My rationale on Pitti Engineering (3% allocation, 34% profit)
My first buy in Pitti was in July 2023 at INR445. My last transaction (buy) was in August at INR520. My average cost is INR475.
Pitti has come on my radar many a times here https://twitter.com/drprashantmish6/status/1417516673704284161 and here: https://twitter.com/sahil_vi/status/1481641274205560834 . However, I bit the bullet just couple of months back.
My decisions was mainly driven by barriers of entry:
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Pitti is uniquely positioned company with almost everything under one roof: Management highlights that they are the only one in India with presence in sheet metal, fabrication, tooling and machining, shaft manufacturing and assembly. This has allowed them to transition their business to garner larger chunk in the value chain. Earlier company was mainly oriented towards commoditized loose sheet metal sales and customer at their end would laminate and assemble their motors/machines. However, now Pitti manufactures/casts and assemble various parts of motors (shaft, stator and rotors) along with their lamination now integrated with these components and making the product almost ready to use. This accounted for ~75% of revenues in Q1 FY24 and remaining was loose metal sheet sales.
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Time to market: a single product takes about 18-24 months for vendor registration, for a single product it takes 18 months for approval, and some pilot time and final commercial production. So all in all it shall take 3 to 5 years for any new player to reach market
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Very high number of SKUs: to take Pitti head-on any new competitor needs to have 5000+ SKUs on day one
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Competitive with China its products have indirectly went into China as well. In their concall they mention some of their products are 40-45% cheaper than China.
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Long relationships for its customers: company has one to two decades of relationship with global giants like ABB, GE, Siemens, Cummins etc.
Note: Above points are taken/summarised from valuepickr thread (Pitti Engineering Limited: Is it on an inflection point?), Sahil’s and Dr. Prashant’s threads.
In addition to above, Pitti gives exposure to high growth areas like railways, data centers, 5G and EV.
Source: Company presentation, Q1 FY24
Large market size of 5 lakh tons provides a long runway for growth. Pitti has only ~10% market share. Most of the market is un-organised.
Lastly valuations (PE<30) were not as crazy as some of the capital goods, EV and railway companies recently have shot upto.
Looking ahead: company has guided to do ~1800 crores of revenues by FY25/26. So revenue shall increase by 70-80% cumulatively by FY25. While company has also guided for improvement in EBTIDA per ton by 4-5%. Hence, profit growth is likely to exceed 100% cumulatively by FY25/26.
Triggers for margin improvements: scale benefits, automation of factories (already in progress), and operating leverage.
Risks: Portion of revenue is cyclical and debt on the balance sheet.
Disclaimer: I am not a financial advisor and nor a SEBI registered Analyst. The content shared here is only for learning purpose. All the names mentioned here are for example and learning purpose. I may buy more, exit or partly sell the stock/bonds without any prior intimation.