LIC MF-Backed Stock Gets Buy Call From Brokerage For 40% Potential Upside

During Friday's closing session, Pitti Engineering, a small-cap company, achieved a market worth of Rs 2,111.94 Cr. India's largest and most reputable producer of electrical steel laminations, motor cores, sub-assemblies, die-cast rotors, and press tools is Pitti Engineering Limited (formerly Pitti Laminations Limited).

The brokerage company Axis Securities issued a buy call on the stock with a target price of Rs 915, implying a possible upside of 40% from its present market price. As a result, the shares of Pitti Engineering finished on the BSE on Friday with an upside gap of 1.21% at Rs 658.95 apiece.

Reasons To Buy The Shares of Pitti Engineering

According to the research analysts of Axis Securities, here are the 3 reasons considering which investors can buy the stock.

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%.

Pitti Engineering Share Price Target

"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)," said Axis Securities in a note.

"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," the brokerage further stated in a note.

Pitti Engineering Shareholding Pattern

During Q2FY24, the company reported promoters' shareholding of 59.29%, FIIs stake of 0.13%, DIIs stake of 5.51%, and public stake of 35.07%. As per the shareholding pattern of Pitti Engineering for the July to September 2023 quarter, LIC mutual fund held fully paid up equity shares of 7,61,066 or 2.37% stake in the company.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.