Commissioning Raebareli Plant Will Increase Future Production Capacity By 30%

Key Takeaways

• Pennar Industries is focusing on high-margin businesses, which is expected to enhance revenue and improve net margins.
  
• Expansion efforts and strategic reinvestment are anticipated to drive sustained growth and bolster earnings.
  
• Strategic exits and delays in operations create short-term revenue fluctuations and uncertainty about future growth and profitability.

Catalysts

Operates as an engineering company in India and internationally.

• Pennar Industries is exiting low-margin businesses and focusing on high-margin segments such as pre-engineered buildings, hydraulics, process equipment, engineering services, and tubes, which will enhance revenue and improve net margins.
  
• Commissioning of the Raebareli plant is expected to increase production capacity by 25-30%, further driving revenue growth and operational leverage, which should positively impact net margins.
  
• Strong order book growth, particularly in the U.S. markets and pre-engineered buildings in India, suggests a robust pipeline for future revenue, expected to bolster earnings.
  
• Potential new plant expansions in PEB (Pre-Engineered Buildings) in India and the U.S. are anticipated to support continued growth in revenue and improve the bottom line over the next few years.
  
• Strategic capital reinvestment from the liquidation of non-core businesses is planned to fuel growth in focus segments, likely resulting in improved return on capital and earnings growth.

Pennar Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pennar Industries's revenue will grow by 12.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 5.3% in 3 years time.
• Analysts expect earnings to reach ₹2.3 billion (and earnings per share of ₹15.19) by about February 2028, up from ₹1.1 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 20.8x on those 2028 earnings, up from 18.1x today. This future PE is lower than the current PE for the IN Metals and Mining industry at 21.0x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.14%, as per the Simply Wall St company report.

Pennar Industries Future Earnings Per Share Growth

Risks

• Delays in commissioning the Raebareli plant and converting the U.S. order book to revenue due to the U.S. election could contribute to short-term uncertainty about revenue growth.
  
• An 8% decline in total income in Q2 compared to the previous period indicates potential volatility in revenue and reliance on growth in newer high-margin segments, which may not offset declines immediately.
  
• The working capital days increased to 77 days primarily due to increased inventory holding. This could pressure cash flows if not reduced as projected, affecting net margins.
  
• The exit from low-margin businesses results in a reduction of overall revenue, indicating a transition that might initially impact revenue and potentially create disruptions in profitability and net margins.
  
• The ongoing strategic exits from several business units like water treatment, chemicals, and solar could lead to short-term revenue fluctuations and require careful management to avoid affecting earnings stability.

Valuation

• The analysts have a consensus price target of ₹228.0 for Pennar Industries 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 ₹43.3 billion, earnings will come to ₹2.3 billion, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 16.1%.
  
• Given the current share price of ₹143.9, the analyst price target of ₹228.0 is 36.9% 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.