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Engineering & Capital GoodsEngineering & Capital Goods
January 21, 2016January 21, 2016
I n d i a F o r g i n gI n d i a F o r g i n g
Edelweiss Securities LimitedAmit Mahawar+91 22 4040 7451amit.mahawar@edelweissfin.com
Swarnim Maheshwari+91 22 4040 7418swarnim.maheshwari@edelweissfin.com
Indian Players Set for
Quantum LeapIndian Players Set for
Quantum LeapIndian Players Set for
Quantum Leap
1 Edelweiss Securities Limited
Engineering and Capital Goods
Executive Summary
Indian forging players, buttressed by inherent advantages—low manpower cost, high quality design‐engineering capability—are in a sweet spot to capture higher share of the global CV & PV heavy and complex components’ outsourced pie from NAFTA and Europe. Our extensive analysis pegs the prospective pie at USD5‐6bn, opening up the floodgate of opportunity for Indian players to scale up in
the global value chain. Among the listed India forgings pack, we place our bet on Bharat Forge (BHFC), whose already established credentials on global forgings stage are further burnished by prudent collaborative supplier strategy enhancing scalability, while an optimised product mix yields higher sustainable RoE (20% plus) with one of the lowest breakeven levels (~25%). We now predict next level of value addition from its deepening penetration in global aerospace and defence manufacturing value chain. We also initiate coverage on Ramkrishna Forgings (RKFL) with ‘BUY’. Its opportune transition to manufacturing complex & heavy forged components opens up new addressable opportunities of INR30‐40bn.
Global outsourcing pie: Inherent advantages burnish India’s prospects
India’s already well established credentials on the global forging stage are set to get a major
boost from the outsourcing trend in the industry. Frugal engineering & management skills,
India’s quintessential hallmarks, lend it significant competitive edge to cash in on the
opportunity. Moreover, sizeable manpower cost advantage—~USD1.1 average wage per
hour versus minimum ~USD7.25 in US & Europe—yields atleast 20% higher profitability for
Indian players. Also, higher investments in modern press lines and machining capacities over
the past 6‐8 years has helped players attain scale by gaining entry in the high entry barrier
global OEM value chain. Stringent pollution norms in mature markets like US stymieing
greenfield capex is further driving demand for high quality forging components from India.
Mapping growth: CV & PV opportunity pegged at USD5‐6bn
We researched extensively across domestic and global OEMs and forging companies to map
the contours of the opportunity size in India, NAFTA and Europe markets—primary revenue
drivers of Indian forging players. Our calculations peg the opportunity size at USD4‐5bn in
PV and USD1.0‐1.5bn in CV. Besides these, BHFC’s deepening penetration in global
aerospace and defence manufacturing value chains will add ~USD5‐7bn and USD2bn,
respectively, to the opportunity pie.
Players with large presses have scale and RoE edge
We favour players (BHFC and RKFL) with large forging presses with full service and
machining capabilities. Our deep analysis indicates that higher tonnage presses generate
superior RoEs in turn favoring scale – while moving up the press size the gain in tonnage is
greater even though the cycle time is higher imparting higher operating leverage and better
contribution margins. EBIDTA margins also remain largely protected as a single OEM cannot
guarantee full capacity utilsation, driving vendors to maintain a pool of OEMs across sectors
to optimise both scale and mix.
(Click here for video clip)
2 Edelweiss Securities Limited
Engineering and Capital Goods
Outlook: Set for quantum leap; BHFC, RK Forgings preferred bets
In the Indian forging listed space, we place our bets on BHFC and RKFL. BHFC offers solid
long‐term potential in most profitable auto forgings, significant penetration scope in
aerospace, defence etc. We maintain ‘BUY/SO’ with a revised target price of INR1,100 as we
roll over to FY18E earnings, valuing earnings at 21x. We envisage RKFL to benefit from shift
to large CV components as its new presses yield better profitability. We initiate coverage on
it with a target price of INR700 (assigning 14x PE for 26% earnings CAGR and improving RoE
over FY15‐18E.
