Axis Securities initiates coverage on smallcap stock with ‘buy’ rating, sees 40% upside; do you own?

Pitti Engineering Ltd Share Price: Shares of Pitti Engineering Limited (PEL) have soared more than 2000 per cent in the last three years, showing a strong uptrend over the company's increasing capacity and global footprint along with a robust order book. 

Domestic brokerage firm Axis Securities has initiated coverage on PEL with a ‘buy’ rating, setting a target price of ₹915. The brokerage sees a 40 per cent upside on the stock from the current levels with a previous closing price of ₹658.95.

‘’We initiate coverage on 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,'' said Axis Securities in its latest report.

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The brokerage expects the company’s revenue to grow at a compound annual growth rate (CAGR) of 13 per cent to ₹1,588 crore by FY26 (factoring similar raw material price trend as of H1FY24 backed by volume CAGR of 16 per cent by FY26E). 

On the operational front, PEL's earnings before interest, tax, depreciation, and amortization (EBITDA) is expected to grow at 13 per cent CAGR to ₹258 crore by FY26E, led by an increase in value-added products, resulting in operating margin expansion (by 240bps to 16.2 per cent by FY26). 

A combined strategic operation will further support in improving the company’s return on equity (ROE) and return on capital employed (ROCE) to 25.8 per cent and 26.7 per cent respectively by FY26E.

‘’We believe these factors will cumulatively boost the company’s profitability at a CAGR of 38 per cent by FY26E to ₹154 crore…We thus value the company at 19x on FY26 earnings to arrive at a target price of ₹915 per share, implying an upside of 40 per cent from the current levels,'' said Axis Securities. 

In the previous trading session, shares of PEL settled 1.21 per cent higher at ₹658.95 apiece on the BSE. PEL is a smallcap firm and commands a market capitalisation of ₹2,111.94 crore.

PEL: Peer Comparison

PEL has superior revenue growth momentum as compared to Indian peers with robust execution capabilities with sustainable growth outlooks going ahead. The company also delivered strong margin expansions with cost optimization initiative, strong volume growth and richer product mix. 

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‘’Historically, PEL has outperformed its domestic peers on operating margin front. We believe PEL will surpass growth in terms of profitability and higher CAGR earnings growth at 38 per cent from FY23E to FY26E,'' said the brokerage.

Key growth drivers favoring PEL

-Railways replacement demand: With PEL’s increasing market share in the export market and its wide range of value-added products, Axis Securities estimates huge potential in the North American market. Indian Railways under multiple projects like Train 18, Vande Bharat are spending on revamping the passenger train system. 

-Renewable energy sector: India is one of the fastest-growing economies and is finding alternatives through renewable energy sources to meet its surging energy needs. By FY30, the government plans to achieve a 500GW non-fossil fuel-based capacity through solar and wind power. 

-EV adoption: The Indian electric vehicle (EV) market is expected to grow at a CAGR of 49 per cent in the next 3-5 years. With the change in government norms for localised products, the brokerage expects a significant demand can be witnessed from the EV market. PEL’s expertise in the motor manufacturing segment will play an upper hand and aid in incremental growth for the company, according to Axis Securities.

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Key risks ahead for PEL

-Slowdown in capex activities: Any delay in the company’s capex activities will result in opportunity loss as currently, the economy is going through robust capex activities and is focussing on railway, power generation and infrastructure development. PEL can lose orders if it does not cater to the speeding industry demand.

-Volatility in raw material prices: Fluctuations in steel prices would impact margins as the company imports as well as locally sourced electro steel from three companies (Posco, JSW & China Steel)

-Geopolitical risks: Increase in Russian-NATO tensions, cyber attacks, US-China competition and other such tensions can disrupt global trade affecting demand and leading to volatility in inflation cycles. PEL’s 1/3rd of revenue is accounted for from the export market. Such tensions can negatively impact a company's order book and profitability.

-Fund Raise: Companies often opt for various financing options to support growth initiatives. Avenues like debt, equity and other financing instruments can be considered to explore capacity expansion in a strategic move of internal accruals prove insufficient.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.