Premium Conductors And Domestic Growth Will Boost Future Earnings

Key Takeaways

• APAR Industries benefits from domestic growth and India's electricity plan, boosting revenues with increased orders for conductors and related products.
  
• New high-margin products like synthetic transformer oil enhance earnings potential amid global renewable energy shifts.
  
• Increased domestic sales and reduced exports due to competition and logistical challenges could negatively impact margins and future revenue growth.

Catalysts

Engages in the electrical and metallurgical engineering business in India and internationally.

• APAR Industries anticipates a significant opportunity from India's national electricity plan involving a projected investment of ₹9.15 lakh crores, which is aimed at increasing transmission capacities. This expansion should boost revenues through increased domestic orders for conductors and related products.
  
• The transition towards premium conductors, such as AL-59, which are lighter and command higher realizations, should enhance both revenue and net margins as they replace traditional ACSR conductors, despite a challenging export environment.
  
• The uptick in order intake from the U.S. market by 17.5% quarter-over-quarter and the expected continued growth can increase future revenues, particularly in the cable and conductor segments.
  
• Expansion into new high-margin products like synthetic transformer oil positions APAR to capture more value in the global shift towards renewable energies, potentially boosting earnings through higher-margin sales.
  
• Strong domestic growth driven by sectors like renewable energy, railways, and data centers should support continued revenue growth, with a focus on niche, high-demand product verticals that could sustain higher profitability levels.

APAR Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming APAR Industries's revenue will grow by 16.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.0% today to 4.7% in 3 years time.
• Analysts expect earnings to reach ₹12.7 billion (and earnings per share of ₹298.96) by about December 2027, up from ₹8.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹9.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.1x on those 2027 earnings, up from 47.0x today. This future PE is greater than the current PE for the IN Industrials industry at 13.3x.
• Analysts expect the number of shares outstanding to grow by 1.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.88%, as per the Simply Wall St company report.

APAR Industries Future Earnings Per Share Growth

Risks

• Increased domestic sales and reduced export mix, especially due to Chinese competition and logistic challenges, could affect margins negatively, as exports tend to be more profitable than domestic sales, impacting overall earnings.
  
• Declining U.S. business with a 38.9% drop compared to last year due to lower revenues and logistical issues may struggle to reach previous levels, affecting future revenue and profit growth.
  
• Significant global competition, particularly from Chinese firms, in various international markets might lead to pricing pressures, affecting revenue and profitability.
  
• Delays and underachievement in transmission line and substation additions could impact projected domestic infrastructure growth, risking revenue targets depending on this sector's expansion.
  
• Execution risks associated with shifting product lines and transitioning domestic demand might not sufficiently compensate for reduced export volume, potentially impacting revenue growth and margins.

Valuation

• The analysts have a consensus price target of ₹10145.5 for APAR Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹11700.0, and the most bearish reporting a price target of just ₹7607.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹270.1 billion, earnings will come to ₹12.7 billion, and it would be trading on a PE ratio of 48.1x, assuming you use a discount rate of 12.9%.
  
• Given the current share price of ₹9953.0, the analyst's price target of ₹10145.5 is 1.9% 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.