Capacity Expansion And Export Resumption Will Drive Future Success

Key Takeaways

• Growth in FMEG and strategic product launches are expected to drive significant revenue increases and achieve breakeven by early FY '26.
  
• Expansion in high-margin products and distribution networks will enhance revenue and net margins, supported by increased capacity and export growth.
  
• Volatility in copper prices, overcapacity risk, and geopolitical uncertainties present challenges, while wire demand drops and the FMEG segment struggles to break even.

Catalysts

Manufactures and sells wires and cables, and fast-moving electrical goods (FMEG) in India and internationally.

• R R Kabel anticipates significant growth in its FMEG segment, particularly through strong volume growth in fans and new product introductions, which is expected to drive revenue and contribute to achieving breakeven by early FY '26.
  
• The company is focused on increasing its revenue contribution from high-margin products and expanding its distribution network, which is likely to enhance both revenue and net margins.
  
• R R Kabel plans to undertake a CapEx of ₹1,200 crores over the next three years to expand capacity, specifically in its cable segment, potentially boosting revenue by ₹4,000 to 4,500 crores annually.
  
• The resumption of export growth backed by new certifications and logistical improvements indicates potential for increased export revenue and higher margins due to enhanced product mix and global market reach.
  
• The company is working towards achieving double-digit EBITDA margins through strategic initiatives to improve operational efficiencies, which is expected to significantly impact earnings in the coming years.

R R Kabel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming R R Kabel's revenue will grow by 16.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.7% today to 5.8% in 3 years time.
• Analysts expect earnings to reach ₹6.6 billion (and earnings per share of ₹58.33) by about February 2028, up from ₹2.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹4.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.3x on those 2028 earnings, down from 50.1x today. This future PE is greater than the current PE for the IN Electrical industry at 36.5x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.97%, as per the Simply Wall St company report.

R R Kabel Future Earnings Per Share Growth

Risks

• Volatility in copper prices, a key raw material, has negatively impacted margins in the past and could continue to pose a risk to revenue and profitability stability.
  
• The company is highly dependent on wire products, where demand has been challenging, reflected by a decline in domestic and export volumes for wires, impacting revenue growth.
  
• There is a potential risk of overcapacity in the cable segment due to aggressive capacity expansion plans not only by R R Kabel but also by industry peers, which could lead to price competition and affect net margins.
  
• The FMEG segment, despite growth, is yet to achieve breakeven, and continued losses or underperformance in this segment could impact overall earnings and margin improvement goals.
  
• Significant export reliance, particularly on markets like Europe, exposes the company to geopolitical uncertainties and economic slowdowns in those regions, which could disrupt revenue from exports.

Valuation

• The analysts have a consensus price target of ₹1615.0 for R R Kabel 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 ₹1950.0, and the most bearish reporting a price target of just ₹1435.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹113.7 billion, earnings will come to ₹6.6 billion, and it would be trading on a PE ratio of 42.3x, assuming you use a discount rate of 15.0%.
  
• Given the current share price of ₹1156.45, the analyst price target of ₹1615.0 is 28.4% 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.