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Ramkrishna Forgings (RKFL) reported a strong Q1FY24 performance, with revenue up 28% YoY (despite Q1 being seasonally weak; flat QoQ) and 25% YoY rise in volumes on stronger exports. RKFL is undertaking several initiatives (refer to our report) to structurally boost its growth prospects, thus moving into higher value-add assemblies and diversifying by exploring complementary products & assemblies, apart from future-proofing itself in the EV-shift together with high focus on BS deleveraging, even as it incurs calibrated growth capex/bolt-on acquisitions. Driven by healthy volume growth (15-20% guidance for 3-4 years), continued diversification, and improving financials (higher return ratios/reducing leverage), we increase our EV/EBITDA to 11x (~35% premium to the 5-year average of 8x; ~16.5x for BHFC), with 21% EPS CAGR over FY23-26E. We raise FY24E/FY25E EPS by 7%/5% and maintain our BUY rating with revised TP of Rs555/sh (Rs390 earlier).

Strong performance in an otherwise seasonally-weak quarter: Revenue grew 28% YoY (flat QoQ) to Rs8.4bn, at 6% above consensus estimate. EBITDA margin expanded by 40bps YoY (-10bps QoQ) to 22.4% (Emkay est.: 21.1%; Consensus est.: 20.8%), mainly led by positive operating leverage. ‘Other income’ grew 617% YoY (+178% QoQ) to Rs47mn, which was largely related to forex gain worth Rs30mn. Tax rate stood at 23.8%, as Management shifted to the lower tax regime in FY24. PAT increased to Rs0.8bn (Emkay: Rs0.4bn; Consensus: Rs0.6bn), beating estimates owing to both — higher operating profit and ‘other income'.

Earnings-call KTAs: i) Indicates robust demand outlook within India and North America, with volume growth guidance of 15-20% for FY24 as well as for the next 3-4 years. ii) Through a combination of organic and inorganic routes, the company is expanding its product portfolio (adding new verticals), geographical reach (more countries, deeper penetration) and foraying into higher-value sub-assemblies and assemblies. iii) Margin guidance for expansion by another 50-100bps from 1Q levels. iv) Recent expansion in: a) Cold forging with Rs1.25b capex will add 25k MT capacity; 100% capacity is booked, with revenue generating from Q1FY25; entirely for EVs and PVs. b) Warm forging with 56,300MT capacity for differential gears parts; commenced production in 1Q with supplies to CVs; full utilization expected in FY25E; to cater to CVs, tractors and PVs, with margin profile higher than that of current business. vi) Company announced the acquisition of Multitech (MAPL), which makes differential assembly & trailer axle assembly consisting of castings & forgings; the acquisition will expand Company’s presence in B2C categories and help it to make entire assemblies (vs only components); as a result, Company expects additional revenue of Rs5-6bn over 2 years. During FY23, MAPL clocked revenue of Rs3bn, EBITDA margin of 14%, gross debt of Rs450mn, asset turnover of 1:3, and net working capital at 60 days. vii) Railways is expected to contribute 4-4.5% to the Company revenue in FY24. viii) FY24 revenue mix guidance of 60:40 (Domestic:Exports) and 70:30 (Auto:Non-Auto). ix) Management does not expect any equity dilution in the foreseeable future; cash-flows are strong enough to fund capex as well as help deleverage; Mgmt expects net debt:EBITDA to lower, from 1.55x to 1x in coming 6-8 quarters. x) FY24 capex guidance: Rs3-3.5bn.

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