Backward Integration And Automation Will Improve Future Profitability

Key Takeaways

• Backward integration and strategic technological tie-ups aim to enhance supply chain efficiency, reduce costs, and improve profitability and margins.
  
• A strong order book and effective cash management strategy drive revenue potential and support the goal of becoming debt-free.
  
• Selective order intake and dependency on integration efforts could limit growth and pose risks to revenue consistency and financial resilience.

Catalysts

Manufactures and sells transformers in India.

• Transformers and Rectifiers (India) Ltd has a substantial unexecuted order book of ₹3,686 crores as of December 2024, with inquiries worth ₹19,000 crores under negotiation or in bidding, indicating strong future revenue potential.
  
• The company's acquisition of a CRGO processing unit, aimed at 100% backward integration, should reduce dependency on external suppliers and raw material costs, likely boosting net margins.
  
• The initiation of the PGCIL approval process for a fully automated radiator facility is expected to enhance operational efficiency and potentially drive margin improvements.
  
• Strategic technological tie-ups for backward integration are anticipated to begin adding value by Q4 FY '26, potentially improving supply chain efficiency and supporting profitability enhancements in the coming years.
  
• With an aim to become a debt-free company, improved cash management through the CPIR model (cash payable, receivable, and inventory management) is expected to enhance earnings and solidify their financial position.

Transformers and Rectifiers (India) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Transformers and Rectifiers (India)'s revenue will grow by 49.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.6% today to 11.6% in 3 years time.
• Analysts expect earnings to reach ₹7.3 billion (and earnings per share of ₹47.09) by about January 2028, up from ₹1.6 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 45.5x on those 2028 earnings, down from 80.3x today. This future PE is greater than the current PE for the IN Electrical industry at 42.4x.
• Analysts expect the number of shares outstanding to grow by 0.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.29%, as per the Simply Wall St company report.

Transformers and Rectifiers (India) Future Earnings Per Share Growth

Risks

• The company is being selective with its order intake, focusing on high-margin and favorable payment terms. This conservative approach might limit revenue growth as they deliberately choose not to take all available orders. This caution could negatively impact the total revenue generated, especially if demand conditions change.
  
• The drop in order bookings from ₹1,000 crores in Q2 to ₹631 crores in Q3 suggests variability, which could pose a risk to consistent revenue flow and target achievement. If this trend continues, it could reflect in less predictable earnings and challenges in meeting revenue targets.
  
• There are concerns about maintaining margins, as seen in the minor reduction from 17% to 16.5% EBITDA margin. Despite scaling operations, varying product mix influences profitability, indicating potential volatility in net margins and PAT if high-margin products fail to proportionately increase in sales.
  
• The CEO’s mention of achieving USD 1 billion revenue in 3 to 4 years, with potential for changes in economic metrics, highlights uncertainty in long-term financial projections. This could impact investor confidence in sustainable earnings growth and margin targets.
  
• Dependency on backward integration efforts and external M&A activities, which are expected to significantly impact revenue and margins, carries inherent risks. Delays in achieving operational efficiencies from these initiatives could adversely affect net income projections and financial resilience.

Valuation

• The analysts have a consensus price target of ₹1437.0 for Transformers and Rectifiers (India) 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 ₹62.6 billion, earnings will come to ₹7.3 billion, and it would be trading on a PE ratio of 45.5x, assuming you use a discount rate of 14.3%.
  
• Given the current share price of ₹856.15, the analyst's price target of ₹1437.0 is 40.4% 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.