Shaily Engineering
Leading exporter of high precision products for marquee brands
We initiate coverage on Shaily Engineering (SHEP IN) with a BUY rating and a target price of Rs 720 (42% upside potential), based on 30x FY26E P/E. SHEP is India’s leading exporter of high-precision engineered plastic products and components, with ~4 decades of experience. Its wide customer base (long-standing relationship with a Swedish home furnishing major, Unilever, Gillette, P&G, Sanofi, GE, Garrett) is spread across the healthcare, consumer, personal care, appliances, automotive and lighting industries. On strong order book and guidance received from key customers, we expect SHEP to report robust 19%/29%/46% CAGR in revenue/ EBITDA/PAT over FY23-26E (FY18-23: 14%/12%/8%), likely aided by sharp recovery in the healthcare segment, additional revenues from new verticals (steel furniture, drug discovery IP-led platform for GLP-1) and uptick in EBITDA margin (19%+, given its focus on improving capacity utilisation, value-added products and increasing the healthcare revenue mix). With no major capex planned (~Rs 2bn in last 2 years; till it achieves 75% CU from ~40% in 9MFY24) and prudent working capital management (90-day cycle), we expect RoCE to double to 20%+ in FY26E (FY23: ~11%) to generate a cumulative FCF of ~Rs 1.8bn over FY25E-FY26E (would be used to pare debt by ~Rs 400mn annually). We estimate healthy OCF/EBITDA of ~60% and FCF/PAT of ~100% over the next 2-years.
Nearly 4-decade experience in manufacturing high precision products in niche segments for marquee global brands: Established in 1987, SHEP has diversified its business across various industries such as healthcare, consumer, personal care, appliances, automotive and lighting sectors catering to demand from global industry leaders (led by long-standing relationship with a Swedish home furnishing major, Unilever, Gillette, P&G, Sanofi, GE, Garrett to name a few). Its foray into Steel Furniture business helped to diversify concentration beyond plastics and also cemented relationship with its largest customer. Entry into IP-led insulin pens position SHEP among few global players specialising in such complex products.
Consumer (largest) and healthcare (fastest) the growing segments: As per CARE Ratings, the consumer segment (home furnishing, personal care, steel furniture and toys) is estimated to have recorded ~85% of total revenue in FY23. Healthcare (~8% of revenue mix) is expected to witness strong growth on the back of a robust order book of insulin pens. SHEP has collaborated with large multinationals in the design and manufacture of medical devices considered integral to the launch of select GLP-1 block buster drugs (Semaglutide current market of ~200mn pens pa is estimated to be 500mn pens by 2030). SHEP’s ability to develop IP & own pen injector platforms is expected to enhance the brand of the company as a research-led solutions provider. It currently has 5 pen injector platforms for various molecules and are working towards developing an auto injector. A ~Rs 1.5bn capex done in the healthcare division in last 2 years provides ~3x revenue potential in the next 3-5 years.
Higher capacity utilisation, greater revenue mix of healthcare and VAP to drive margins, return ratios and FCFs: SHEP’s focus on building capacities ahead of demand across market cycles has helped it in gaining customer’s confidence of assured product supply. Large capex (~Rs 2bn in last 2 years) led to lower capacity utilisation and impacted margins of SHEP. With no major planned capex (till CU reach 75% from ~40% in 9MFY24), we expect RoCE to cross 20% in FY26 (FY23: ~11%) and generate ~Rs 1.8bn FCFs over FY25-FY26. Overall, we expect SHEP to report a strong 19%/29%/46% CAGR in revenue/EBITDA/PAT over FY23-26E (FY18-23: 14%/12%/8%).
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