1
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Contents
Executive summary .................................................................................................................. 1
Focus charts ............................................................................................................................. 4
Structural Shift in Global Forgings: Advantage India ................................................................ 6
Indian Players: Opportunity Pie Pegged at USD5‐6bn ......................................................... 10
Companies
Bharat Forge .......................................................................................................................... 13
Ramkrishna Forgings .............................................................................................................. 43
Mahindra CIE Automotive ...................................................................................................... 61
MM Forgings .......................................................................................................................... 72
Annexure ................................................................................................................................ 78
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Engineering and Capital Goods
Focus Charts
Indian forging players at an advantage on margins front Break up of USD7bn auto forging industry
Collaborative supply drives scalability from OEM Higher presses generate better ROE; lower breakeven levels
Change in RoE with different revenue mix at 2 different capacity utilizations in a 16000T press
0.0
6.0
12.0
18.0
24.0
30.0 Dana Holding
Meritor
Thyssen Krup
Nippon Steel &
sumi M
etal
Schuler
BFL (SA)
RKFL
MM Forg
(%)
EBITDA Margins
India average margins at ~20%
Collaborative supply
(Design/engg./testing/supply)
Typical customer acquisition process
Selection
1‐2 yrs
Audit
1 year
Approval
1‐2 yrs
Initial orders
1‐2 yrs
Time frame
25x 5x x
Magnitude of business
Supply partner
3‐5 yrs
(7.0)
0.2
7.4
14.6
21.8
29.0
At 90% At 60%
(ROE , %
)
50 CV: 50 PV 60 CV: 40 PV 70 CV: 30 PV
80 CV: 20 PV 90 CV: 10 PV
North America HCV 7%
Europe HCV8%
India HCV5%
USA PV40%
Europe PV33%
India PV7%
0.0
7.0
14.0
21.0
28.0
35.0
8.0
21.2
34.4
47.6
60.8
74.0
16000T
12500T
8000T
6000T
5500T
4000T
2500T
(%)
(%)
Breakeven level (%) ROE's (RHS)
0.0
14.0
28.0
42.0
56.0
70.0
At 90% At 60%
(ROE , %
)
50CV: 50NA 60 CV: 40 NA 70 CV: 30 NA
80 CV: 20 NA 90 CV: 10 NA NA: Non Auto
1
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Engineering and Capital Goods
Table 1: Global peer comparison
Source: Bloomberg, Edelweiss research
Company
Market
Cap
(USD mn) Year Revenue EBITDA Adj. PAT
EBITDA
Margins
(%)
EV/
EBITDA
(x)
P/E
(x)
P/B
(x)
ROE
(%)
Dana Holding 1,900 CY14 6,617 596 319 9.0 6.9 8.9 3.3 30.9
(USA) CY15E 6,060 673 290 11.1 3.9 6.9 2.1 27.0
CY16E 6,030 680 276 11.3 3.9 6.9 1.9 26.6
Meritor Inc 666 CY14 3,766 284 249 7.5 6.3 4.1 NA NA
(USA) CY15E 3,432 333 154 9.7 9.8 4.4 NA (0.4)
CY16E 3,494 340 159 9.7 4.7 4.2 NA (2.1)
Thyssenkrupp AG 9,982 CY14 55,925 3,147 288 5.6 7.0 NM 3.9 8.1
(Germany) CY15E 45,716 3,177 801 7.0 5.5 12.5 2.4 20.1
CY16E 46,869 3,413 969 7.3 4.5 9.9 2.0 20.1
Precision Cast Parts 31,935 FY15 10,001 2,920 1,810 29.2 13.6 20.3 2.8 13.7
(USA) FY16E 9,690 2,840 1,600 29.3 12.8 19.5 2.7 14.7
FY17E 10,410 3,130 1,810 30.1 11.6 16.8 2.6 15.2
Shandong 743 CY14 247 36 34 14.5 24.3 25.6 1.7 6.8
(China) CY15E 139 2 (10) 1.7 NM NM 1.6 (2.0)
CY16E 180 19 0 10.3 41.4 71.6 1.6 0.1
Chongyi Zhangyuan 1,454 CY14 329 46 11 14.1 38.0 147.3 4.9 3.7
(China) CY15E 313 20 23 6.3 81.3 49.4 3.4 2.7
CY16E 357 27 16 7.5 59.9 72.6 3.2 4.0
Bharat Forge 2,673 FY15 1,130 213 107 18.9 13.4 24.9 5.2 23.5
(India) FY16E 1,177 223 113 18.9 12.7 23.7 4.5 20.7
FY17E 1,343 262 142 19.5 10.6 18.9 3.9 22.3
Ramkrishna Forgings 171.3 FY15 110 19 10 17.4 14.2 16.5 2.8 19.1
FY16E 135 21 10 15.2 10.8 17.6 2.5 14.9
FY17E 212 38 15 17.7 8.1 11.4 2.1 19.6
Mahindra CIE 996.0 FY15 911 72 (13) 7.9 19.1 NM 3.7 (6.1)
FY16E 872 102 47 11.7 9.9 21.6 3.1 15.0
FY17E 972 132 67 13.6 7.7 15.2 2.6 18.1
Financials (USD mn) Valuations
6 Edelweiss Securities Limited
Engineering and Capital Goods
Structural Shift in Global Forgings: Advantage India India’s already well established credentials on the global forging stage are set to get a
major boost by the structural shift underway—outsourcing of heavy and complex
components to developing nations—in the industry. Frugal engineering & management
skills, India’s quintessential hallmarks, lend it significant competitive edge to cash in on
this opportunity. Moreover, sizeable difference in average wages per hour (~USD1.1
versus ~USD10.0 in US & Europe) lead to atleast 20% higher profitabillity for Indian
players. Also, tightening emission norms alongwith lower greenfiled capex in developed
nations are bound to tip the scales in India’s favour, helping it corner higher share of
global OEMs outsourcing pie.
Global forging industry: Shift underway The global forging industry capacity is pegged at ~40‐45mt with China and Europe
dominating the market with more than 55% share. Global forging production at CY14
end stood at ~25mt, indicating ~60‐65% global capacity utilisation. India’s share in
global forged component production stands at ~8%.
Chart 1: Global forging production (CY14)
Source: Euro forges Masters
We note that the Indian forgings sector is extremely fragmented with more than 87% of
the installed capacity with small and very small players. However, overall production is
driven by large forging companies which control almost 45% of the total output. High
capital‐intensity and stringent & tedious process for OEM validation leads to only a few
select players attaining scale by gaining entry into the global OEM value chain. In India,
Bharat Forge, RK Forgings, MCIE and MM Forgings have been able to forge a global
image driving most of the exports of forged components to the West.
