances their aftermarket strategy, potentially resulting in higher revenue growth.
  
• Investment in expanding manufacturing facilities, particularly for EV powertrain and plastic injection molding businesses, indicates the company's readiness to scale operations and capture more market share, likely improving earnings over time.

Shriram Pistons & Rings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shriram Pistons & Rings's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.0% today to 15.5% in 3 years time.
• Analysts expect earnings to reach ₹7.4 billion (and earnings per share of ₹168.39) by about February 2028, up from ₹4.8 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 25.7x on those 2028 earnings, up from 18.5x today. This future PE is lower than the current PE for the IN Auto Components industry at 29.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.63%, as per the Simply Wall St company report.

Shriram Pistons & Rings Future Earnings Per Share Growth

Risks

• Geopolitical tensions and high energy costs, especially in Europe, have led to a slowdown in the company's export markets, including Europe, the Middle East, and South America, which can negatively impact revenue growth.
  
• Despite the growth in certain segments, the passenger vehicle industry has recorded a muted performance, and commercial vehicles and three-wheelers remained flat year-on-year, which could affect the company's overall revenue and market positioning.
  
• Challenges in penetrating new export markets due to volatile freight rates and geopolitical issues could restrict growth in international revenues.
  
• The transition to electric vehicles (EVs) may not be as rapid as hoped, and the lack of significant penetration of EVs could slow down the adoption of new product offerings, impacting long-term earnings potential.
  
• The integration and performance of recent acquisitions, like TGPEL Precision Engineering, pose execution risks, which could affect profitability if the anticipated synergies are not realized or if the acquisitions do not perform as expected.

Valuation

• The analysts have a consensus price target of ₹2950.0 for Shriram Pistons & Rings 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 ₹47.7 billion, earnings will come to ₹7.4 billion, and it would be trading on a PE ratio of 25.7x, assuming you use a discount rate of 13.6%.
  
• Given the current share price of ₹2019.3, the analyst price target of ₹2950.0 is 31.5% 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.