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View & Valuation

In its investor day, Ramkrishna Forgings (RMKF), reemphasized its focus to diversify revenue base from CV to other segments of auto (2W, PV, OHT) and non-auto (Oil and gas, railways and mining). RMKF targets revenues of Rs45-48b by FY26E (v/s ~Rs26b in 9MFY24). This will be led by standalone business (~62% incremental contribution) and balance by recently acquired entities such as, 1) MACL-JMT revenues to be at Rs6-6.75b in FY26E (v/s Rs1.75-2.25b annualized in FY24E) and from ACIL at Rs2.2-2.75b in FY26E (v/s Rs50m annualized in FY24E). Some of the focus areas will be 1) supply of differential assemblies and expect ~10% of overall volumes to come from the segment ahead, 2) Railways both fabricated parts (already supplying to LHB) and forged wheel project which is an import substitute with take or pay arrangement with the railways for ~80k wheels per annum and ~20k wheels by the JV partner, 3) target to penetrate Oil and Gas segment through JMT Auto acquisition (~3.5% revenue contribution) and 4) ACIL (crankshaft) - RMKF to add 6 cylinder crankshaft capabilities to service HCV customers beyond existing ACIL customers from 2W, PV, tractor and LCV segment. Street builds in revenue/EBITDA/Adj.PAT CAGR of 14.2%/15.4%/28.4% on a standalone basis. Although execution remains key things to watch for, valuations at 29.3x/24.3x FY25/26 bloom S/A EPS is pricing in the positives, we believe. Not Rated.

Management interaction key takeaways (PPT Link)

* Differential assemblies (case, case cover, gear and pinion) is new growth target segment - Already supplying in non-assembled form and in nascent stage to supply in full assembly which will unfold in 6-9 months. Co target is to get in-to more assemblies ahead. Have started working on couple of platforms for domestic OEMs. Shift from components to assembly to value addition – moving towards assemblies (direct to vehicle). Expect ~10% of volumes from this assembly supply.

* Rail wheel project – an import substitute – Overall capacity is ~228k forged wheels per annum. Take of pay contract with railways for ~80k wheel per annum for 20 years. Have take or pay commitment by the JV partner for ~20k wheels. Co will focus only on forge wheel business (for LHB, semi-high speed up to 200 kmph) and not cast wheels (for goods applications with speed up to 60 kmph). Project to commission by end of FY26.

* Underlying volumes and shift towards India a major growth driver - NA class 8 outlook – seeing some decline in flatbed truck segment. However, backed by recent infrastructure bill and inflation stabilizing, seeing a pick-up in infra and freight liner (~44% of NA industry). Expect NA overall CV volumes to grow 1-3% CAGR from CY22-27E. Europe – Expect to receive large order from one of the leading truck OEM soon. Penetrating in across product lines. Along with China +1, there Europe +1 also playing out and India is at the forefront to meet Europe’s forging requirements. Expect Europe overall CV volumes to grow 1-3% CAGR from CY22-27E. Seeing India have potential to supply ~20% of world forging requirements.

* Capacity expansion, inorganic growth to drive revenue outperformance – Expect RKFL’s revenue to grow to Rs45-48b by FY26E (v/s Rs26b in 9MFY24). Revenues from MACL-JMT to increase to Rs6-6.75b (v/s Rs1.75-2.25b annualized in FY24E) and from ACIL to increase to Rs2.2-2.75b (v/s Rs50m annualized in FY24E). Asset turns expect to improve to 3.5x in 3-5years vs 2.2x currently. Capex – expect standalone capex of Rs4.9b/Rs3.5b/Rs3.5b and subsidiary capex of Rs200m/Rs1.35b/Rs1.1b in FY24/FY25/FY26. Expect to improve WC (days) further from 101/91 days in FY23/1HFY24. Expect consolidated balance sheet to be net cash by FY26E (v/s Rs5.93b net debt as of 9MFY24).

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