Re-launching Favre Leuba And Expanding High-End Offerings Will Boost Future Prospects

Key Takeaways

• KDDL's expansion in higher-end watch components and precision engineering could boost revenue and long-term growth.
  
• New divisions in bracelets and packaging, alongside strategic brand relaunches, are expected to enhance revenue and net margins.
  
• Supply chain disruptions, currency fluctuations, and declining luxury spending are challenging KDDL's profitability and revenue in its watch components and new business segments.

Catalysts

Engages in the manufacturing and sale of watch dials and hands, and precision engineering components in India and internationally.

• KDDL is expecting a gradual recovery in demand for high-end products in the next fiscal year, especially as they move towards the higher-end market segment in watch components. This could positively impact future revenue.
  
• The company's new bracelet division, which commenced commercial production, has shown an encouraging response with significant export demand expected. This division could offset challenges in the watch dials and hands segment and enhance overall revenue growth.
  
• The expansion of Eigen, the precision engineering business, with a strong export demand and a new production facility planned, is expected to support long-term growth. This could significantly boost revenue and earnings potential as the division grows its customer portfolio and geographical reach.
  
• The new packaging unit geared toward high-demand sectors like watch and jewelry has begun production, which could drive additional revenue and earnings as capacity utilization increases.
  
• The relaunch of the Favre Leuba brand with high-quality Swiss watches and strategic international distribution should drive brand recognition and revenue growth, potentially enhancing KDDL's net margins with a premium product offering.

KDDL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KDDL's revenue will grow by 20.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 7.7% in 3 years time.
• Analysts expect earnings to reach ₹2.0 billion (and earnings per share of ₹138.93) by about February 2028, up from ₹932.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.3x on those 2028 earnings, up from 30.8x today. This future PE is greater than the current PE for the IN Luxury industry at 27.6x.
• Analysts expect the number of shares outstanding to decline by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.52%, as per the Simply Wall St company report.

KDDL Future Earnings Per Share Growth

Risks

• The luxury goods sector, which includes premium watch brands, has seen a decline in consumer spending in major markets such as China, Hong Kong, and Europe, potentially affecting future revenue and profitability for KDDL's watch components business.
  
• Inventory corrections and subdued endpoint sales have resulted in a continuous fall in Swiss exports, impacting the flow of fresh orders for KDDL, which could negatively affect future revenue and earnings.
  
• Supply chain disruptions, material shortages, and rising costs of materials such as steel and precious metals are putting pressure on margins in the watch component sector, risking lower net margins.
  
• Currency exchange rate fluctuations have increased component costs for buyers in markets where currencies have depreciated, posing a risk to KDDL's revenue from international sales.
  
• Although new business segments like the bracelet division are ramping up, they may take time to offset performance challenges in the existing watch dials and hands segments, leading to potential near-term revenue and profit volatility.

Valuation

• The analysts have a consensus price target of ₹3435.0 for KDDL 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 ₹25.7 billion, earnings will come to ₹2.0 billion, and it would be trading on a PE ratio of 31.3x, assuming you use a discount rate of 14.5%.
  
• Given the current share price of ₹2335.8, the analyst price target of ₹3435.0 is 32.0% 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.