Overview :
Ramkrishna Forgings Limited was founded on 12th November, 1981. On a bed of integrity, fuelled by burning ambition. Years of staying true to our principles and tireless endeavour, we have produced rich results. We became a limited company on 25th May, 1995 and today we are an organisation manned by qualified and highly skilled people with state-of-the-art manufacturing facilities and international levels of quality control.
Our Company is a supplier to various sectors like Domestic and Overseas market. We are also a critical safety item supplier for Screw Coupling, Bolster suspension, Side frame keys and Draw Gear Assembly for Railway Coaches and wagon. We are a preferred supplier for OEM's like TATA Motors, Ashok Leyland & VE Commercial and we are also a global supplier for companies like Meritor to name a few
Ramkrishna Forgings (RFL) is the second largest forging company in India after Bharat Forge (BFL) with an installed capacity of 150,000MT. The Company primarily caters to Automotive, Railways and Mining sectors. RFL has almost doubled its capacity in last two years by expanding its press line capacity to 80,000MT in FY17, which aided the Company to enhance its market reach as well as clients base. With the major capacity expansion programmes are behind and visible rebound in global markets suggesting higher demand for forging products, we believe RFL is likely to witness a healthy traction hereon with the expected FCF generation of over Rs4.6bn during FY18-FY20E.
Bright Outlook for Automobile Segment Augurs Well
RFL derives 80% of its total revenue from Automotive segment (including exports) as auto volumes had been favourable over the years. Further, as India’s economy is set to witness healthy growth on the back of reforms and visible improvement in global economy, we expect demand for automotive parts to remain healthy and hence for forging works. Further, increased domestic investment in Railways and Mining will ensure incremental demand of RFL products.
Favourable Industry Structure
Total installed capacity of forging industry is ~4mnT, 87% of which falls under small (5,000-12,500MT) and 8% under medium (12,500-30,000MT) categories. Hence, capacity above 30,000MT forms only 5% of the industry and RFL is the second in this large category after BFL (domestic capacity is 400,000 MT). Hence, we consider RFL as the best alternative to BFL, which has already scaled up from supplying only rear axle assemblies to large and complex products like front axle beams and assemblies.
Margins Improvement on the Cards
Presently, RFL enjoys higher EBITDA margin from Ring Rolling segment (up to ~22-23%) due to complex nature of work and optimum utilisation. Going forward, we expect increasing contribution of exports (RFL foresees export revenue up to 42-45% in FY20E) and improved revenue contribution from press line (12,500MT) with higher utilisation will propel RFL to witness higher margins and better profitability.
Healthy FCF with Least Capital Expenditure
RFL has concluded its major expansion drive and is currently in the process of improving the utilisation of newly commissioned facility. We expect RFL to generate free cash flow of Rs4.6bn over FY18-FY20E aided by low capex requirement and healthy margins. Notably, RFL is currently in the process of enhancing its machining capacity by 5-7% through debottlenecking.
The Ramakrishna Forgings stock has been on a tear of late with a 40 percent gain in the last 3 months. The company also posted a very good set of earnings in the second quarter as strong volume growth drove revenues.
To know what is keeping the stock so active and the outlook going forward, CNBC-TV18 spoke to Naresh Jalan, MD, Ramkrishna Forgings.
When asked if an increase in raw material prices would impact their margins in second half, he said any increase in prices would be passed on, so does not impact them but the only thing that impacts the balance sheet is the time taken by OEMs to decide on price hikes.
For the first half FY18 the revenues were up 58 percent at Rs 590 crore and margins were up at 19.6 percent versus 18.9 percent.The extraordinary jump seen in the revenues was because the compnay managed to increase their market share and content per vehicle on back of capacity expansions.
The company is into manufacturing of forging and pressing parts and majority of their revenues come from commercial vehicle segment, while 15 percent of domestic revenues come from Earth-moving and railways equipment. Exports to US, UK constitute of 27 percent of the revenues. The total capacity stands at 1.5 lakh tonne.
Jalan said the company has large exposure to Class 8 and Class 5 trucks in US market and their total exposure to exports currently is 30 percent and domestic is 70 percent but by FY18, it will be 35 percent exports and 65 percent domestic.
Moreover, realisations in the export market are higher by 100-150 basis points, he added. Both the US and UK market source largely from India.For the forging industry the hike in exports have increased by around 30 percent to the US market, said Jalan, adding that this momentum is likely to continue in 2018 as well.
In terms of tonnage, the company has already guided for 1.10 to 1.15 lakh tonnes in FY18 as compared to 80 tonnes done in FY17, which is a jump of 30 percent, he said. Total utilisation capacity stands at 1.50 lakh tonnes.
Therefore, utilisation in FY18 would be around 70 percent, he said. As utilisiation improves, there will be improvement in both bottomline and topline as overhead costs come down. By FY19 the utilisation would be closer to 100 percent, said Jalan.
When asked if they were looking at inorganic growth in terms of the stressed asset sales, he said the QIP done by company a few months back was with an intention of inorganic growth and they are cash ready to grab any such opportunity for a right price. The first place to look at would the NCLT cases, he said.
Valuations Still Appear Attractive:BUY
Despite a sharp upsurge in stock price during last six months due to improving financials and healthy outlook, we believe that the stock still trades at attractive valuation considering a massive discount of ~50% in FY20E earnings against BFL. However, as healthy improvement in return ratios (RoE at 21% in FY20E) is comparable with that of BFL (23% RoE in FY20E), we expect the valuation gap to shrink in ensuing period. We initiate coverage on RFL with BUY recommendation and a Target Price of Rs975 (15.5x FY20 EPS).
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