Lighting & Consumer Durables Focus And Steel Pipes Expansion Will Improve Future Profitability

Key Takeaways

• Strategic innovation and international expansion drive revenue growth and enhance EBITDA margins in key segments.
  
• Cost rationalization and debt-free focus improve profitability, offering net margin and earnings stability.
  
• Falling HR Coil prices, stable export sales due to trade uncertainties, and low steel prices pose revenue and profitability risks for Surya Roshni.

Catalysts

Manufactures and markets steel pipes and tubes, lighting products, fans, home appliances, and PVC pipes in India.

• Surya Roshni's focus on innovation, premiumization, and technology in the Lighting & Consumer Durables segment is expected to drive double-digit revenue growth and achieve higher EBITDA margins. These strategies are likely to positively impact revenue and net margins.
  
• The expansion of capacity and implementation of Direct Forming Technology (DFT) in the Steel Pipes and Strips segment could lead to increased efficiency and production volumes, potentially boosting revenue and improving EBITDA per ton.
  
• The strategic cost rationalization, focusing on maintaining a debt-free status and cash surplus positions the company for increased profitability, which may enhance net margins and earnings stability.
  
• Expansion in key international markets, including the Middle East, Saudi Arabia, Europe, and Canada, coupled with a healthy order book worth ₹600 crores, is expected to provide significant growth opportunities, positively affecting future revenue streams.
  
• Investment in new plants and capacity expansion across facilities, such as the Gwalior facility's domestic wire business unit and the spiral plant, aims to increase production capabilities and support growth initiatives, potentially contributing to revenue growth and enhanced net margins.

Surya Roshni Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Surya Roshni's revenue will grow by 14.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 6.5% in 3 years time.
• Analysts expect earnings to reach ₹7.3 billion (and earnings per share of ₹33.71) by about February 2028, up from ₹3.2 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 13.8x on those 2028 earnings, down from 18.3x today. This future PE is lower than the current PE for the IN Metals and Mining industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.02%, as per the Simply Wall St company report.

Surya Roshni Future Earnings Per Share Growth

Risks

• The company's revenue faced a marginal decline of 4% in the quarter due to an 18% year-on-year decrease in HR Coil prices, which could further impact margins if such declines persist.
  
• There was a decline in revenue by 8% year-on-year in the Steel Pipes and Strips segment, primarily driven by falling HR Coil prices, highlighting potential revenue risk if the trend continues.
  
• Despite healthy demand, export sales remained unchanged year-on-year, with global trade uncertainties and U.S. tariff policies impacting potential double-digit growth, suggesting risk to future revenue and market expansion.
  
• EBITDA per ton for the Steel Pipes and Strips segment declined year-on-year, attributable to the absence of inventory gain, which could affect profitability if similar conditions impact future inventory assessments.
  
• Dependency on stable steel prices, which are currently at a five-year low, presents a risk if prices rise unexpectedly, potentially affecting cost environment predictions and future earnings.

Valuation

• The analysts have a consensus price target of ₹307.0 for Surya Roshni 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 ₹111.9 billion, earnings will come to ₹7.3 billion, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 14.0%.
  
• Given the current share price of ₹270.4, the analyst price target of ₹307.0 is 11.9% 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.