Motilal Oswal Initiates Coverage on Unimech Aerospace with Buy Rating as Stock Surges 40% YTD

Motilal Oswal Initiates Coverage on Unimech Aerospace with Buy Rating as Stock Surges 40% YTD​

Motilal Oswal has initiated coverage on Unimech Aerospace, assigning a "Buy" rating to the company. The brokerage firm has set a target price of Rs 1,530, which implies a significant upside of 27% from current market levels.

This positive outlook comes as the stock has already witnessed a substantial rally, gaining 40% on a year-to-date basis. Unimech serves as a critical supplier of specialized aero engine tools for major players including LEAP, Pratt & Whitney, and Rolls Royce, alongside airframe tools for Airbus and Boeing.

Strategic Positioning and Market Tailwinds​

The bullish stance from Motilal Oswal is anchored in the company's ability to offer competitive pricing while benefiting from favorable tailwinds in new engine programs. The brokerage notes that a shift in maintenance, repair, and overhaul (MRO) demand toward Asia presents a strong growth trajectory for the firm.

Currently, the aerospace segment contributes 80% of the company's FY26 total revenue. Analysts expect this vertical to remain a primary driver of growth over the medium term as Unimech leverages its established presence among 18 customers in this space.

Expansion into High-Mix Precision Engineering​

A core component of Unimech’s growth strategy involves penetration into high-mix and low-volume precision engineering businesses. This segment currently serves 17 customers and accounted for 20% of FY26 revenue, but it is expected to grow at a faster pace due to its vast total addressable market.

Furthermore, the company is pursuing inorganic expansion through strategic acquisitions and joint ventures. Following the acquisition of Hobel Bellows and a joint venture with Kanoo, Unimech is now exploring opportunities to establish a manufacturing footprint in the U.S. to enhance services for marquee customers in Europe and North America.

Projected Financial Growth and Margin Expansion​

Financial analysts anticipate a robust recovery for Unimech between FY26 and FY28E. Despite a flat revenue performance and profit decline in FY26 due to margin contraction, the company is projected to deliver a 74% revenue CAGR, 83% EBITDA CAGR, and 57% PAT CAGR during the forecast period.

Growth is expected to be fueled by a recovery in core aero tooling and precision components, alongside contributions from recent joint ventures. The brokerage expects EBITDA margins to stabilize at 35%, while Return on Equity (RoE) and pre-tax Return on Capital Employed (RoCE) are projected to improve to 16% and 18% by FY28, up from 9% and 12% in FY26.

Risk Factors and Capital Allocation​

While the company is well-positioned for growth in the aerospace, defense, energy, and semiconductor equipment sectors, Motilal Oswal highlighted specific risk factors. These include high revenue concentration within the aerospace business, a heavy dependence on its top five customers, and significant reliance on exports to a limited number of international markets.

To fuel these expansion plans, Unimech raised Rs 500 crore through its December 2024 IPO. The company has earmarked Rs 80.3 crore for capital expenditure, Rs 40 crore for debt repayment, and Rs 70 crore for working capital, with the remaining funds allocated for general corporate purposes and issue-related expenses.