New Export Approvals Will Expand High-Margin International Market Share

Key Takeaways

• Volume growth in India and Thailand demonstrates strong demand, with expansion efforts driving potential revenue and earnings growth.
  
• New export approvals and strategic operational changes position the company to capture higher-margin international markets and improve net margins.
  
• Intensifying competition and operational challenges in key markets and facilities could pressure Rajratan Global Wire's market share, margins, and profitability.

Catalysts

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

• The volume growth in India and Thailand, with India experiencing a 23% increase and Thailand a 32% volume growth in the first half, indicates strong demand and potential for revenue and earnings growth as the company capitalizes on increased market share.
  
• The Chennai plant's production ramp-up, which targets 14,000 tonnes per annum, is expected to reduce freight costs significantly, improving net margins once approvals from local customers streamline operations.
  
• New approvals for export to multinational tire companies in North America and Europe present an opportunity to expand revenue by capturing a higher-margin international market share with high-quality standards.
  
• The adoption of Total Productive Maintenance (TPM) in Chennai and Thailand, along with expected TPM certification at the Indore facility, is likely to enhance operational efficiencies and improve net margins.
  
• Government's restriction on imports from China provides a competitive advantage in the Indian market, potentially sustaining or improving EBITDA margins by reducing Chinese competition in the market.

Rajratan Global Wire Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rajratan Global Wire's revenue will grow by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 11.1% in 3 years time.
• Analysts expect earnings to reach ₹1.5 billion (and earnings per share of ₹29.7) by about February 2028, up from ₹638.5 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, down from 33.4x today. This future PE is greater than the current PE for the IN Metals and Mining industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.48%, as per the Simply Wall St company report.

Rajratan Global Wire Future Earnings Per Share Growth

Risks

• Increased competition from companies like Tata Steel, Aarti Steel, and Bansal Wire, which are expanding their production capacity, may exert pressure on Rajratan’s market share and revenues.
  
• The company's ability to achieve the production volume required to benefit from the PLI scheme is uncertain; failure to meet this target could negatively impact financial incentives and net margins.
  
• Export challenges in the North American and European markets, such as gaining necessary approvals and dealing with high freight costs, could delay revenue growth from these markets.
  
• The vulnerability of Rajratan's Thailand operations to competition from Chinese manufacturers, who aggressively price their products, could compress margins and affect profitability.
  
• The initial ramp-up of the Chennai facility, with associated higher fixed costs and logistical inefficiencies, weighs on operating margins, posing a risk to short-term profitability.

Valuation

• The analysts have a consensus price target of ₹615.5 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 ₹810.0, and the most bearish reporting a price target of just ₹439.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹13.5 billion, earnings will come to ₹1.5 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 ₹420.45, the analyst price target of ₹615.5 is 31.7% 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.