Pitti Engineering stock soared over 2000% in last three years; is there more upside left?

Global brokerage firm Phillip Capital has initiated coverage on Pitti Engineering (PEL) with a 'buy' rating, setting a target price of ₹940 apiece. This target price suggests a potential upside of nearly 38% from the stock's previous closing price of ₹684.35 apiece. 

Notably, the shares, over the last one-year, more than doubled investors' wealth, delivering a return of 135%, and skyrocketed 2018% in just three years.

Pitti Engineering is one of the leading manufacturers and exporters of electrical laminations from India and one of the leading suppliers to all motor manufacturers domestically. It also specialises in the manufacture of value-added motor/generator sub-assemblies and precision machined components for diverse sectors.

The brokerage lists the following key reasons for its bullish outlook:

Diversified product portfolio with more focus on value addition

The company has diversified its product portfolio with a strong focus on value addition. According to Phillip Capital, Pitti Engineering has moved upstream—from loose laminations to assemblies, to larger sub-assemblies, and now to components.

This transformation, according to the brokerage, required raising in-house skills and developing new capabilities across sheet metal, machining, and assembly. In the process, PEL transformed from being a plain laminations manufacturer to becoming an integrated engineering solutions provider.

The brokerage notes that a significant portion of the company's volumes are now concentrated on assembly and value-added products, where margins are typically much higher than those for loose laminations, and it said the company is targeting to garner more than 80% of revenue from these higher-margin products, which will also help it to bump up its EBITDA per tonne.

Evolved as a domestic player by de-risking exports

The company had a dominant share of exports in total revenues historically, but over a period, its product range and long-standing relationships with major clients helped it to grow its domestic business while de-risking exports.

The brokerage notes that the company's export revenue share has dropped to 33% in FY23 from 55% in FY16. It further adds that the company remains among the leading companies in the exports of electrical laminations, and its focus is on value-addition and more trusted customers.

The company expects domestic revenue to increase to 75% in the coming years. For FY24, its target for exports’ share is 28%, translating to a revenue of ₹4.0–4.5 billion, said Phillip Capital. 

Diversified industry mix helped in new customer acquisition 

The brokerage points out that the company was earlier focused on just making steel lamination on motors and it has now moved up in the value chain, due to which it has started adding new customers and industries. In the last five years, the brokerage said the company added 48 new customers.

The waiting period to become ‘on-boarded’ by new customers is around 1.0–1.5 years. This is because the products are complex and need to be customised, which results in high customer stickiness and high entry barriers for PEL’s competitors, the brokerage noted. 

Capacity expansion to cater to strong industry tailwinds

Capacity expansion for increasing revenue-earning potential and profitability PEL’s investment in capacity expansion will help increase its offerings and reach customers quicker. The brokerage said the company has proposed a capacity expansion of sheet metal to 72,000 tonnes (current 50,200 tonnes) and machining to 648,000 hours (current 460,800), which is to be operational by Q1 FY25, and the brokerage expects this expansion will strengthen the company's revenue-earning potential going forward.

In addition, debottlenecking and automation exercises at Hyderabad will increase profitability levels. PEL has already set up its own facility at Aurangabad, Maharashtra, and since Maharashtra accounts for 60% of its domestic business, this move will help PEL to reach customers faster, easily source raw materials, and significantly reduce its logistics and operational costs, the brokerage highlighted. 

Key tailwinds for PEL’s next-level growth

Pitti Engineering is the tier-1 supplier to Wabtec for machine components, which go into railway locomotives. 

The brokerage stated that the company is at the approval stage to supply this component directly to the railways. At present, directly/indirectly, this business generates a revenue of ₹800 million, which PEL expects to ramp up to ₹2.0–2.5 billion by FY25.

Further the company is now looking for opportunities in Europe (Spain), especially for marine and wind power/renewable energy, with potential revenue of about ₹1.5 billion starting in H2FY25. 

PEL has signed a Letter of Intent (LOI) for supply in the two-wheeler electric vehicle (EV) manufacturing sector, offering the potential for an annual revenue of ₹1.5 billion, as per the brokerage. 

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.