Ramkrishna Forgings Ltd – Geared for strong growth
Indian forging industry is highly fragmented and dominated by smaller units. There are around 380 forging units in India of which 87% fall into the category of small units. While 8% of the players are mid-sized, only 5% of players falls under the larger size (capacity above 30000 MTPA) category. The total installed capacity of Forging in India is at 3.77m MTPA during FY16. While Bharat forge occupies the leading position with 300K MTPA capacity, Ramkrishna Forgings (RMKF) with capacity of 150K MTPA is among the larger players in the industry.
RMKF manufactures forged, machined and ring-rolling components for CVs, Earth Moving Equipment, Railways, General Engineering, Defense, etc. Its product portfolio consists of Front axle components, Rear Axle components, Engine components, Transmission components, Crown Wheels, Steering knuckles, Crankshaft assemblies, etc in the automobiles. The company has a marquee global customer base of 17 OEMS including Tata Motors, Ashok Leyland, VE Commercials and Tier I companies.
Company has five manufacturing facilities with a total capacity of 150,000 tonnes. Of this capacity, the older forging and machining lines constitute 46,000 MT, 24,000 MT is the ring rolling facility, and 80,000 MT is the recently commissioned capacity of four new presses. The recently completed capacity addition includes a 12,500 tonnes press line, making RMKF only the second company in India to have this press.
RMKF which was on expansion spree over the last few years has completed its capex program. This resulted in increase of Gross Block by 3.5x in the last three years to Rs.12.7 bn. The new capacity has presses with the capability of 3150 MT, 4500 MT, 6300 MT and 12500 MT. Currently, the capacity utilization for forging and ring rolling lines stands at 92% and for press line capacity utilization stood at 29% during FY17. Company also enjoys strong competitive advantage as there is limited supply across the globe. In India it is only the second company to have 12,500 MT capacity.
With the expected recovery in demand in both domestic as well as export markets the new capacity utilization to increase sharply in the next two years. In addition to this, the growth is also expected to come from deeper penetration of new OEM’s and increased content per vehicle. It has tied up with one of the leading OEMs in Europe and USA for supplying front axle beams and knuckles from new capacities. The company has received sample approvals for 97 new items as of Dec’16, out of which 65 items are for leading OEM’s in India and 32 items towards exports. The company is soon venturing into the Oil & Gas and Aerospace segments. All these factors should drive significant growth over the next few years.
We expect the company’s topline to grow at more than 25% for next three years. As the company benefits from higher operating leverage, we expect operating margins to expand current 18.8% to 22% over the next few years. After two consecutive years of decline, earnings are expected to accelerate over the next two years. Limited capex requirement and increased FCF generation should help the company in easing debt burden. Current debt stands at Rs.8.5 bn and expected to come down in the coming years.
Company is currently trading at FY18E PE of 20x and P/B of 2.3x. Company provides good opportunity for next two years on the back of its strong earnings growth, improved cash flows, improving return ratios, and attractive valuations.