Buy Shaily Engineering Ltd for the Target Rs 4,074 by Motilal Oswal Financial Services Ltd
Robust outlook intact, led by healthcare segment Revenue/EBIDTA/PAT grew 14%/22%/17% YoY in 1QFY27
* Shaily Engineering’s (SHEP) 1QFY27 result was driven by its healthcare segment, while weakness persisted in the consumer segment.
* Healthcare revenue surged 84% YoY (in line), driven by increasing traction in GLP-1 pen volume following patent expiry in India and Canada.
* Consumer revenue slid 24% YoY (miss) due to continued weak consumer sentiment in the US and Europe. Industrial revenue grew 25% YoY.
* EBITDA margin expanded 190bp YoY to 29.6%, driven by greater revenue mix of higher-margin healthcare segment, despite losses in UK subsidiary.
* Domestic revenue surged 114% YoY with its mix rising to 58%. This was driven by expanding GLP-1 pen volume supply to domestic pharma customers after opening of generic drug market.
* Export revenue fell 7% YoY due to weakness in consumer segment and low revenue booking in the UK subsidiary (down 73% YoY).
Key highlights from the management commentary
* Healthcare: FY27 guidance of 36m pen has upside risk; Dr. Reddy’s volume intact; sold 9m pen devices in 1Q (50-60% GLP-1); appointed dedicated sales heads for the US and Europe to expand business; additional 25m pen capacity is expected by Sep’25 to take total to 75m+ pens; received approvals to supply Semaglutide pens in Canada and Brazil; two new projects signed for IP-led platforms.
* Consumer: Revenue slid due to continued weak consumer sentiment in the US and Europe; revenue is likely to be flat in FY27E.
* Consumer electronics: To manufacture critical products; started suppling in small batches; business confirmation from a new customer to supply five new products likely from 4Q; acquired land for a new plant in South India for ~INR1b capex; to disclose further update in 2Q.
* Semiconductor: Revenue is likely to accrue from 4Q; manufacturing specialized trays having volume requirement in millions.
* Consumer electronics and Semicon will be domestic-focused businesses.
* UK subsidiary is expected to come back strongly in next few quarters.
Valuation and view: Reiterate BUY
We cut FY27E earnings by 3% after a miss in 1Q earnings. However, we raise FY28E earnings by 8% owing to higher-than-earlier-expected growth and margins in healthcare. We now expect a CAGR of 33%/44%/48% in revenue/ EBITDA/PAT over FY26-28, with a 32%+ EBITDA margin in FY28, driven by volume commitments from key healthcare customers. Robust RoE/RoCE (~29%/39% in FY28E) and OCF (~INR8b over FY26-28) will support the expansion of GLP-1 pen capacity by ~5x. Thus, we are constructive on SHEP and reiterate our BUY rating with a revised TP of INR4,074, based on 50x FY28E EPS. Slower-than-expected growth and earnings could lead to a derating in the scrip’s valuation and pose a risk to our positive view.
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