Leveraging HVDC And Service Expansion Will Strengthen Future Prospects

Key Takeaways

• Record order intake and backlog from HVDC projects suggest strong potential for revenue growth in coming quarters.
  
• Focus on expanding service business and strategic export market improvements are expected to diversify income streams and enhance earnings resilience.
  
• Reliance on HVDC projects and the Indian market carries risks from delays, economic slowdown, regulatory challenges, competition, and exchange rate volatility impacting financial stability.

Catalysts

Offers products, projects, and services for electricity transmission and related activities in India and internationally.

• Hitachi Energy India reported its highest-ever quarterly order intake and a record order backlog, primarily driven by large HVDC projects, suggesting strong revenue growth potential in subsequent quarters.
  
• The company is focusing on expanding its service business unit starting April 2025, aiming to tap into a large installed base of approximately ₹80,000 crore, likely boosting future revenue and diversifying income streams beyond product sales.
  
• There is significant expected growth in India's renewable energy sector and power transmission capacity, driven by potential investments totaling ₹18.8 lakh crore and ₹9.16 lakh crore respectively, providing long-term revenue growth opportunities for Hitachi Energy.
  
• The company's strong cash position and transition to being debt-free, alongside their strategic plans for ₹2,000 crore investment in capacity building over the next 4 to 5 years, indicate potential improvement in operational efficiencies and margin expansion due to increased capacity and lower financial costs.
  
• Hitachi Energy’s concerted effort to enhance their export market strategy, where excluding large one-time orders, exports contributed over 40% to the total orders, supports expectations of diversified revenue streams and improved earnings resilience.

Hitachi Energy India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hitachi Energy India's revenue will grow by 33.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 10.2% in 3 years time.
• Analysts expect earnings to reach ₹14.9 billion (and earnings per share of ₹352.99) by about March 2028, up from ₹3.1 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 60.6x on those 2028 earnings, down from 159.4x today. This future PE is greater than the current PE for the IN Electrical industry at 33.6x.
• 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 14.92%, as per the Simply Wall St company report.

Hitachi Energy India Future Earnings Per Share Growth

Risks

• The reliance on large HVDC projects for revenue could create risks if there are delays or cancellations in project execution, which would impact revenue recognition and cash flow.
  
• The weakening GDP growth and slower economic environment may impact the wider infrastructure segment demand, affecting revenues and order backlogs.
  
• The high dependence on the Indian market and specific sectors like renewable energy and transmission projects exposes the company to regulatory and policy risks that could affect future orders and margins.
  
• Intense competition from global players in HVDC technology could pressure margins and market share, impacting profitability.
  
• Exchange rate volatility affecting export orders could lead to fluctuating reported earnings and profit before tax, especially with high foreign exchange gains previously contributing to income.

Valuation

• The analysts have a consensus price target of ₹14210.75 for Hitachi Energy India 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 ₹17075.0, and the most bearish reporting a price target of just ₹10500.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹146.0 billion, earnings will come to ₹14.9 billion, and it would be trading on a PE ratio of 60.6x, assuming you use a discount rate of 14.9%.
• Given the current share price of ₹11800.25, the analyst price target of ₹14210.75 is 17.0% 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.