China +1 Strategy And India Expansion Will Strengthen Future Prospects

Key Takeaways

• China +1 strategy and India's facility expansion are poised to boost order inflow, enhancing future revenues and margins.
  
• Greenfield CapEx project will expand capacity for higher-margin products, improving margin profile and future earnings.
  
• Challenges in Europe, U.S. demand softening, and operational setbacks in Romania may hinder revenue and profitability, despite growth in China.

Catalysts

Engages in the manufacture and sale of precision bearing cages in India and internationally.

• Expansion in the Bronze Bushing business is expected to maintain strong performance, which could positively impact revenue growth in the second half of FY 2025.
  
• The fourth quarter is anticipated to be strong due to demand normalization as inventory reductions and destocking exercises conclude, likely impacting revenue and margins positively.
  
• Benefits from the China +1 strategy and the expansion of customer facilities in India are expected to increase order inflow, potentially boosting future revenues and margins.
  
• Continued growth in the China market and an improved product mix in Romania could reduce overall subsidiary losses, enhancing bottom-line growth.
  
• Long-term growth from the greenfield CapEx project will add capacity for higher-margin products, like bushings and cages, potentially improving overall margin profile and future earnings.

Harsha Engineers International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Harsha Engineers International's revenue will grow by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.4% today to 11.6% in 3 years time.
• Analysts expect earnings to reach ₹2.4 billion (and earnings per share of ₹24.24) by about February 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 31.8x on those 2028 earnings, up from 29.0x today. This future PE is lower than the current PE for the IN Machinery industry at 36.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.74%, as per the Simply Wall St company report.

Harsha Engineers International Future Earnings Per Share Growth

Risks

• Continued challenges in Europe, demand softening in the U.S., and overall industrial demand reduction could lead to stagnant or declining revenues.
  
• Delays in concluding major outsourcing projects in Europe and challenges faced in those projects could impact operational efficiency and profit margins.
  
• The underperformance and bleak prospects in Romania, coupled with the inability to achieve operational breakeven, might continue to affect overall profitability.
  
• Pressure on gross margins from bearing manufacturers and material pass-through mechanisms could squeeze net margins if not effectively managed.
  
• Although there is growth in China, the reliance on China’s performance and the softness in the large-size bearing cage and wind and industrial segments could create earnings volatility.

Valuation

• The analysts have a consensus price target of ₹561.75 for Harsha Engineers International 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 ₹20.5 billion, earnings will come to ₹2.4 billion, and it would be trading on a PE ratio of 31.8x, assuming you use a discount rate of 13.7%.
  
• Given the current share price of ₹419.45, the analyst price target of ₹561.75 is 25.3% 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.