Euroforge members
23%
Japan 9%
NAFTA 8%
China 39%
India 8%
Australia1%
Brazil 2%
Korea 3%
Taiwan 4%
Russia 3%
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Engineering and Capital Goods
Chart 2: India forgings capacity break up Chart 3: India forgings industry—Concentrated production
Source: AIFI, Edelweiss research
Over the past few years, a structural shift has been underway in the forging industry
globally—heavy and complex components are being outsourced to developing nations
including India. Amongst the many factors engineering this transition, prominent are:
1. Cost competitive business model: India is amongst the most competitive
manufacturers of auto components, especially in metal intensive parts and
forgings, which entail design engineering skills. Frugal engineering and
management skills, India’s hallmarks, lend it significant competitive edge in this
regard. Moreover, average wage in the country stands at USD1.1/hour,
significantly lower than the minimum USD7.25/hour plus in US and Europe. Our
annalysis indicates that while employee cost to sales ratio is 10% for Indian
companies, it is significantly higher at 30% for global companies, a predominant
factor fuelling outsourcing.
Chart 4: Benchmarking Indian auto component industry with component majors
Source: Companies, Edelweiss research
Note: Figures for Dana Holding, Meritor and Shuler are Dec 14 ending, Thyssen Krup is
Sep 15 ending and Bharat Forge and Ramkrishna Forgings in March 15 ending
Large(Above 30K
tonnes) 5% Medium
(5K‐30K tonnes)8%
Very small(less than 5K tonnes)
87%
0.0
6.0
12.0
18.0
24.0
30.0
Dana Holding
Meritor
Thyssen Krup
Nippon Steel &
Sumitomo Metal
Schuler
BFL (SA)
RKFL
MM Forg
(%)
EBITDA Margins
Global average margins at~10%
India average margins at ~20%
Average wages for India stands at USD1‐1.2/hr versus minimum +USD7.25/hr in US & Europe contributing to higher margins for Indian companies
Large44%
Medium17%
Very small39%
8 Edelweiss Securities Limited
Engineering and Capital Goods
2 Augmenting capacities to net higher pie: Large forging players have made
significant investments in adding modern press lines and machining capacities over
the past 6‐8 years, which have helped them attain scale by gaining entry in the high
entry barrier global OEM value chain. Ergo, buttressed by its technological
competence and augmented capacities, the industry is increasingly addressing
opportunities arising out of the growing outsourcing trend among global
automotive OEMs. Case in point being BFL, whose share in European and NAFTA
CV market, as per our analysis, has catapulted to more than 60% currently
from ~33% in FY10 in front axle beam and crankshaft segments.
Chart 5: Forging capacities of top 4 Indian companies have doubled in past 7 years
Source: Bharat Forge, RKFL, MCIE, MM Forgings, Edelweiss research
Chart 6: Exports of key Indian forging companies have grown 4x in past 8 years
Source: Bharat Forge, RKFL, MM Forgings, Edelweiss research
250,000
330,000
410,000
490,000
570,000
650,000
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
H1FY16
(MT)
39 40
62
30.0
38.0
46.0
54.0
62.0
70.0
5 11 17 23 29 35 41
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
(%)
(INR mn)
Total exports (LHS) Exports as a % of total sales
While forgings capacity has doubled over 6‐7 years, major investment has gone into high value addition machining etc. over last 3 years
Indian forging companies clocked exports CAGR of 18% in the last 8 years thus, demonstrating their prowess
1
9 Edelweiss Securities Limited
Engineering and Capital Goods
3 Stringent pollution norms in developed markets: Stringent pollution norms in
mature markets like US have led to players sharpening focus on compliance rather
than capacity addition to cater to the burgeoning demand. Ergo, while greenfield
capex as a % of total capex has been dipping in matured markets, capex for
pollution control equipment, robotics & manipulators has catapulted considerably.
This is driving demand for high quality forging components from Indian companies.
Chart 7: No new greenfield capex in N. America despite higher capacity utilisation
Source: US forging magazine
Chart 8: Expansionary capex waning; replacement capex dominates overall capex
Source: US forging magazine
26.0
16.0
61.0
37.0
13.0
47.0
0.0
14.0
28.0
42.0
56.0
70.0
CY13 CY14
(Capacity utilisation %)
10‐50% 51‐80% >81%
0.0
14.0
28.0
42.0
56.0
70.0
CY12 CY13 CY14 CY15
(%)
Green‐field Brown‐field New equipment(Replacement) others
High labour costs and stricter pollution control norms are driving new equipment capex in US, while there is no major green‐field expansion planned
10 Edelweiss Securities Limited
Engineering and Capital Goods
Indian Players: Opportunity Pie Pegged at USD5‐6bn
Since India, NAFTA and Europe are primary revenue drivers of Indian forgings players,
deep diving analysis of the 3 geographies is imperative to accurately map the forgings
industry opportunity size. In the absence of credible statistics, we, backed by extensive
research across OEMs and forging companies, peg the forgings opportunity pie across
the 3 geographies in heavy commercial (HCV) and passenger vehicle (PV) markets at
~USD5‐6bn.
