US Order Win And Capacity Upgrade Will Streamline Operations

Key Takeaways

• Record order book and strategic North American expansion enhance revenue visibility and growth prospects over the near term.
  
• Operational improvements and strategic shifts towards diverse segments could improve efficiencies and net margins.
  
• Heavy reliance on government projects, financial leverage, and geopolitical risks threaten Skipper's revenue growth and financial stability.

Catalysts

Manufactures and sells transmission and distribution structures, telecom towers, and fasteners in India.

• Skipper's order book has reached a historic high of ₹7,458 crores, up 20% year-on-year, providing strong revenue visibility over the next 18 to 24 months. This suggests sustained growth in revenue.
  
• The company secured a significant multi-million dollar order in the U.S.A., marking a strategic expansion into North America and creating opportunities for future market expansion, likely enhancing revenue growth.
  
• Skipper is on track to complete a 75,000-tonne capacity expansion, expected to be fully operational from May '25, which will support increased Engineering volumes and is likely to drive higher revenue and improved earnings.
  
• The implementation of SAP S/4HANA RISE is expected to streamline operations, enhance efficiency, and provide real-time insights, potentially improving operational efficiencies and expanding net margins.
  
• The focus on reducing dependency on government projects like Jal Jeevan and shifting towards the plumbing and retail segments in the Polymer business indicates a strategic shift to improve profitability, which should positively impact net margins.

Skipper Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Skipper's revenue will grow by 17.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 5.1% in 3 years time.
• Analysts expect earnings to reach ₹3.7 billion (and earnings per share of ₹34.17) by about May 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 27.3x on those 2028 earnings, down from 44.5x today. This future PE is greater than the current PE for the IN Construction industry at 21.1x.
• Analysts expect the number of shares outstanding to decline by 4.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.49%, as per the Simply Wall St company report.

Skipper Future Earnings Per Share Growth

Risks

• The heavy reliance on India’s government infrastructure projects, such as the Jal Jeevan Mission, could be a risk, as these projects have shown volatility and dependency on government allocations, potentially impacting revenue and cash flow.
  
• The competitive landscape and pricing pressures in the Polymer segment could affect profitability, especially given the industry-wide challenges and the frequent CapEx by competitors, impacting net margins.
  
• The financial leverage remains a concern, as interest costs have increased significantly alongside revenue growth and this trend, if continued, may impact net earnings and financial stability.
  
• Execution on international orders, particularly from markets like the USA, is critical, and any delay or inability to ramp up execution capabilities could pose risks to projected export revenue growth.
  
• There is vulnerability to macroeconomic or geopolitical factors, such as trade tensions with countries like China and Mexico, which could affect Skipper's order pipeline and execution timelines, thereby impacting revenue growth and order book prospects.

Valuation

• The analysts have a consensus price target of ₹642.5 for Skipper 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 ₹72.8 billion, earnings will come to ₹3.7 billion, and it would be trading on a PE ratio of 27.3x, assuming you use a discount rate of 14.5%.
  
• Given the current share price of ₹457.6, the analyst price target of ₹642.5 is 28.8% 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.