Securing New Global Contracts And Benefiting From Strong USD Will Strengthen Future Prospects

Key Takeaways

• Strong growth in the Bronze Bushing segment and a new long-term contract will enhance future revenue and profitability.
  
• The China Plus One strategy and USD strength are expected to drive increased international demand and long-term earnings growth.
  
• Persistent economic challenges and overseas subsidiary losses, especially in Romania, could hinder Harsha Engineers' revenue growth and profitability.

Catalysts

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

• Harsha Engineers International expects strong growth in their Bronze Bushing segment, which is projected to continue meeting their annual sales targets, providing a boost to future revenue.
  
• The company has secured a major long-term contract for cages with a global customer, expected to contribute significant additional business starting the second half of financial year 2026, improving revenue and possibly net margins.
  
• Harsha stands to benefit from the strong USD, which increases the price competitiveness of its products in the U.S. and other international markets, potentially boosting export revenue.
  
• The company is focusing on improving product mix and implementing cost-cutting measures, particularly in its Romanian operations, which is expected to help reduce losses and ultimately improve net earnings.
  
• Harsha is poised to benefit from the China Plus One strategy, with new facilities being commissioned by customers that could lead to increased demand for their products, contributing to long-term revenue and earnings growth.

Harsha Engineers International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Harsha Engineers International's revenue will grow by 12.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.1% today to 11.3% in 3 years time.
• Analysts expect earnings to reach ₹2.3 billion (and earnings per share of ₹25.15) by about March 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 29.9x on those 2028 earnings, up from 27.6x today. This future PE is greater than the current PE for the IN Machinery industry at 28.4x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.22%, as per the Simply Wall St company report.

Harsha Engineers International Future Earnings Per Share Growth

Risks

• Economic challenges in key markets like Europe and the U.S. remain significant, with no concrete signs of revival, potentially impacting revenue growth.
  
• The strengthening of the USD versus emerging market currencies could adversely affect international trade dynamics and indirectly impact revenues and profitability.
  
• Romania's operations face demand challenges and significant losses, preventing them from achieving operating breakeven, thus negatively affecting overall net margins.
  
• Overseas subsidiary losses, especially from Romania, are a concern, with an expectation to continue in the near term, impacting earnings.
  
• Delays in global customer CapEx projects and demand softening domestically could slow anticipated revenue streams and growth in the cages and associated segments.

Valuation

• The analysts have a consensus price target of ₹503.75 for Harsha Engineers International 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 ₹610.0, and the most bearish reporting a price target of just ₹440.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹20.3 billion, earnings will come to ₹2.3 billion, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 14.2%.
• Given the current share price of ₹390.15, the analyst price target of ₹503.75 is 22.6% 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.