Fundamentally strong Engineering stock which is India’s largest and globally renowned manufacturer of electrical sheet laminations, motor cores, sub-assemblies, die-cast rotors, and machined components, gets a ‘Buy’ tag on it from Axis Direct, with an upside potential of 28 percent from its previous close price.
Pitti Engineering Limited
Pitti Engineering Limited is India’s largest and globally renowned manufacturer of electrical sheet laminations, motor cores, sub-assemblies, die-cast rotors, and machined components. Its key product lines include sheet metal, precision machining, and assemblies. The company’s products are sold across 5 continents through its 3 domestic state-of-the-art manufacturing plants
With a market capitalization of Rs. 2,301 Crores on December 8, 2023, the shares of Pitti Engineering Limited opened at Rs. 718 up 0.97 percent from its previous day’s close price of Rs. 711.10.
Axis Direct, one of the well-known Investment Banks, has given a ‘Buy’ tag to the company’s stock with a target price of Rs. 915 indicating a potential upside of 28 percent as compared to the closing stock price levels.
The Rationale behind providing such a recommendation pertains to various trigger points Comprising,
Value-added products to yield higher realizations
Pitti Engineering Limited (PEL) has strategically evolved its products to meet market demands, resulting in the company’s profitability improvement and it has also helped the company to enhance its competitive edge and attract more customers.
Revenue from export orders stood at Rs 371 Crores which improved by 25 percent YoY. Similarly, with increasing demand in the renewable energy segment in the international market, we believe the export market will significantly aid in PEL’s revenue growth and improve its profitability moving forward.
In FY23, PEL’s EBITDA/Ton improved by 5 percent (3-year CAGR), thereby improving its profitability further by 51 percent (3-year CAGR). These value-added products have also helped the company to enhance its competitive edge and attract more customers.
Capex-driven economy to support robust order book
In FY23, PITTI’s order book significantly improved by 149 percent YoY to Rs 823 Crores backed by a diversified product basket, and robust demand from the domestic market on account of economic growth and increasing inquiries from the international market.
It expects the company’s order book to further improve given the increasing growth and demand from the Railways, Power Generation, and Industrial sectors for the company’s products. To cater to this demand, PEL has already carried a major Capex of Rs 467 Crores in a phased manner from FY21. This has increased PEL’s production capacity by ~56 percent in the last 3 years.
Earlier, PEL used to supply products to 100 windmills a year whereas, with increasing demand in the renewable energy segment, PEL is currently supplying its products to 100 windmills per month. This supply is expected to further increase as many players have made India a hub for sourcing for its South Asian country’s needs.
Pitti Casting (PCPL) Merger and potential acquisition
PEL recently announced the merger of Pitti Castings Pvt. Ltd. a group company engaged in the manufacturing of high-quality casting in grey iron, ductile iron, low carbon, and alloy steel grades. Post-merger, PCL’s revenue is expected to grow significantly on account of robust demand in the components business, leading to higher operating margins for the company.
In FY23, PCPlL’s revenue stood at Rs 150 Crores, in which PEL contributed Rs 80 Cr. This merger will aid the company in ensuring a consistent supply of high-quality casting products and will have enhanced control over the supply and inventory management of raw materials. PEL is also looking into potential acquisitions to further increase its market share and sales volume by 20 percent.
Axis Direct expects the company’s revenue to grow at a CAGR of 13 percent to Rs. 1,588 Crores by FY26, factored by a similar raw material price trend as of H1FY24 backed by volume CAGR of 16 percent by FY26E. Its EBITDA is expected to grow at a CAGR of 13 percent to Rs 258 Crores by FY26E, led by an increase in value-added products, resulting in operating margin expansion.
These factors will cumulatively boost the company’s profitability at a CAGR of 38 percent by FY26E to Rs 154 Crores and a combined strategic operation will further support in improving the company’s ROE and ROCE to 25.8 percent and 26.7 percent respectively by FY26E.
The company’s revenue from operations grew 15.34 percent from Rs. 953.82 Crores in FY22 to Rs. 1,100.17 Crores in FY23, accompanied by increasing profits of Rs. 51.86 Crores to Rs. 58.83 Crores.
It has reported a return on equity (ROE) of 19.04 percent and a return on capital employed (ROCE) of 20.22 percent, it is making good returns on its equity and capital employed.
According to the latest shareholding data available for the September 2023 quarter, the company’s Promoters hold a 59.29 percent stake, Domestic Institutional Investors hold 5.52 percent and Foreign Institutional Investors hold 0.13 percent.
Written by: Bharath K.S
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