Defense And Infrastructure Tailwinds Will Support A Stronger Long Term Outlook

Catalysts

About Goodluck India

Goodluck India is a steel engineering company with businesses across precision tubes, auto tubes, engineered structures, solar structures and a growing defense and aerospace subsidiary.

What are the underlying business or industry changes driving this perspective?

• Ramp up at Goodluck Defense and Aerospace, with shell capacity moving from 150,000 to 400,000 units per year and order visibility of around one year plus 2 years of letters of intent, points to a larger, higher EBITDA contribution from defense that could support consolidated margins and earnings.
• Government of India’s rising capital outlay for defense and focus on indigenization, including higher domestic procurement and artillery orders, aligns directly with the company’s artillery shell and aerospace forgings capabilities and may help sustain order inflows and revenue visibility.
• Large and multi year government allocations for infrastructure, high speed rail corridors and urban development, combined with the company’s execution on the Ahmedabad to Mumbai bullet train and high capacity utilization of 92%, position its engineering structures segment to support steady revenue and operating leverage.
• Growing demand for solar and energy transition projects, where the company supplies transmission tubes and solar structures and has already reached around ₹400 crores revenue with internal expectations of ₹600 crores to ₹700 crores, can increase the share of value added products and support blended EBITDA margins.
• Export oriented model with more than ₹1,000 crores of exports over the last 3 years, easing tariffs in key markets and interim trade agreements that improve access for industrial products can help support volumes and realizations in auto tubes and precision products, which may benefit revenue and EBITDA per tonne.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Goodluck India's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.6% today to 6.6% in 3 years time.
• Analysts expect earnings to reach ₹3.8 billion (and earnings per share of ₹32.93) by about August 2029, up from ₹2.0 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.1x on those 2029 earnings, up from 8.0x today. This future PE is greater than the current PE for the IN Metals and Mining industry at 19.5x.
• Analysts expect the number of shares outstanding to decline by 2.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.56%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A large part of the optimism rests on global demand for 155 mm artillery shells staying very strong for multiple years. If geopolitical tensions ease or defense budgets are reprioritized, order inflows for Goodluck Defense and Aerospace could slow, which would affect revenue and the planned 30% to 35% segment EBITDA margins.
• The defense and aerospace ramp up requires around ₹400 crores of CapEx funded by roughly 60% equity and 40% debt. Any delay in approvals, production scale up or export orders would leave the company with higher capital employed and interest costs without matching cash flows, putting pressure on earnings and returns.
• Management is targeting a move from around 56% to 60% value added mix to 60% to 65%. If competition in auto tubes, infrastructure and solar structures keeps pricing tight or customers resist higher value product pricing, the expected improvement in blended EBITDA per tonne and net margins may not come through.
• The export led model, including reliance on eased U.S. tariffs and new India U.S. trade agreements, could be vulnerable if trade policies change again or if demand in key overseas markets softens. This would impact export volumes, realizations and consolidated revenue.
• Capacity utilization in hydraulic tubes is only 40% to 45% today and depends on better export conditions to move towards 60% to 65%. If demand recovery is weaker than anticipated, the company may carry underutilized capacity alongside higher depreciation from recent CapEx, which would weigh on operating leverage and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹562.66 for Goodluck India based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be ₹58.2 billion, earnings will come to ₹3.8 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 15.6%.
• Given the current share price of ₹490.75, the analyst price target of ₹562.66 is 12.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.