Chart 9: Break up of USD 5‐6bn forging opportunity geography wise
Source: Industry, Edelweiss research
HCV market: Opportunity pie pegged at ~USD1.0‐1.5bn Typically, in a class 8 truck (more than 15 tonnes), total weight of forged components
(~100‐120 in number) is around ~600‐700kg. Certain critical components like front axle
beam, crank shaft, steering knuckle etc., comprise ~50% of forged components’ weight.
Table 1: Weight of forging components category wise in class 8 truck
Source: Industry, Edelweiss research
As per latest available numbers, the HCV industry across US, Europe and India is pegged at
~0.8mn vehicles. Based on our calculation of 700kg of forged components used per HCV, we
estimate the consumption of such components on annual basis to be ~56mt. Of the total
forged components, almost one third are machined parts, entailing superior realisations
than normal forged components. We estimate the size of the CV forging industry across the
3 geographies at ~USD1‐1.5bn.
North America HCV 7% Europe HCV
8%
India HCV5%
USA PV40%
Europe PV33%
India PV7%
Description Major parts Apprx. Weight
Chassis component Front axle beam, steering knuckle, control
arm, wheel carrier etc.
275
Power train components Crankshaft, connecting rod, Piston 250
Transmissoin
components
Gear Counter shafts, Tranmission &
chassis parts and other small components
175
1
11 Edelweiss Securities Limited
Engineering and Capital Goods
Chart 10: Market size of CV forging industry around USD1.0‐1.5bn
Source: Industry, Edelweiss research
PV market: Estimated opportunity of ~USD4‐5bn Typically, the weight of forging components in a passenger vehicle is ~120‐150kg, almost
20% of that in a CV. However, by virtue of being volume driven, the size of PV forgings
industry is way bigger than CV. As per latest available numbers, the PV industry across US,
Europe and India is pegged at ~31mn vehicles. Based on our calculation of 125kg of forged
components used in a PV, we estimate the consumption of such components on an annual
basis at ~369mt. Ergo; we estimate the size of the PV forging industry across 3 geographies
at USD4‐5bn.
Chart 11: Market size of PV forging industry estimated at USD4‐5bn
Source: Industry, Edelweiss research
USAUSD 0.5‐0.6bn
EuropeUSD 0.5‐0.6bn
IndiaUSD 0.3‐0.4bn
USAUSD 2.2‐2.6n
EuropeUSD 2‐2.2bn
IndiaUSD 0.5‐0.6bn
12 Edelweiss Securities Limited
Engineering and Capital Goods
CCoommppaanniieess
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
In our view, investors’ current pessimism on Bharat Forge’s (BHFC) growth prospects is unfounded. Our conviction is bolstered by meticulous analysis of its key markets, indicating ample growth opportunities—~USD1.3 bn PV & CV exports potential. Moreover, we envisage next level of value addition from aerospace (~USD5‐7bn opportunity) and defence (USD2‐3bn potential). A collaborative supplier strategy and optimal product mix will continue to buoy scale and superior RoE (20‐25%), reinforcing BHFC’s credentials. Ergo, we estimate the company to sustain a reasonable 15‐18% earnings CAGR and stable RoE (~20%) over FY15‐18, near‐term headwinds notwithstanding. Maintain ‘BUY’ with INR1,100 TP (INR1,210 earlier) as we roll over to FY18E, valuing the company at 21x.
USD1.3bn target market in auto; aero, defence potent value adds
Sharpened high margin products focus and OEM addition enhance BHFC’s USD1.5bn
CV opportunity by ~USD300mn. Moreover, US PV market entry not only opens fresh
~USD1bn revenue potential, but also reduces cyclicality. Further, we envisage next
level of value addition from BHFC’s deeper penetration in global aerospace and
defence manufacturing value chain, entailing INR5‐7bn revenue potential (FY18E).
Focus on large presses drives scale; optimal mix key RoE kicker
BHFC has successfully added marquee global OEMs to its kitty via collaborative supplier
strategy, enhancing scalability potential. Also, an optimised product mix has enabled it
to generate higher RoE (20% plus) sustainably. Our deep diving profitability analysis
across various press lines indicates that BHFC has one of the lowest breakeven levels
(~22%) and best‐in‐class contribution level (50%) driven by focus on large‐sized press
lines, in turn favouring scale with stable margin.
Outlook and valuations: Raring to go; maintain ‘BUY’
The sharp correction in the stock (down 40% over 6M) is an excellent buying
opportunity for long‐term shareholders’ value creation, given BHFC’s increasing
presence in niche and scalable global aerospace manufacturing value chain and
expanding auto product reach. These, we believe, offer significant RoE accretion
potential beyond FY18. We have build in impact of weak class 8 & oil and gas in our
FY16‐17E earnings (~10% EPS cut). We maintain ‘BUY/Sector Outperformer’.
