Current market environment remains conducive for the business of Pitti Engineering Ltd. Buy for target price of ₹1180 (37% upside): Axis Securities

Company Update post Plant Visit and Management Meeting Changes in Estimates Post-Update

Recommendation Rationale post Plant Visit

 Focus on Capacity Utilization: During the plant visit, we noted that the operations at the plant are in full swing and the company is undertaking initiatives to monitor and improve the operating efficiency of the machines. The management also mentioned that the lamination operations will be shifted to its Aurangabad facility, aimed at making optimum utilization of the facilities and logistics. PEL is expected to add machining capacity in the space vacated after the relocation of lamination operations. This capacity addition will be funded through internal accruals as well as leasing the equipment as right-of-use assets – having minimal impact on the balance sheet and depreciation expenses. The management does not expect to incur any spike in Capex for this expansion.

 Internal Ramp-up Complemented by Inorganic Growth: We also discussed PEL’s plans for future growth. The management mentioned that the company aims to achieve a 25% market share over the next five years. While its focus is on efficiency improvements and capacity additions, PEL is actively seeking opportunities to acquire businesses that complement its current offerings. PEL has already announced the acquisition of Bagadia Chaitra Inds Pvt. Ltd. (BCIPL), expanding its footprint in South India. During the current quarter, PEL is expected to complete the previously announced merger of Pitti Castings Pvt. Ltd. (PCL), a group company engaged in the manufacturing of high-quality castings in grey iron, ductile iron, low carbon, and alloy steel grades. Post-merger, PCL’s revenue is expected to grow significantly due to robust demand in the components business, leading to higher operating margins for the company.

 Improving Product Mix: The company is focusing on increasing the share of exports and value-added products, which are high-margin offerings. The management mentioned that offering value-added products is a win-win situation for PEL and its customers as it allows the company to increase the realizations while customers can reduce dependence on multiple suppliers. This strategy coupled with economies of scale achieved through higher utilizations is likely to improve the PELs margin profile going ahead.

Sector Outlook: Positive

Company Outlook & Guidance: Ongoing merger, focus on increasing share of value-added products, and increasing demand in the international business are likely to aid the company’s efforts to increase its market share. The company aims to increase its market share to around 25% in the next five years, which if achieved will lead to 3x volume growth. While, value-added products and exports are high-margin products, rising volumes and capacity utilization are likely to improve operating leverage (as fixed costs remain broadly the same) driving margins higher.

Current Valuation: 25x FY26EPS (Unchanged from 25x FY26EPS)

Current TP: Rs 1,180/share (Earlier TP: 1,145/share)

Recommendation: We maintain our BUY recommendation on the stock.

Outlook

We have updated our projections to reflect the impact of the PCL merger, which is expected to be revenue and margin accretive but will dilute equity marginally. Accordingly, we model Revenue/Operating Profit/PAT CAGR of 32%/31%/35% over FY24/26E, taking into account the potential impact of the BCIPL acquisition as well as the PCL merger. The revenue and operating profit projections also factor in the anticipated increase in value-added products and exports, resulting in operating margin expansion. We have marginally increased finance costs to reflect the impact of increased borrowings post the BCIPL merger.

Valuation & Recommendation

We maintain our BUY rating on the stock with a revised TP at Rs 1,180/share, implying an upside of 37% from the CMP. We believe the current market environment remains conducive for the business and the dilution of equity (around 35 Lc shares to be added) is unlikely to impact the valuation significantly. Accordingly, we continue to value the stock at 25x on its FY26 EPS. We believe our recommendation is supported by a) PEL’s robust Capex and capacity addition directly resulting in strong improvement in the company’s order book, b) Increasing revenue contribution from value added products (components), c) Upcoming merger with Pitti Castings and acquisition of BCIPL supporting the earnings growth.

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