Chennai And Thailand Operations And Wire Ropes Will Create Opportunity

Key Takeaways

• Diversification into the wire ropes market and increased export growth are expected to enhance profitability and revenue growth.
  
• Strategic location and improved capacity utilization in Chennai should reduce costs and boost operational efficiency, positively affecting margins.
  
• Increasing competitive pressures and logistic inefficiencies could constrain Rajratan's growth and profitability despite market penetration efforts in new initiatives.

Catalysts

Engages in manufacturing and sale of tyre bead wires in India and Thailand.

• Increased capacity utilization in Chennai is expected to reduce costs and improve operational efficiency, positively impacting net margins.
  
• Entry into the wire ropes market, with a planned capacity of 10,000 tonnes, is expected to diversify revenue streams and improve earnings, as this product has higher profitability compared to current offerings.
  
• Export growth from Chennai and Thailand, particularly to Europe and the U.S., is anticipated to drive a 15% volume growth, which will likely increase overall revenue.
  
• Improvement in client base and market position in Thailand is expected to enhance profitability and stabilize earnings in the upcoming fiscal year.
  
• Reduction in freight costs from the Chennai facility, due to its strategic location, is likely to improve gross margins and contribute to better net earnings.

Rajratan Global Wire Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rajratan Global Wire's revenue will grow by 17.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 9.1% in 3 years time.
• Analysts expect earnings to reach ₹1.4 billion (and earnings per share of ₹26.85) by about May 2028, up from ₹588.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.0x on those 2028 earnings, down from 35.4x today. This future PE is greater than the current PE for the IN Metals and Mining industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.65%, as per the Simply Wall St company report.

Rajratan Global Wire Future Earnings Per Share Growth

Risks

• The Indian tire industry is projected to grow only at a modest rate of 5%-6%, potentially limiting Rajratan's significant revenue growth from its primary market.
  
• There are increasing competitive pressures in the bead wire market, with new capacities being added from major players like Tata, Aarti Steel, and Bansal Wire, which could squeeze margins and affect overall earnings.
  
• The company relies on successful execution and market penetration of its new wire rope initiative. Any delays or failures could result in underutilization of capacity and negatively impact returns on investment.
  
• The freight costs associated with selling materials to North India and from Chennai have previously caused operational losses. Failure to optimize logistics could continue to erode net margins.
  
• Rajratan’s Thai operations are subject to competitive pressures and potential tariff impacts. A continued decline in profitability or failure of expected growth in this region could adversely affect overall earnings.

Valuation

• The analysts have a consensus price target of ₹543.25 for Rajratan Global Wire 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 ₹714.0, and the most bearish reporting a price target of just ₹394.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹15.0 billion, earnings will come to ₹1.4 billion, and it would be trading on a PE ratio of 30.0x, assuming you use a discount rate of 14.7%.
• Given the current share price of ₹409.75, the analyst price target of ₹543.25 is 24.6% 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.