Upcoming US Market Expansion And Renewable Projects Will Boost Future Prospects

Key Takeaways

• Strong domestic growth in T&D renewables and railways, supported by government infrastructure CapEx, is expected to positively impact future revenues.
  
• Increased U.S. market presence and high-quality standards are likely to enhance margins and boost earnings, alongside strategic innovation and efficiency improvements.
  
• Increased competition and operational challenges, including currency depreciation and rising costs, are exerting pressure on APAR Industries' revenue, margins, and profitability.

Catalysts

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

• The domestic market for APAR Industries has shown strong growth, particularly in areas like T&D renewables and railways, amidst a backdrop of government CapEx in infrastructure. This trend is expected to continue, potentially impacting future revenue positively.
  
• With an increased interest and ongoing approvals in the U.S. market, especially for cables, APAR is poised to leverage its presence in this $20 billion annual market. This could potentially enhance earnings due to improved margins from stringent quality standards demanded in the U.S.
  
• The potential for increased tenders and projects in the domestic transmission and substation sectors could lead to improved top-line growth. Retendering processes with higher budgets might result from market and commodity price adjustments, which could raise future revenue.
  
• The growth in India's renewable energy sector, specifically wind energy, is expected to accelerate. Given APAR’s strong market share in this segment, the wind capacity expansion could result in enhanced net margins and revenue.
  
• Strategic innovation and increased operational efficiency through Industry 4.0 initiatives, especially in the Cable business, are expected to optimize costs and productivity, which may lead to improved net margins and boost earnings.

APAR Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming APAR Industries's revenue will grow by 15.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 4.7% in 3 years time.
• Analysts expect earnings to reach ₹13.0 billion (and earnings per share of ₹327.8) by about January 2028, up from ₹8.1 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 39.8x on those 2028 earnings, up from 36.2x today. This future PE is greater than the current PE for the IN Industrials industry at 25.4x.
• Analysts expect the number of shares outstanding to decline by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.98%, as per the Simply Wall St company report.

APAR Industries Future Earnings Per Share Growth

Risks

• There is increased competition from Chinese producers in export markets like Australia, Africa, and Latin America, which may lead to pricing pressure and affect revenue and margins.
  
• The depreciation of the rupee and rises in commodity prices such as copper and aluminum are leading to challenges in tender pricing, retendering, and delays, possibly impacting revenue timing and net margins.
  
• Decline in export revenue as a percentage of total revenue, which may suggest reduced profitability since domestic sales have lower margins compared to export sales.
  
• Slow progress in India’s transmission line and substation projects, potentially resulting in reduced or slowed revenue growth if planned projects are not completed on schedule.
  
• Execution delays and cost rises in freight, notably due to geopolitical tensions like the Red Sea issue, which can increase costs and negatively impact earnings.

Valuation

• The analysts have a consensus price target of ₹9174.2 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 ₹11535.0, and the most bearish reporting a price target of just ₹6672.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹277.6 billion, earnings will come to ₹13.0 billion, and it would be trading on a PE ratio of 39.8x, assuming you use a discount rate of 13.0%.
  
• Given the current share price of ₹7282.0, the analyst's price target of ₹9174.2 is 20.6% 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.