Expanding Into Aerospace And EVs Will Bring Risks But May Enhance Future Stability

Key Takeaways

• Aggressive growth targets and market expansion plans could pressure revenue stability and margins if market conditions shift or investments don't yield timely returns.
  
• Global market expansions and strategic investments could expose Greaves Cotton to geopolitical risks and potential strain on short-term earnings.
  
• Greaves Cotton's strategic diversification, operational efficiency, and new investments position it for improved resilience and potential strong revenue growth across multiple segments.

Catalysts

Operates engineering and mobility retail business in India, Middle East, Africa, Southeast Asia, and internationally.

• Greaves Cotton aims for ambitious growth targets, including a target of ₹15,000 crores by 2030, which may lead to high expectations of revenue growth in the high 20s to 30% yearly. This aggressive target might not be sustainable if market conditions change, impacting revenue projections.
  
• The strategy to expand into various industries, including aerospace and construction equipment, requires significant investment in capacity and capabilities. This could lead to increased production costs and potential pressure on net margins if not managed effectively.
  
• The company plans substantial strategic investments in new product development, manufacturing expansion, and technology. While these are expected to drive long-term growth, they could strain short-term earnings if returns on these investments are delayed.
  
• Ongoing expansion in international markets, such as Europe, Africa, and the Middle East, and the reliance on export growth can expose the company to geopolitical and foreign exchange risks, which may affect revenue stability and earnings projections.
  
• The filing for an IPO by Greaves Electric Mobility entails raising funds primarily for technology and manufacturing expansion and is subject to market acceptance and regulatory approval. If market conditions are unfavorable, this could impact the anticipated cash inflow and, consequently, influence their financial outlook and EPS.

Greaves Cotton Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Greaves Cotton's revenue will grow by 11.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 7.6% in 3 years time.
• Analysts expect earnings to reach ₹3.0 billion (and earnings per share of ₹12.79) by about March 2028, up from ₹369.1 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 17.7x on those 2028 earnings, down from 144.2x today. This future PE is lower than the current PE for the IN Machinery industry at 28.3x.
• Analysts expect the number of shares outstanding to decline by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.06%, as per the Simply Wall St company report.

Greaves Cotton Future Earnings Per Share Growth

Risks

• Greaves Cotton's strategic pivot towards a diversified, fuel-agnostic multi-product, multi-business model positions it for improved resilience and less reliance on any single segment, potentially stabilizing revenue streams. (Revenue)
  
• The company's strong financial performance, marked by a 13% growth in standalone revenues and sustained EBITDA improvements, indicates effective operational efficiency and cost management. This suggests potential for consistent earnings. (Earnings)
  
• Strategic investments in new product development, brand building, and expanding into high-growth areas are effectively being utilized, which could drive further revenue growth and strengthen net margins. (Net Margins)
  
• Greaves Electric Mobility's upcoming IPO and strategic expansions, including increased dealership networks and product enhancements, could significantly boost its market presence and revenue from the electric vehicle segment. (Revenue)
  
• Expansion of exports and collaborations with partners in key international markets reflect efforts to diversify revenue sources, potentially leading to an increase in international sales contributions. (Revenue)

Valuation

• The analysts have a consensus price target of ₹154.0 for Greaves Cotton 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 ₹38.8 billion, earnings will come to ₹3.0 billion, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹228.65, the analyst price target of ₹154.0 is 48.5% lower. Despite analysts expecting the underlying buisness 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.