Hitachi Energy India Limited's (NSE:POWERINDIA) Shares Climb 26% But Its Business Is Yet to Catch Up

Hitachi Energy India Limited (NSE:POWERINDIA) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The annual gain comes to 184% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Hitachi Energy India's price-to-sales (or "P/S") ratio of 11.2x might make it look like a strong sell right now compared to other companies in the Electrical industry in India, where around half of the companies have P/S ratios below 3.6x and even P/S below 1.5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Hitachi Energy India

How Has Hitachi Energy India Performed Recently?

Recent revenue growth for Hitachi Energy India has been in line with the industry. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hitachi Energy India.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Hitachi Energy India would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 26% last year. The latest three year period has also seen an excellent 58% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 32% over the next year. Meanwhile, the rest of the industry is forecast to expand by 33%, which is not materially different.

In light of this, it's curious that Hitachi Energy India's P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Final Word

Shares in Hitachi Energy India have seen a strong upwards swing lately, which has really helped boost its P/S figure. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Analysts are forecasting Hitachi Energy India's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Hitachi Energy India with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Hitachi Energy India, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.