COMPANY UPDATE
BHARAT FORGE Scaling the global pitch
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Medium
Sector Relative to Market Overweight
MARKET DATA (R: BFRG.BO, B: BHFC IN)
CMP : INR 775
Target Price : INR 1,100
52‐week range (INR) : 1,362 / 743
Share in issue (mn) : 232.8
M cap (INR bn/USD mn) : 180 / 2,655
Avg. Daily Vol.BSE/NSE(‘000) : 1,107.0 SHARE HOLDING PATTERN (%)
Current Q2FY16 Q1FY16
Promoters *
46.7 47 46.7
MF's, FI's & BK’s 17.8 17.8 16.8
FII's 14.1 14.1 15.3
Others 21.3 21.3 21.2
* Promoters pledged shares (% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW Capital Goods Index
1 month (7.1) (5.8) (12.0)
3 months (17.0) (11.5) (23.1)
12 months (23.2) (15.9) (25.0)
Amit Mahawar
+91 22 4040 7451
amit.mahawar@edelweissfin.com
Swarnim Maheshwari
+91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
India Equity Research| Engineering and Capital Goods
January 20, 2016
Financials ‐ Consolidated
Year to March FY15 FY16E FY17E FY18E
Revenues (INR mn) 76,247 79,438 90,648 1,04,500
Rev. growth (%) 13.5 4.2 14.1 15.3
EBITDA (INR mn) 14,408 15,027 17,665 21,166
Adjsuted profit (INR mn) 7,238 7,612 9,560 12,162
EPS (INR) 31.1 32.7 41.1 52.2
EPS growth (%) 71.8 5.2 25.6 27.2
Diluted P/E (x) 24.9 23.7 18.9 14.8
ROE (%) 23.5 20.7 22.3 24.1
Engineering and Capital Goods
14 Edelweiss Securities Limited
Growth Resilient Despite Near‐Term Headwinds
Fig. 1: Sharpening focus on new businesses to sustain growth
Source: Company, Industry, Edelweiss research
BHFC’s CV exports to NAFTA region had doubled in FY15 riding sharp rise in inventory build
up in anticipation of robust demand. However, correction in inventory over the past 6‐8
months has raised fresh growth concerns among investors. This prompted us to evaluate
the overall opportunity pie available to BHFC in the CV market and assess the revenue
potential of new products in US and Europe over the next 2‐3 years.
The company has a clear focus on large CV components like front axle beam, crankshaft etc.,
which account for major portion of its US and European CV exports. These large
Investors’ pessimism, triggered by the tepid US Class‐8 data, on BHFC’s growth
prospects prompted us to dig deeper to not only investigate its veracity, but also map
the total opportunity pie in the company’s key CV markets—US, India and Europe.
Our findings, we are glad to report, conclude that the company has ample fire power
to fuel its growth engine. Sharpened focus on new transmission products along with
addition of new OEMs to its kitty enhances BHFC’s USD1.5bn potential addressable
opportunity across target geographies by more than USD300mn. Moreover, entry in
the US PV market not only opens up a new revenue potential of almost USD1bn, but
also reduces cyclicality. Further, prudent focus on businesses materially larger/more
profitable than the conventional auto forgings business like aerospace and defence
entail revenue potential of INR10‐11bn by FY18E. Ergo, BHFC has sufficient scale up
opportunities at its disposal, tepid NAFTA region notwithstanding, that impart
reasonable revenue visibility over FY15‐18. We estimate INR13bn revenues to come
from new revenues streams by FY18E.
“The ‘ambitious plan to double the SA operations topline from INR34bn achieved
in FY13‐14 to about INR70bn by FY17‐18, a
growth CAGR of 20% ” BHFC plans to achieve this through several growth
initiatives led by improving market share
and creating a broader product offering in industries we currently serve. Railways,
defence, aerospace will be big opportunity
area. Mr. Baba Kalyani, Chairman, Bharat Forge
(In Annual report 2014‐15)
Aero space & defence (USD 7 ‐ 9 bn)
New Opportunities
Passenger vehicle USA(USD1bn)
Commercial vehicle
USD300mn
INR 13bn incremental revenue from new target businesse
1.0
2.4
3.8
5.2
6.6
8.0
6.5
4.5
2.0
Aerospace & defence
PV CV
(INR bn)
FY18
Bharat Forge
15 Edelweiss Securities Limited
components constitute around 60‐65% of total forgings in a CV, which according to our
analysis have a total market potential of around USD1.0‐1.5bn across the company’s 3 large
markets—India, US and Europe. Moreover, BHFC has broadened its product portfolio for
these markets and is now targeting additional products for CVs—primarily transmission
components—which we believe could add more than USD200‐300mn to its total
addressable opportunity across target geographies.
Additionally, BHFC has successfully added new OEMs in US and Europe in the CV segment,
enhancing incremental revenue visibility over and above the current client base. For
example, the company is now a supplier to PACCAR in the US, which has a sizeable 30% plus
market share in Class 8 trucks in the NAFTA region. We believe this alone could add
USD50mn peak revenue to BHFC’s kitty over the next 3‐4 years.
Fig. 2: Focus on new business to sustain growth
Source: Industry, Edelweiss research
FY15‐18E CV sales to grow, albeit at a modest 5%, despite weak NAFTA
In FY15, BHFC’s CV revenue (standalone) had catapulted 43% driven by 115% and 43% spurt
in NAFTA and India markets, respectively. While India is expected to sustain growth
momentum in high teens, NAFTA market has seen sharp drop in order intake over the past
6‐8 months led by inventory de‐stocking, which is likely to sustain till March 2016 as per
inputs from industry participants. Hence, while we build in a drop of 17% for FY16E, we
expect a growth of 7% in FY17 in BHFC’s exports to the NAFTA market and a reasonable
growth rate of ~12% for Europe during FY16E‐17, both driven by contribution from new
products & OEM expansion. We believe BHFC will post better growth than industry, as
shipments to new OEMs and new components ramp up.
