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Blowout quarter: 10% revenue beat and best ever margins

* RMKF delivered 26% EBITDA beat versus our Q2 forecasts, driven by a 10% revenue beat and 300bps EBITDA margin beat. Revenue surprise was supported by higher-thanexpected sales in industrials, while margin beat was driven by inventory gains. ROE based on H1 annualized profits expanded to a healthy 16%.

* Order bookings remained consistent from auto and industrial customers in India and overseas markets. Recent orders could add incremental revenues of up to Rs5bn in FY23E/24E, in our view. Beginning the execution of some orders in FY22 can provide an upside risk to our FY22 volume estimates by ~5%.

* RMKF remains a key beneficiary of the CV upcycle in domestic and overseas markets. Improving macros, pick-up in infra-spending, and recovery in replacement demand should drive a 30% volume CAGR in the underlying India MHCV industry in FY21-24E, along with a 16% CAGR in North America (NA) Class8 and 13% in Europe HCVs in CY20-23E.

* Backed by the CV upcycle and a robust order book, we expect revenue/EBITDA CAGRs of 33%/43% in FY21-24E. Higher OCFs and moderating capex will drive B/S deleveraging. Retain Buy with a DCF-based Dec'22 TP of Rs1,530, implying a target EV/EBITDA of 9x.

Strong quarter: Revenue grew 129% yoy to Rs5.8bn, above our estimate of Rs5.3bn, aided by higher-than-expected revenues in the Industrials segment. Domestic revenue grew 115% to Rs2.9bn, led by a 70% volume surge. In comparison, export revenue grew 152% to Rs2.9bn, led by a 100% volume jump. EBITDA margin expanded by 600bps yoy to 24%, (Consensus est.: 21%) above estimates, led by inventory gains. Consequently, PAT increased from Rs21mn in Q2FY21 to Rs0.5bn in Q2FY22, above the estimate of Rs0.4bn.

Demand outlook remains robust: We expect RMKF to deliver a topline CAGR of 33% with revenue reaching Rs30bn by FY24E, driven by: 1) revenue CAGR of 37% in domestic CVs, backed by an industry CAGR of 30%. RMKF has been gaining share with its largest domestic customer Tata Motors, and the trend is expected to persist due to the proximity of its manufacturing plants to TTMT’s facilities; 2) revenue CAGR of 28% in exports, driven by growth in the underlying NA Class8 production (16% CAGR) and Europe HCVs (13% CAGR). The company is also gaining share with its largest international customer Dana Corp and other OEMs such as MAN, Scania and Iveco. It has won orders with customers like Caterpillar in the Oil & Gas segment as well; and 3) revenue CAGR of 32% in domestic industrials on order wins from Railways, Hitachi, International Tractors, etc.

Retain Buy with a DCF-based Dec'22 TP of Rs1,530, implying a forward EV/EBITDA of 9x. Operating leverage, B/S deleveraging, diversification and continued order wins/flows are likely to put RMKF on a sustainable path of profitability. ROE is likely to rise from a low of 3% in FY21 to 23% in FY24E, driven by better margins and asset turnover. Key risks: Delay in auto sector/macro recovery, client concentration risk and adverse currency.

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