Salzer Electronics: 2X revenue by FY27, 26% revenue & 26% PAT growth at a PE of 18
Shift towards renewables creating opportunities for Salzer. Promoters increasing stake thru a preferential allotment adding to the confidence in its ability to benefit from the renewables opportunity
1. Industrial Switchgears, Wires & Cables manufacturer
salzergroup.net | NSE : SALZERELEC
Largest manufacturer of Cam Operated Rotary Switches – Market leader with 25% share
Products
Business Verticals
2. FY17-23: Revenue growing YoY every year since FY23
PAT grown sequentially YoY since FY17, barring FY21
Over the last 10 years, we have given a 16%, 17% CAGR on sales, and in the five years 18%. Hopefully, we will continue to better that in the coming years.
CAGR (FY17-23):
Revenue = 17% growth
PAT = 13% growth
3. FY23: PAT up 62% and Revenue up 29% YoY
Net revenue was Rs.1013.1 crore as against 783.6 crore in FY22, a year-on-year growth of about 29%.
Growth driven by high demand products – Toroidal Transformers, Three phase Transformers, Wire Harness, Rotary Switches and Isolators – which comprised 65% of Switchgear division sales
The profit after tax was Rs.36.4 crores in FY23 as against 22.5 crore in FY22, a year-on-year growth of 62%. The PAT margin was at 3.6% in FY23 as against 2.9% in FY22, a year-on-year increase of 72 basis point.
4. A weak Q1-24: PAT up 6% and Revenue up 21% YoY
Revenue increased by 21% year-on-year to INR288.67 crores from INR237.19 in the corresponding previous period.
41% YoY growth in Industrial Switchgear & 12% growth in Wires & Cables
The EBITDA margin for the quarter increased by 33 basis points to 9% and the PAT grew by nearly 6% to INR10.17 crores in Q1 FY '24.
5. Business metrics: Targeting 18% ROCE by FY25
So, we are working to improve our ROCE to close to 18%. That's what our target here internally is.
And one of the reasons is the long working capital cycle. I think that is where the reason that the capital employed is higher. So, we as I have been telling, I think, we are working to reduce our inventory, bring down our receivables. So, these are the 2 major contributing factors for higher capital deployment.
So, if we get this done and also improve our EBITDA margins by at least 1 or 2 percentage points, then we will see our ROCE growing significantly higher.
6. Outlook: 26% revenue CAGR till FY27
i. Doubling in 4 years: 26% revenue CAGR till FY27
On doubling SALZERELEC: I'm confident that we will be able to do this definitely in 4 years. But if things work out well, yes, maybe we can do this one more year earlier.
ii. 20-25% revenue growth in FY24
Our projections for the year are limited to, I think, 20% to 25% growth rate.
iii. 26% PAT growth in FY24
FY24 PAT ==> 20% revenue growth in FY24 and 4% PAT margin
FY24 PAT = 1.2 X 1037.09 X 4% = Rs 49.8 cr Vs Rs 39.6 cr in FY23 = 26% growth
On the PAT level, we are confident of crossing the 4% PAT margins in this financial year.
iv. Industry tailwinds: Renewables driving growth
The global shift towards renewable energy, such as solar, wind, hydro has created new opportunities for electrical equipment manufacturers. Based on the domestic and export outlook, we are optimistic on our overall business performance and growth.
v. New manufacturing facility to manufacture high demand products
Set up utilising accruals a new manufacturing facility on a 30000 sq.ft rented building strategically located in Hosur, Tamil Nadu to manufacture high demand products like Wire Harnesses and Toroidal Transformers with an Initial investment cost of Rs. 15 Cr. This Unit has commenced its operations successfully since April 2023 and is on path of steady progress.
7. 26% revenue growth till FY27 at a PE of 18
8. So Wait and Watch
If I hold SALZERELEC then I have held a stock which has delivered revenue CAGR of 17% over the long term. There is no reason to quit when SALZERELEC has guided for 26% growth till FY27
There may be an opportunity for an upside as the management claims they are being conservative and refraining from giving a guidance for 30%+ bottom-line growth in FY24
I would say, we will see at least a 35% absolute number growth or 30% to 40%. But just being a little conservative, let’s see how the first two quarter goes, and then we can have a real projection for next year, because the markets are still I would say a little fluid, people are a little conservative, though the Indian market is growing well, but we don’t know how the global headwinds is going to turn out in the next few months.
The next few quarters need to be watched quite carefully. Expected PAT for FY24, based on a top-line guidance of 20% growth and 4% PAT margin is Rs 49.8 cr. Q1-24 PAT was Rs 10.2 cr i.e. the remaining Rs 39.6 cr (49.8-10.2) has to be delivered in the next 3 quarters at a tough asking run rate of Rs 13.2 cr which is 30% higher than Q1-24 PAT.
9. Or, join the ride
If I am looking to enter the stock then
SALZERELEC is guiding for 25%+ revenue CAGR till FY27. For FY24 top-line growth of 20-25% and PAT growth of 26% is being guided for. This outlook for a PE of 18 makes the valuations quite reasonable.
SALZERELEC are promoters optimistic about business prospects and have increase promoter holdings through a preferential issue
Post conversion of the warrants into equity, the Promoters shareholdings in your Company will stand increased by 6.50% at 38.84%
SALZERELEC has a book value of Rs 413 cr (as of Q4-23) and is available at a market cap of Rs 692 cr implying a price to book ratio of 1.55 which is a reasonable valuation for a company which has track record of delivering 17% growth over the long term.
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Disclaimer
It is an analysis of the company data and not a stock recommendation
My analysis can be completely wrong and can change the next minute based on changes in my understanding of the company
I look to own good companies at prices where there is a path to market beating returns over decades