Existing market size
USD ~0.8bn
Targe market size
USD300mn
Combined opportunity size
for BFL
USD1.1bn
Focus on new
products
(transmission
components) will
add new target
market by
USD300mn
Engineering and Capital Goods
16 Edelweiss Securities Limited
Chart 1: CV sales growth to be led by India and Europe
Source: Company, Edelweiss research
Table 1: Recent commentary of global CV players on US and European markets
Source: Companies
(22.0)
(4.6)
12.8
30.2
47.6
65.0
0.0
2.4
4.8
7.2
9.6
12.0
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
(%)
(INR bn)
India NAFTA Europe Others % change
Company Management NAFTA Europe
PACCAR Ron Armstrong (CEO) "Next year should be another for
the U.S. and Canadian Class 8
truck industry and be in a range
of 240,000 to 270,000 units."
The European economic and truck
market outlook continues to improve.
"Our 2016 forecast for Europe’s heavy
truck market is a range of 250,000 to
280,000 trucks."
Jan Gurander (CFO)
Martin Lundstedt (CEO)
Daimler AG Bodo Uebber
( CFO)
“For the year 2016 we are
somewhat optimistic, as I've
already said, for the NAFTA
region.”
“Order intake in Europe was quite
promising to stay in l ine with our
market guidance of 10% to 15% for this
year. And it gives us a l ittle bit, also
optimistic for the year 2016 within
Europe. But also here it is said, it has
to be said that we will finally update
you in February for the market
assumptions of 2016.”
Volvo “Next year, we anticipate a
280,000 truck market which, once
again, that is a good market.”
“We do foresee a better truck market
next year with 275,000 trucks.”
Bharat Forge
17 Edelweiss Securities Limited
PV could add USD80‐100mn to revenue by FY18E
The PV segment is almost 4x the CV segment—total US and Europe CV sales at ~0.56mn p.a.
versus ~28.0mn for PV. Typically, in a PV, forging components account for ~120‐130kg
compared to 650‐700kg in a CV. Also, since not so heavy forgings are required in a PV,
realisations are lower at about INR90‐100/kg in the mass segment, which are 10‐15% higher
in the luxury segment. This implies an overall PV forgings market potential of ~USD3‐4bn in
US and Europe, of which ~50% will be totally new opportunity from the US. Including several
large components like crankshafts etc., we believe BHFC will have an overall (new) target
market of around USD1bn for large PV components from the US alone.
Management has added several OEMs in this segment over the past few quarters, which has
been driving its PV exports—H1F16E exports doubled (YoY) and are estimated to touch
INR2.0bn in FY16E (INR430mn in FY15) and INR5.0bn by FY18 (management guidance at
USD100mn). We assume a robust 126% revenue CAGR in PV exports over FY15‐18 to
INR5.0bn, taking BHFC’s overall PV exports to 12% plus by FY18 from less than 2% in FY15 of
overall revenue, further reducing cyclicality in the company’s revenue—PV market is
comparatively less volatile than CV.
Chart 2: Total PV and exports PV revenue mix for BHFC Chart 3: PV market is less volatile than cyclical CV market
Source: Company, Industry, ACEA, Edelweiss research
0.0
14.0
28.0
42.0
56.0
70.0
0.0
1.5
3.0
4.5
6.0
7.5
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(%)
(INR bn)
Total PV revenues Exports PV mix (RHS)
BHFC’s entry in the US PV market opens up an overall new revenue potential of
almost USD1bn. Management’s target of USD100mn revenue by FY18 seems
achievable to us given increased focus on new product launches. Also, higher
contribution (10‐12%) of PV exports to FY18E sales will reduce cyclicality.
(40.0)
(20.0)
0.0
20.0
40.0
60.0
(76.0)
(38.0)
0.0
38.0
76.0
114.0
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY11
CY12
CY13
CY14
(%)
(%)
Europe Cv North America CV
Europe PV (RHS) North America PV (RHS)
Engineering and Capital Goods
18 Edelweiss Securities Limited
Fig 3: PV offer USD1bn opportunity for BHFC
Source: Company. Industry AIFI, Edelweiss research
Aerospace, defence: BHFC to add USD100mn new sales by FY18E
BHFC had made substantial investments in terms of management bandwidth, machining
capex and attaining PQs/approvals from many global OEMs in businesses which are
materially larger/more profitable than the conventional auto forgings business. We believe,
the company is well positioned now to grow aerospace and defence businesses given
management’s clear and focused approach of targeting specific products which entail higher
value addition and scale. While aerospace opportunity will be driven by 4 global OEMs it had
signed agreements with, defence, to begin with, will be driven by manufacturing of
components for specific projects like artillery guns for the domestic market, in our view. We
expect aerospace and defence revenues to grow to USD100mn (INR7bn) by FY18E (10‐11%
of SA sales) on account of significant ramp up from global OEMs in aerospace and from off‐
set related components business from the domestic defence market.
