IGI Logo

Ramkrishna Forgings (RMKF), India’s second-largest manufacturer and exporter of forging components, has undertaken several initiatives to structurally boost its growth prospects beyond being a proxy play on the domestic MHCV space, apart from futureproofing itself in the EV-shift, with high focus on balance sheet (BS) deleveraging. Initiatives are:

* Emerging as a sub-assemblies/assemblies supplier: RMKF is continuously expanding its product basket through new-product introductions (e.g., 225/317 new products developed in FY21/FY22, respectively) and focus on value addition (attempts to address ~84% of the available forging content per vehicle by 2027 vs. ~66% in FY22), via entering the sub-assemblies and assemblies space vs. pure components;

* Structurally diversifying away from the cyclical nature of domestic M&HCVs (core served segment) via: i) EVs, which are expected to form ~5% of the auto mix in 2 years vs. ~2% currently (segments being targeted are 3Ws, pickups & SUVs, and small trucks); ii) increasing contribution from LCVs (currently ~6% of exports) and PVs;

* Improving share of the non-auto business (~21% of the mix), to ~30% in 6-8 quarters, driven by: i) Railways growing from ~2% of sales currently to >4%; this does not include the recent 20-year award (in tandem with Titagarh Wagons) for forged wheels, with potential lifetime revenue of Rs280bn); ii) Oil & Gas: to grow from ~1.9% now to 2.5%;

* Growing inorganically via bolt-on acquisitions: for example, JMT Auto has potential to add ~Rs5bn of peak annual revenue over ~2 years (~13% of FY25E revenue);

* Leverage the China+1 and Europe +1 themes, supported by strong traction from fresh order wins (Rs9.8bn in FY22, Rs7.8bn in FY23); and

* Driving operating deleverage through improving the mix and cost-saving efforts (guidance of ~100bps margin improvement annually).

These initiatives are backed by timely capex into newer/higher tonnage lines, focus on valueadded offerings (>80% revenue from machined parts) and new product introduction (~1,200 new products developed since FY17, with types of forging parts expanding from 12 in FY17 to 33 in FY22); it thereby targets addressing ~84% of available forging content per vehicle by FY27 vs. 24%/66% in FY17/FY22. We believe RMKF is now more securely positioned vs. earlier cycles, to drive superior & steady growth with high visibility and profitability

We expect a robust 27% earnings CAGR with BS deleveraging; retain BUY: We expect RMKF to deliver revenue/EBITDA CAGR of 14%/15% over FY23-25E to Rs39bn/Rs8.9bn; this, along with moderating capex, will drive BS deleveraging (net debt/EBITDA to reduce to 1x in FY25E vs 5x/1.8x in FY21/FY23) and improved return ratios (21% RoE in FY25E vs 19.5% in FY23). We retain BUY, with Mar-24 TP of Rs390/sh, implying forward EV/EBITDA of 8.5x (vs 10-year average of 9x; 16.5x for BHFC). Key downside risk: Sharp, sustained slowdown in underlying industries.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer