Export Reliance And Emission Regulations Will Undermine Long Term Earnings Outlook

Catalysts

About Tenneco Clean Air India

Tenneco Clean Air India designs and manufactures clean air, powertrain and advanced suspension systems for automotive OEMs in India and global markets.

What are the underlying business or industry changes driving this perspective?

• Heavy reliance on export led growth, including intra group consolidation of production into India, could face delays or scale back if global OEMs moderate de risking from China or European plants. This would undercut the expected step up in higher margin export revenue and leave overall top line growth below current market expectations, pressuring earnings.
• Legislation driven content gains in clean air and off highway, such as TREM 5 and any tightening beyond BS 6.2, may be pushed out or diluted by policymakers to support OEM profitability and farmer affordability. This could limit mix improvement and capex productivity and cap the upside to revenue growth and EBITDA margins that investors are currently capitalizing.
• Advanced Ride Technologies is positioned as a key beneficiary of premiumization and a rapid shift to semi active suspension, but this disruption may be slower or more concentrated in a few models. That could increase price competition on conventional shocks and delay the inflection in content per vehicle, which would restrain margin expansion and earnings growth versus bullish assumptions.
• The shift of global programs and tooling into India to exploit labor cost advantages assumes sustained cost leadership and flawless execution. Any wage inflation, labor code changes or execution slippages could erode cost arbitrage, forcing sharper price concessions to OEMs and compressing net margins and return on capital employed.
• Long duration lifetime bookings anchored in tightening emission and comfort requirements increase fixed cost commitments in plants and engineering. If industry volumes in commercial vehicles or exports undershoot due to macro or policy risks, under absorption of overheads could drag EBITDA margins and free cash flow below levels implied by the current valuation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Tenneco Clean Air India's revenue will grow by 13.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.6% today to 10.0% in 3 years time.
• Analysts expect earnings to reach ₹7.4 billion (and earnings per share of ₹18.09) by about December 2028, up from ₹5.8 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 33.5x on those 2028 earnings, up from 32.8x today. This future PE is greater than the current PE for the IN Auto Components industry at 31.4x.
• 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 14.64%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is already delivering steady top line expansion, with value added revenue growing faster than its served markets across passenger vehicles, commercial trucks, off highway and industrial segments, which could sustain or accelerate revenue rather than cause a long term decline.
• Export volumes are starting from a low base and are growing faster than domestic sales, supported by both third party OEM demand and intra group consolidation into India, so rising export mix and attractive export margins could support higher earnings and net margins over time.
• Large incremental lifetime bookings of INR 9,840 crores, including INR 1,760 crores from exports and strategic wins with new OEMs, materially increase medium term revenue visibility and could underpin multi year growth in revenue and operating profit.
• Premiumization of the Indian auto market and a rapid shift towards advanced ride technologies and semi active suspension raise the content per vehicle opportunity, which may structurally lift margins and earnings as higher value suspension systems scale across more models.
• Forthcoming and tightening emission and efficiency regulations, including TREM 5 and potential future norms for passenger and commercial vehicles, align directly with the company’s core clean air and powertrain capabilities and could drive mix improvement, higher realizations and resilient EBITDA margins over the long term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹407.0 for Tenneco Clean Air India based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹74.1 billion, earnings will come to ₹7.4 billion, and it would be trading on a PE ratio of 33.5x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹475.0, the analyst price target of ₹407.0 is 16.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.