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Excellent delivery; broad-based positivity persists…

MM Forgings (MMF) reported strong operational results in Q4FY21. Standalone net sales jumped 81.3% YoY, 32% QoQ to | 286 crore. EBITDA came in at | 56.5 crore, up 152% YoY with attendant margins rising 450 bps QoQ to an 11-quarter high of 19.8%. The company realised savings across all cost heads, with gross margins improving 64 bps sequentially with other expenses, employee costs down 184 bps, 141 bps QoQ, respectively, on percentage of sales basis. Consequent standalone PAT was at | 30.1 crore, up 96% QoQ. MMF declared an interim dividend of | 5/share for FY21.

Demand visibility in place across India, international markets

As of FY21, CV formed ~80% of sales with PV contributing ~15% and offhighway and other segments contributing the rest. The company has a presence across geographies, with domestic market, Europe & US markets accounting for ~47%, ~43% of FY21 sales, respectively. The Indian CV space has been a laggard within the overall sluggish automotive industry performance post FY19. With usual CV down cycles lasting for about two years and bulk of the present decline behind us, the industry is poised to rebound strongly and embark on a cyclical upturn once pandemic resurgence abates. The government’s infra push, pick-up in demand visibility of key user industries like mining, road building, construction and expected revival in economic growth are key tailwinds for the sector. Elsewhere, US Class 8 truck production is seen robust in CY21E backed by higher economic activity, waning of the pandemic and partly aided by low base. We build 23.4% revenue CAGR, going forward, in FY21-23E, amid healthy demand visibility across served markets and segments.

Medium-term margin expansion on track

Prices of key raw materials, steel and aluminium, witnessed a steep increase in the past six months. The company has input cost pass-through arrangements with clients (albeit with a small time lag) and, hence, has been relatively unaffected. Solid offtake prospects domestically and abroad are seen leading to MMF deriving operating leverage benefits as capacity utilisation levels improve. Its focus on increasing machining content and value addition from heavier press lines added in the past are expected to be margin accretive. We expect margins to touch 18.5% levels by FY23E.

Valuation & Outlook

For MMF, standalone PAT is expected to grow at 51.4% CAGR in FY21-23E, albeit on a low base. With peak of capex cycle behind it, expected increase in utilisation levels via improvement in demand scenario as well as healthier margin performance keep the outlook healthy, in our view. We stay positive on the stock and retain our BUY rating, valuing it at 18x FY23E EPS to arrive at a revised target price of | 790 (earlier | 530).

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