See exponential growth in revenue and EBITDA
• The Indian machining industry is poised for growth as European suppliers boost outsourcing to low-cost countries.
• Revenue/EBITDA is set to grow by ~3x/~4x by FY28, implying a CAGR of 36%/50% over FY25–28.
• The management expects margin tailwinds from growth in the ASP and change in the export mix. It is targeting a margin expansion of more than 400bp in the medium term.
• We see PAT increasing to ~INR60cr by FY28 (57% CAGR over FY25–28), with a PAT margin of ~15%.
• RoIC is likely to decline in FY25 as the full potential of increased capex is not realised. OBSCP expects RoIC to increase to 22%/23% by FY27/FY28 from 20%/14% in FY24/FY25.
India’s machining industry is poised for growth
• Globally, the machining industry is pegged ~USD53bn and is expected to grow at 5.4% CAGR over 2023–29.
Automotive constitutes the biggest end user industry, accounting for ~85% of the total value.
• The Indian machining market is estimated at USD5.3bn (or ~10% of the global market). It is expected to clock 8% CAGR over 2023–29 as against a global growth of 5.4%.
• Exports from India gathered pace over the last two years (~20% CAGR over 2021–23). This growth rate is expected to continue as global suppliers are increasingly looking to cut costs.
• Both forging and machining are: i) energy intensive, and ii) have higher emissions and wastage. With an increase in emission regulations and energy prices, global suppliers are outsourcing to low-cost countries (refer Slide 33 for announced job cuts).
Incremental capacity to drive revenue growth
Adding new capacity of 60lk units over the next two years
• It has four plants, three in Pune and one in Chennai. A plant is coming up in Gujarat.
• Though machining capacity exists in all plants, is adding capacity of 25lk/35lk units at its Pune/Chennai plant to cater to growing demand.
• Investment casting (IC) is available only at the second unit in Pune as it is required for few components. IC is high energy and labor intensive, but capex requirement is much less.
• A further capacity addition is seen in 12–18 months.
• Not many details are available on its upcoming plant in Gujarat. We expect Start of operations in FY27.
Revenue to grow 3x by FY28
• Growth in capacity will drive revenue to ~INR400cr by FY29. However, it is still below the management’s target of INR500cr.
• It may need to add capacity to achieve its FY29 revenue guidance of INR500cr.
• There is strong scope of ASP development as sales in higher-priced segments like defence and marine grows.
• Revenue mix by segments: auto (65%), defence (20%), marine (~15%), and others (5%).
Valuation and view
See bull case of INR450 and sales of INR500cr
• We have arrived at our TP using the blended average of FY27 and FY28 earnings and a 20% discount to its three-year forward peer multiples.
• We used a one-year forward multiple and discounted it at WACC for three years to arrive at our target multiple.
• As OBSCP has no direct peer in the listed auto space, we have used Happy Forgings and Bharat Forge to arrive at our target multiple.
• We initiate coverage with a ‘BUY’ rating and a TP of INR360, an upside of 53% from its CMP.
• Our bull case of INR450 is predicated on the company achieving sales of INR500cr.
• Our base case is driven by the management’s guidance that its order book supports its capacity expansion plan. We did not consider a top-down approach in this report.
OBSC PERFECTION has potential for exponential revenue and PAT growth
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