Domestic brokerage house KRChoksey has initiated coverage on Pitti Engineering with a buy call and a target price of ₹754, indicating an upside potential of almost 61 percent from its current market price of ₹469.10, as on July 31.
The brokerage is optimistic about the company's prospects and expects it to capitalize on the upcoming capex cycle in the core sectors and emerging opportunities from sunrise sectors such as renewable energy and EV, resulting in a robust revenue CAGR of 24 percent from FY23- FY25E. Moreover, it anticipates an improvement in EBITDA margins and a positive trend in EBITDA/ton.
"The company's efforts towards debt reduction and its superior return ratios further add to its positive outlook. The company's manufacturing plants are equipped with advanced technology, which positions it well for growth. Additionally, its impressive client base spanning various industries and a wide range of product
offerings contribute to its potential for continued expansion. Based on these positive factors, we recommend a “BUY” rating for the company with a Target Price of ₹754, which corresponds to 18x the estimated EPS for FY25," it rationaled.
Stock Price Trend
The stock hit its 52-week high of ₹551.55, rising as much as 17.5 percent in intraday deals today, August 1. With this, the scrip has now surged around 115 percent from its 52-week low of ₹256,80, hit in March, earlier this year.
It has advanced almost 31 percent in the last 1 year and 45 percent in 2023 YTD, giving positive returns in 4 of the 7 months completed in this current calendar year.
It rallied 27.5 percent in July, extending gains for the 4th straight month after a 4.3 percent rise in June, 7.7 percent gain in May and a 21 percent jump in April. However, it shed 7.5 percent in March, 6.5 percent in Feb and 3 percent in January this year.
Meanwhile, in the long term, the stock has given multibagger returns, soaring 1,566 percent in 3 years.
Earnings
The firm has not yet reported its June-quarter earnings. However, in the March quarter (Q4FY23), it posted a 25 percent rise in its net profit at ₹25 crore but its revenue from operations declined 9 percent to ₹248 crore.
About the Firm
Pitti Engineering (PEL) is India's largest manufacturer of Electrical Sheet Metal products, founded in 1983. It operates fully automated manufacturing facilities in Telangana and Aurangabad and is divided into two primary business segments: Motors and generators, and components. The company boasts a diverse product portfolio and holds a leading position in assembling large alternators and motors in India. Some of its esteemed clients include GE, Siemens, and Wabtec.
Investment Rationale
Potential business opportunities: As per the brokerage, engineered products catering to user industries like diesel and electric locomotives, data centers, consumer durables and renewable energy formed a large portion of its residual order book. The emerging segments like power systems for data farms, propulsion systems for electric vehicles, various sub-assemblies for intercity passenger and freight movement, components for mass urban transit systems, and components and assemblies for renewable energy segments are starting to make sizeable contributions to the order book. Capital goods players, operating mostly on just-in-time inventories, are countering a fully depleted inventory across the supply value chain, it said.
Value addition products: Pitti Engineering has emerged as a prominent and respected player in India's electrical engineering sector, stated the brokerage. Notably, they hold the distinction of being the largest exporter of laminations in India. Over the years, Pitti has undergone significant growth and transformation, diversifying its product range for various industrial applications. This expansion has turned Pitti into a fully integrated manufacturer, capable of offering customized assemblies to meet its customers' specific requirements. By focusing on value-added products and assembled offerings, Pitti has achieved higher realizations, ensuring competitiveness in the market and effectively catering to its clients' evolving demands, noted the brokerage.
Healthy Order-Book: The brokerage pointed out that in the recent past, Pitti has experienced a significant increase in demand and inquiries. As a result, the current order book stands at ₹823 crore for FY23. This surge in orders can be attributed to the company's strong emphasis on the domestic market, capitalizing on positive economic growth. PEL is confident that the demand from the domestic market will continue to be robust and is expected to outpace the growth in the export market. As a result, the company anticipates that the domestic market's revenue share will increase to 70-75 percent compared to the current 66 percent. By focusing on the domestic market and leveraging favorable economic conditions, Pitti aims to enhance its revenue share and maintain a strong position in the industry. The company's proactive approach to meet increasing demand is expected to drive its growth and profitability in the coming periods, explained the brokerage.
Demand-driven by Railways, Power and Industrial Sectors: The brokerage informed that during the recent budget, the Railways has received an unprecedented capital outlay of ₹2.4 lakh crore. The company is also exploring new business prospects in the international market through the 'China plus One' supply chain strategy and new product development. With a focus the EV segment's motors, as well as windmill components, the Railways anticipates a combined revenue potential of approximately ₹100 crore per year over the next three years. Moreover, the government's emphasis on green energy projects currently contributing around 5 percent to the revenue, is expected to grow in the future. The power segment (16 percent of revenue) and Industrial Commercial segment (14 percent of revenue) are also projected to strengthen due to robust demand, it said.
Marquee clientele: As per the broekrage, PEL stands out by offering a unique combination of three capabilities within a single company: sheet metal, machining, and components manufacturing. This combination is a rarity, with only a few companies possessing such capabilities under one roof. The company's impressive clientele includes renowned names like Siemens, ABB, GE, Wabtec, Caterpillar, and BHEL, which speaks volumes about the exceptional quality of their products. Additionally, the entry barrier for new players is high, as it would take them 4-5 years to establish and deliver end products, further highlighting the company's strong competitive advantage.
Expansion Plans: In order to meet the impending demand, the company has undertaken the Capex expansion in a phased manner. The company had taken approval of ₹270 crore (June-20) and ₹197 crore (May-22). The company has spent INR 244 cr out of the first tranche towards capacity expansion at Aurangabad and the remaining ₹26 crore would be spent during the current financial year. While the second tranche of ₹197 crore (utilized by FY24) will be used towards reorganization of lamination facility from Hyderabad to Aurangabad.