Chart 4: Defence & aerospace revenue to take off
Source: Company, Edelweiss research
Europe PV Market(USD 1.5 ‐ 2.0 bn)
USA PV market(USD 2.0 ‐ 2.5 bn) BHFC’s target market USD 1.0 ‐ 1.2 bn
India PV Market(USD 0.5 ‐ 0.8 bn)
1.1 1.6
4.2
11.3
0.0
2.5
5.0
7.5
10.0
12.5
0
1,500
3,000
4,500
6,000
7,500
FY15 FY16E FY17E FY18E
(%)
(INR mn)
Total Aerospace and Defence A&D as a % of Revenues
Bharat Forge
19 Edelweiss Securities Limited
Focus on Large Press Drives Scale, Best‐in‐Class RoEs
BHFC has sustained a solid track record of attracting global OEMs and moved its target
market in CVs from <20% (i.e., market share of OEMs) in FY99‐00 to more than 50‐60%
currently in key markets. We dissected the OEM ramp up in BHFC’s large markets over the
past many years and compared utilisation and capacity expansion across industry cycles for
the company. We conclude that BHFC had been able to successfully improve its overall
utilisation level, evident from 54% historically to 60% plus over the past 3‐4 years, despite a
substantial ramp up in forgings capacity.
Chart 5: Targeting key OEMs; BHFC has gradually covered OEMs which have >70% market share
Source: Company, Industry Edelweiss research
7
15
(8)
15
‐2‐3
10
711
4 14
(20.0)
0.0
20.0
40.0
60.0
80.0
2000 2006 2015 2017
(European
Market Share)
Daimler Volvo MAN Scania DAF
BHFC has successfully added marquee global OEMs to its kitty and moved its target
market in CVs from <20% over FY99‐00 to more than 50‐60% currently. We dissected
the OEM ramp up in the company’s large export markets and compared revenues
across CV cycles to get a handle on the underlying strategy engineering this scale. Our
findings: (1) a collaborative supplier rather than mere vendor approach is yielding
higher participation in manufacturing value chain of OEMs, enhancing scalability
potential; and (2) given that larger press lines yield superior profitability, BHFC has
been able to manage both scale with >50% market share in key products and optimal
mix reflected in its superior RoE of 20‐25% along with much lower breakeven level
versus peers. Leveraging on these advantages, the company is well positioned to tap
additional revenues of >INR10bn from new export segments like PV, aerospace etc.,
by FY18E, as it adds substantial target market, boosting scale.
BHFC was supplying to OEMs with <20% market share in 1999‐00, which now stands at >60%
16.2
16.8
3.0
11
3.2
28
(20.0)
0.0
20.0
40.0
60.0
80.0
2000 2006 2015 2017
(North America
Market Share)
Daimler Volvo PACCAR
Engineering and Capital Goods
20 Edelweiss Securities Limited
Chart 6: BHFC’s utilisation has improved despite significant capacity addition
Source: Company, Edelweiss research
Chart 7: Sustained capacity addition ensures higher reliance of OEMs
Source: Company, Edelweiss research
(1) Collaborative supply strategy enhancing scalability BHFC has not restricted itself to being a mere vendor of forging components, but is also
actively engaged in collaborative supply, where BHFC is involved with the OEMs much
before the product launch stage in co‐designing, engineering, testing from the concept
stage and supply of highly customised machined products. Versus a mere supply
contract for forged components, collaborative supply leads to much higher
participation in an OEM’s manufacturing value chain, potently enhancing the vendor’s
scalability potential. We believe this has helped the company garner majority business
(sole supplier status in some cases) from its key OEMs.
Supply contract from a global OEM is preceded by a tedious effort right from selection,
audit & approval to collaborative supply. It takes 1‐2 years for a product to get the final
OEM approval, post which commercial production commences. BHFC has travelled a
long way in its learning curve for high precision forgings, product designing for both
30.0
40.0
50.0
60.0
70.0
80.0
0
90,000
180,000
270,000
360,000
450,000
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
(%)
(Tonnes)
India Capacity Capacity utilisation (RHS)
Avg. capacity utilzn(FY03‐09) ‐ 54%
Avg. capacity utilzn
(FY11‐15) ‐ ~60%
60,200
29,100
170,000
80,000
0
80,000
160,000
240,000
320,000
400,000
1996‐2000
2001‐2005
2006‐2010
2011‐2015
(tonnes)
Total forging capacity
210,000 218,500
506,700
898,300
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
1996‐2000
2001‐2005
2006‐2010
2011‐2015
(units)
Total machining capacity
Bharat Forge
21 Edelweiss Securities Limited
auto and high‐end applications such as aerospace, oil & gas, locomotives etc. Given
high capital intensity and longer cycle time to break into an OEM, it is not easy for all
vendors to scale up capacities, which acts as a strong entry barrier. BHFC has been
increasing its R&D investments to keep pace with growing needs of OEMs for newer
products is apparent in the exhibit (below). Not only does it help in faster OEM
acquisition, but also aids gain scale with an OEM along with exclusivity in some cases.
Fig. 4: Product development life cycle: Concept‐designing, product validation, commercial production and peak volumes
Source: Company
Collaborative‐supply approach helped BHFC secure some large value businesses from global OEMs:
Boeing: Titanium wing spare components for Boeing’s largest selling (~70% of total Aircrafts sold by Boeing) 737series.
