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CV cyclical recovery to fuel strong growth prospects…

About the stock: MM Forging (MMF) is a prominent forging player serving India, Europe and US markets (FY21 geographical mix – domestic 50%, exports 50%).

* FY21 segment mix – CV 75%, PV 18%, Others 7%

* Total 1.2 lakh MTPA production capacity; FY21 utilisation at ~40%

Q2FY22 Results: MMF posted steady Q2FY22 results.

* Standalone revenue growth was at | 261.3 crore for the quarter

* EBITDA margins were flattish at 18.2% amid operating leverage gains; gross margins down ~250 bps sequentially

* Consequent PAT grew ~16% sequentially to | 27.7 crore

What should investors do? The company’s stock price has grown at ~33% CAGR from ~| 215 levels in November 2016, thereby vastly outperforming Nifty Auto Index

* We retain BUY rating on strong growth prospects & inexpensive valuations

Target Price and Valuation: We value MMF at 17x PE on FY23E basis for a revised target price of | 1125 per share (earlier target price | 925)

Key triggers for future price performance:

* Healthy outlook across served markets; would benefit from impending India CV revival as well as pick-up in US Class 8 truck ordering. Underlying market growth, new product introduction to lead to 36.1% FY21-23E sales CAGR

* We expect sales volume to grow at a CAGR of 27.5% in FY21-23E to ~78,000 tonne in FY23E vs. ~48,000 tonne clocked in FY21

* Operating leverage gains, better mix to push margins to 20% (FY23E)

* FY23E RoCE at ~15% on margin improvement, sweating of assets

* Trades at inexpensive valuation of <14x P/E, <10x EV/EBITDA on FY23E

Alternate Stock Idea: Besides MMF, in ancillary coverage, we like Apollo Tyres.

* India CV revival beneficiary focused on debt reduction, higher return ratios.

* BUY with target price of | 275

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