Expansion In Canada And Latin America Will Fuel Future Success

Key Takeaways

• Expanding international markets and strategic investments in R&D support long-term revenue growth and diversification.
  
• Operational efficiency, strong order book, and market expansion strategies drive future growth in revenue and earnings.
  
• High domestic revenue reliance and challenges in international markets pose risks to revenue stability and future earnings growth.

Catalysts

Manufactures and sells power transmission and material handling equipment in India and internationally.

• Elecon Engineering is focused on expanding its international presence, with plans to increase the contribution of international markets to 50% of its consolidated revenues by FY '30, which is supported by strong R&D investments and product innovation, likely impacting future revenue growth.
  
• The company has robust demand in both its Industrial Gears and Material Handling Equipment (MHE) divisions, with strong performance expected in sectors like steel, power, and cement, suggesting future revenue and earnings growth potential.
  
• Operational efficiency and disciplined cost management have already helped improve EBITDA margins, and ongoing focus on favorable product mix and aftersales services is expected to continue this trend, impacting net margins positively.
  
• Elecon's plans to establish rapid build centers in Canada and Latin America as part of its strategy to mitigate tariff impacts and capitalize on new market opportunities could expand its revenue base and diversify risk.
  
• The strong order book and proactive client engagement, coupled with a focus on customized high-quality engineering solutions, provide a solid platform for sustained growth in earnings and revenue in the coming years.

Elecon Engineering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elecon Engineering's revenue will grow by 15.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 18.6% today to 18.0% in 3 years time.
• Analysts expect earnings to reach ₹6.2 billion (and earnings per share of ₹27.6) by about May 2028, up from ₹4.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.3x on those 2028 earnings, up from 35.9x today. This future PE is lower than the current PE for the IN Electrical industry at 39.1x.
• 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 14.89%, as per the Simply Wall St company report.

Elecon Engineering Future Earnings Per Share Growth

Risks

• The reliance on a high percentage of domestic revenues (83%) could expose the company to fluctuations in domestic demand and economic conditions, potentially impacting revenue stability.
  
• The EBIT margins for the Gear Division have declined from 27.2% to 24.5%, indicating possible challenges in maintaining high profitability, which could affect net margins.
  
• The impact of U.S. tariffs and potential tariff wars might introduce uncertainties or additional costs, affecting earnings from North American markets.
  
• Execution of growth strategies in new markets like Canada and Latin America involves risks regarding market acceptance and operational challenges, possibly impacting projected revenue growth.
  
• Variability in sector performance, such as a decline in the steel sector and potential weakness in the sugar sector, may impact future orders and overall earnings growth.

Valuation

• The analysts have a consensus price target of ₹682.0 for Elecon Engineering 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 ₹34.6 billion, earnings will come to ₹6.2 billion, and it would be trading on a PE ratio of 37.3x, assuming you use a discount rate of 14.9%.
  
• Given the current share price of ₹663.45, the analyst price target of ₹682.0 is 2.7% 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.