Management targets 4200 cr revenue by FY25 and I assume the co would grow 15% in FY26, taking the revenues to ~4800 cr.
In Q3 FY22, the management expressed their intent to become longterm debt free in 3 years, i.e. by FY25 and and the debt at the time was ~480 cr. The debt in fact to increased to 577 cr by end of FY22 and stayed same at 586 cr in Fy23. So, the execution in this direction is not good. However the co issued 12.5 lak warrants and 22.5 lakh equity shares in FY23 at 450 per share (total amount around 157 cr, but AR mentions equity infusion of 77cr (25% of warrant price and full price of equity shares should be higher than 77cr).
The co today issued 5lakh warrants to promoter and 11 lakh equity shares to non-promoters at 600 rs per share. Total amount would be 96 crs.
The amount raised from these warrant and equity infusion would help bring down the debt partially and also would fund growth.
The management indicated the EBIDTA margins to be in the range of 10-10.5% (by FY26) as the product mix improves toward more value addition (currently ~8%).
From this EBIDTA expansion, operating leverage and lower interest cost (as % of revenue) may lead to Net Profit margin of 5% or more (2.9% for FY23 and 3.4% for Q1Fy24), as per my esitmates
So, the Profit would be 4800*5% = 240 cr, where as the current Market cap + Debt = 1694 + 586 cr = 2300 cr. add 171 cr to this to account for equity shares to be issuesd.
So, EV is ~2470 cr
So, the co trades at ~10x EV/Profit in FY26. So, I expect the share price to perform well in near futures and double in next 2.5 years (considering 20x EV/profit in FY26).
Downside risks:
- Inability to scale up the revenues and product mix not changing in favor of VAP. Change in Govt budget or change of ruling party
- More equity infusion that’d dilute the shareholding
- slowdown to export markets for VAP (chances of domestic slowdown are relatively lower)
- Failing to bring down the debt
- contraction in valuation multiples
Possible Upside:
- Beating the revenue targets as the India Infra theme plays out
- NPM higher than 5% ( I believe there’s good probability) as a result if ooerating leverage, lower interest cost and higher VAP mix (higher EBIDTA margin)
- Co could be valued higher, as the return ratio improves with consistent growth (co being in infra theme is added advantage)
- More orders in Forging business from defense, Aerospace or High speed railway bridges etc.
as
Recent fund raised at 600 rs per share and earlier one at 450 rs per share, would act Support or would give comfort to add in correction
Overall a decent opportunity for medium term (2.5 - 3 years timeframe), with equal upside and downside risks and a way to play the Indian Manufacturing and Infra theme
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