Backward Integration And Capacity Expansion Will Unlock Global Opportunities

Key Takeaways

• Robust order book and capacity expansion plans indicate strong future revenue visibility and potential earnings growth.
  
• Backward integration and strategic focus on sustainable energy solutions are expected to improve efficiency, reduce costs, and open new market opportunities.
  
• Intense competition and ambitious expansion plans, including HVDC transformers and backward integration, may strain cash flow and impact profitability and growth.

Catalysts

Manufactures and sells transformers in India.

• The company secured a record-breaking order of ₹740 crores from GETCO, which is expected to significantly contribute to revenue growth in the near term.
  
• With an unexecuted order book of ₹5,132 crores, the company has strong revenue visibility for the next 15 to 18 months, indicating robust future earnings potential.
  
• Backward integration efforts, including the acquisition of a controlling stake in the CRGO processing unit, are likely to improve operating efficiencies and reduce costs, positively impacting net margins.
  
• The company's ambitious capacity expansion plans, including 15,000 MVA expansion by FY '26, are expected to increase production capacity and support revenue growth towards its goal of USD 1 billion in revenue within three years.
  
• By focusing on clean sustainable energy solutions and global expansion, the company is well-positioned to capture new market opportunities, which may result in higher revenues and earnings growth.

Transformers and Rectifiers (India) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Transformers and Rectifiers (India)'s revenue will grow by 48.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.6% today to 11.3% in 3 years time.
• Analysts expect earnings to reach ₹7.4 billion (and earnings per share of ₹23.96) by about April 2028, up from ₹2.1 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 51.5x on those 2028 earnings, down from 76.7x today. This future PE is greater than the current PE for the IN Electrical industry at 38.2x.
• Analysts expect the number of shares outstanding to grow by 4.19% 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.

Transformers and Rectifiers (India) Future Earnings Per Share Growth

Risks

• The company's recent robust performance may not be sustainable long-term, as Q4 margins were driven by a few high-margin orders; ongoing margins are expected to stabilize around 16% to 17%, which could affect future earnings.
  
• Transformers and Rectifiers (India) faces intense competition in the transformer industry, particularly as it expands into HVDC transformers without external technology partners, potentially impacting its revenue growth and market share.
  
• Large capital expenditures, including ₹550 crores for backward integration and capacity expansion, are planned for the coming years, which may strain cash flows and delay the financial benefits, affecting net margins.
  
• Dependence on government orders and infrastructure projects, as highlighted in their revenue sources, may expose the company to volatility in government spending, impacting revenue visibility and growth.
  
• The company's goal of becoming 100% backward integrated by investing in CRGO processing may pose operational risks and affect its cost efficiencies, potentially influencing overall profitability and earnings.

Valuation

• The analysts have a consensus price target of ₹718.0 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 ₹65.4 billion, earnings will come to ₹7.4 billion, and it would be trading on a PE ratio of 51.5x, assuming you use a discount rate of 16.1%.
• Given the current share price of ₹547.5, the analyst price target of ₹718.0 is 23.7% 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.