Expanding Into Renewable Energy And Exports Will Improve Future Margins

Key Takeaways

• Strategic expansion into renewable energy markets and niche import substitution is poised to drive future revenue growth and strengthen margins.
  
• Focus on high-margin components and exports aims to enhance overall margins and earnings growth.
  
• The company's involvement in volatile markets, significant debt, and reliance on North America expose it to risks impacting revenue, margins, and financial stability.

Catalysts

Manufactures and sells iron and steel engineering products in India.

• Pitti Engineering has started the production and commercial supply of parts for hydrogen electrolyzers, indicating a strategic entry into the renewable energy market, which could drive future revenue growth.
  
• The commissioning of the coating line for hydro and thermal power generators positions the company to capitalize on niche market import substitution, expected to bolster revenue and maintain or improve margins.
  
• The expansion in machine component production, especially with castings from Dakshin Foundry, is expected to result in higher-margin contributions, positively impacting net margins.
  
• The expected normalization in the LV motor market and alternator disruptions due to CPCB Bharat VI norms could stabilize and potentially boost revenues in FY '26, improving earnings.
  
• Major product mix shifts towards higher-margin machine components and the strategic focus on export opportunities could enhance overall margins and earnings growth.

Pitti Engineering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pitti Engineering's revenue will grow by 20.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.7% today to 11.3% in 3 years time.
• Analysts expect earnings to reach ₹3.0 billion (and earnings per share of ₹83.43) by about April 2028, up from ₹1.3 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 32.5x on those 2028 earnings, up from 28.9x today. This future PE is lower than the current PE for the IN Electrical industry at 38.2x.
• 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 16.07%, as per the Simply Wall St company report.

Pitti Engineering Future Earnings Per Share Growth

Risks

• The expansion into hydrogen electrolyzer parts and the volatility in raw material prices for small LV motors could pose risks, potentially leading to fluctuations in revenue and net margins.
  
• The company experienced a decline in volumes on the sheet metal side, which might indicate challenges in some end-user industries, affecting future revenue stability.
  
• Exposure to changes in CPCB Bharat VI norms and volatility in the small LV motors market indicates potential risks to revenue if these market conditions do not normalize as expected.
  
• The company's substantial net debt of ₹432 crores could increase financial risk, particularly if interest rates rise or if cash flow from operations is insufficient for debt servicing, impacting net margins and earnings.
  
• The dependence on the North American market for approximately 25% of revenue exposes the company to geopolitical and trade risks, such as tariff changes, which could affect revenue and profit margins.

Valuation

• The analysts have a consensus price target of ₹1343.0 for Pitti 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 ₹26.4 billion, earnings will come to ₹3.0 billion, and it would be trading on a PE ratio of 32.5x, assuming you use a discount rate of 16.1%.
• Given the current share price of ₹1016.5, the analyst price target of ₹1343.0 is 24.3% 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.