Ramkrishna Forgings: ‘Buy’ with revised target price of Rs 758

Published: June 19, 2019 1:36:51 AM

Exports to Europe have started and we expect them to accelerate from FY20. Higher exports would supplement higher machining capacity utilisation.

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By Anandrathi

Continued exports to North America and Europe, new products and diversification are the drivers of strong growth for the next two years despite expected weakness in the domestic market. We maintain our Buy rating at a revised TP of Rs 758 (earlier Rs 672). With growth coming from both North America, Europe and Mexico (growth from DANA), our expectation of strong export growth continues. Exports to Europe have started and we expect them to accelerate from FY20. Higher exports would supplement higher machining capacity utilisation.

Also, the company plans to add new products in to cater to Class 5 trucks (LCV) and thus expect strong growth in FY21. Against the backdrop of strong exports in FY20, we expect EBITDA margin to expand to 21.4% and expect stable margin in FY21. The company plans to spend Rs 4 bn (Rs 1bn already spent in FY19) on LCVs, PCs, the Railways and forgings parts for bearings. We expect the operations to go commercial from September ’20 and expect revenue to come at Rs 7bn from this project. 1) Management is confident of growth in Class 8 trucks in North America till Feb’20; 2) Europe to be 40% of exports in the next two years 3) Oil & gas exports revenue of $10m in FY20. At a 17% CAGR in earnings over FY19-21, we estimate EBITDA growth to be 10% led by margin expansion.

We expect earnings to be higher, at a 17% CAGR, as the company is expected to be under MAT in FY21. We maintain a Buy recommendation at a revised TP of Rs 758, 15x FY21 EPS. Risks: Postponement of capex for the LCV projects, lower growth in exports. At a 17% CAGR in earnings over FY19-21, we estimate EBITDA growth to be 10% led by margin expansion. We expect earnings to be higher at a 17% CAGR as the company is expected to be under MAT in FY21.

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