Top Conviction Ideas : Buy Pitti Engineering Ltd for Target Rs. 1,335 - Axis Securities Ltd
Recommendation Rationale
* Robust Volume Expansion Across Core Segments: PEL delivered a resilient performance with revenue and EBITDA rising 11% and 18% YoY, respectively, reflecting strong execution despite a challenging macro environment. Backed by healthy demand across key end-user industries, the company was able to deliver around 6% volume growth and expressed confidence in reaching the targeted volume growth of 10% in FY26. During the quarter, capacity utilisation stood at 90% for machined hours, 76% for sheet metal, and 77% for casting. PEL expects to see a ramp-up in capacity utilisation from Q4FY26, which shall further drive the volume growth.
* EBITDA Margins Improve Despite Supply-side Issues: The company continued to face challenges related to the supply of electrical steel and has started importing material from Japan and Korea. Despite this, PEL delivered 18% YoY EBITDA growth during the quarter, with an 87 bps improvement in margins. Gains were driven by better operating leverage from increasing volumes and ongoing cost optimisation measures.
* Eyes On Next Leg of Growth: As the current capacities are close to optimum utilisation, the company is planning to make a capital investment of Rs 150 Cr towards capacity expansion to meet the anticipated increase in demand. This capacity expansion is expected to be executed in stages, reaching peak levels by the end of FY27. PEL is also strategically working with customers to increase its contribution to the overall value chain. The management also mentioned that there is a major opportunity arising in the data centre space, and PEL is working on realigning the capacities to cater to the anticipated increase in demand. The management is also open to inorganic growth opportunities in the related sectors to drive the growth beyond FY28.
* Valuation & Recommendation: We value the stock at 22x its Sept’27E EPS with target price to Rs 1,335/share. We believe that the current valuations appear attractive and have a BUY rating on the stock.
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