Pitti Engineering: Strategic operation will support improving ROE and ROCE to 25.8% and 26.7%. Buy for target price of Rs 915 (40% upside)

IMPROVING PROFITABILITY ONE MOTOR AT A TIME!

Pitti Engineering Ltd. (PITTIENG), founded in 1983, is India’s largest and globally renowned manufacturer of electrical sheet laminations, motor cores, sub-assemblies, die-cast rotors, and machined components. The company specializes in manufacturing value-added motor/generator sub-assemblies with an expertise of ~40 years in the domain. The company’s key product lines include sheet metal, precision machining, and assemblies. The company’s products are sold across 5 continents through its 3 domestic state-of-the-art manufacturing plants.

Value-added products to yield higher realizations

PEL has strategically evolved its products to meet market demands, resulting in the company’s profitability improvement. These value-added products have also helped the company to enhance its competitive edge and attract more customers. In FY23, PEL’s EBITDA/Ton improved by 5% (3-year CAGR), thereby improving its profitability further by 51% (3-year CAGR). These value-added products have also helped the company to enhance its competitive edge and attract more customers. Revenue from export orders stood at Rs 371 Cr which improved by 25% YoY. Similarly, with increasing demand in the renewable energy segment in the international market, we believe the export market will significantly aid in PEL’s revenue growth and improve its profitability moving forward.

Capex-driven economy to support robust order book

In FY23, PITTI’s order book significantly improved by 149% YoY to Rs 823 Cr backed by a) a diversified product basket, and b) robust demand from the domestic market on account of economic growth and increasing enquiries from the international market. We expect the company’s order book to further improve given the increasing growth and demand from the Railways, Power Generation, and Industrial sectors for the company’s products. To cater to this demand, PEL has already carried a major Capex of Rs 467 Cr in a phased manner from FY21. This has increased PEL’s production capacity by ~56% in the last 3 years. Earlier, PEL used to supply products to 100 windmills a year whereas, with increasing demand in the renewable energy segment, PEL is currently supplying its products to 100 windmills per month. This supply is expected to further increase as many players have made India a hub for sourcing for its South Asian country’s needs.

Pitti Casting (PCPL) Merger and potential acquisition

PEL recently announced the merger of Pitti Castings Pvt. Ltd. – a group company engaged in the manufacturing of high-quality casting in grey iron, ductile iron, low carbon, and alloy steel grades. Post-merger, PCL’s revenue is expected to grow significantly on account of robust demand in the components business, leading to higher operating margins for the company. In FY23, PCPlL’s revenue stood at Rs 150 Cr, in which PEL contributed Rs 80 Cr. This merger will aid the company in ensuring a consistent supply of high-quality casting products and will have enhanced control over the supply and inventory management of raw materials. PEL is also looking into potential acquisitions to further increase its market share and sales volume by 20%.

Valuation & Recommendation

We initiate coverage on Pitti Engineering Ltd. (PEL) with a BUY recommendation. Our recommendation is supported by a) The company’s increasing capacity b) Its increasing share of value-added products, and c) Its expanding global footprints.

We expect the company’s revenue to grow at a CAGR of 13% to Rs 1,588 Cr by FY26 (factoring similar raw material price trend as of H1FY24 backed by volume CAGR of 16% by FY26E). On the operational front, its EBITDA is expected to grow at 13% CAGR to Rs 258 Cr by FY26E, led by an increase in value-added products, resulting in operating margin expansion (by 240bps to 16.2% by FY26). We believe these factors will cumulatively boost the company’s profitability at a CAGR of 38% by FY26E to Rs 154 Cr. A combined strategic operation will further support in improving the company’s ROE and ROCE to 25.8% and 26.7% respectively by FY26E.

We thus value the company at 19x on FY26 earnings to arrive at a Target Price of Rs 915/share, implying an upside of 40% from the current levels