Rolls‐Royce: Components for largest selling platform of Trent series(>20% of total engines sold by Rolls‐Royce) engines.
Paccar: Large CV components for Paccar which has 30% market share in class‐8 NAFTA market.
A European PV major: EUR250mn PV forgings contract for suspension component.
Collaborative supply
(Design/engg./testing/supply)
Typical customer acquisition process
Selection
1‐2 yrs
Audit
1 year
Approval
1‐2 yrs
Initial orders
1‐2 yrs
Time frame
25x 5x x
Magnitude of business
Supply partner
3‐5 yrs
Engineering and Capital Goods
22 Edelweiss Securities Limited
Chart 8: R&D spending on the rise
Source: Company, Edelweiss research
(2) Strategic focus on larger presses garnered higher RoE Incumbent advantage favoured scale driving market share and RoE
It is pertinent to note that higher tonnage presses generate higher RoEs (refer table
no.2), making volume scale up an imperative. As an OEM cannot guarantee full capacity
utilisation for press lines, forging companies maintain a pool of OEMs with dedicated
production slots for each press line securing margins once base utilisation level is
secured. Further, the forging company tries to improve utilisation further targeting the
most optimal product mix, which is driven by higher tonnage/high value ad products,
helping optimise RoE profile versus competition. We evaluate how BHFC has used this
strategy to gain market share with overseas OEMs.
Apart from attaining global scale in large CV components, BHFC has been able to
optimise overall utilisation of its forgings presses by focusing on most profitable
products. We evaluated the operating matrix of various presses used by forging
companies to understand the variance in profitability in different presses used across
PV and CV. This helped us gain meaningful insights into how rich the company’s
capacity mix is versus domestic peers. We also did a scenario analysis changing the
production mix assuming base capacity utilisation with CV products. Below are our
findings:
RoEs for large CV forge presses are materially higher than presses used for PV
range. This is driven by two factors: a) Gain in tonnage is greater than gain in cycle
time from a lower press to higher, optimizing a greater operating leverage. b)
Contribution margin for large CV components is better than smaller PV products
driven by better realizations.
Given high fixed cost intensity, break even in large CV press lines is as low as ~25‐
30%, which for a PV press line stands at >40‐45%.
Thus, BHFC’s majority revenue share from large components both for CVs and non‐auto
segments (>70% of standalalone) has been a key driver for best‐in‐class RoE with lowest
breakeven levels and superior contribution margins.
0.0
0.3
0.6
0.9
1.2
1.5
0
100
200
300
400
500
FY12 FY13 FY14 FY15
(%)
(INR)
R&D Spend(mn INR) % of sales
Bharat Forge
23 Edelweiss Securities Limited
Table 2: Profitability matrix across press sizes
Source: Industry, Company, Edelweiss research
Chart 9: Larger presses yield much better RoE with lower break even levels
Source: Industry, Company, Edelweiss research
Sensitivity of change in product mix to profitability
BHFC has not only attained global scale in large CV components, but has further
optimised its profitability by attaining production fungibility by adding high volume and
high value non‐auto components like oil & gas components, construction equipment,
railways etc., which has a substantial bearing on a press line’s RoE. We took example of
an 16,000tonne press and assumed different scenarios to understand how sensitive is
the profitability of the press to change in the product mix. After assuming a base
capacity (50% utilisation) for standard CV component for the press, we built
incremental production in non‐auto and PVs independently. Below is how the blended
RoEs move in different scenarios.
16000T 12500T 8000T 6000T 5500T 4000T 2500T
Capacity in MT (For single press) 56,700 38,880 28,512 21,384 18,329 12,219 6,843
Revenue (INR mn) 5,623 3,856 2,827 1,721 1,475 984 551
Contribution Margin (%) 40 40 37 32 32 30 30
PAT (INR mn) 885 524 293 131 112 61 34
CAPEX 4,253 2,916 2,138 1,497 1,283 855 479
Key assumptions
Range of products (Kgs) 60‐250 60‐250 20‐90 20‐50 20‐50 5‐20kg 2‐5kg
Capacity util isation (%) 70.0 70.0 70.0 70.0 70.0 70.0 70.0
Blended realisation (INR/KG) 140 140 125 115 115 115 115
CAPEX per tone (INR/kg) 75 75 75 70 70 70 70
0.0
7.0
14.0
21.0
28.0
35.0
0.0
14.0
28.0
42.0
56.0
70.016000T
12500T
8000T
6000T
5500T
4000T
2500T
(%)
(%)
Breakeven level (%) ROE (RHS)
Engineering and Capital Goods
24 Edelweiss Securities Limited
Sensitivity on RoEs:
1) At 90% utilisation: Blended ROE at peak CV utilization stood at 24%, while it dropped to
to a 6% as the volume shifts to 50% PV. For CV: Non‐auto mix, the ROE band moves
from 34% to 57% from 10% non‐autos to 50% in non‐autos.
2) At 60% utilisation: ROE with a 90:10 CV:PV mix drops to a low of 5‐6% while it becomes
negative if the large 16K press‐line is used to forge 50% CV & PV each. In case of CV to
Non‐auto, ROE hover from 11% to 25%.
Below calculations suggests a sharp drop in RoEs if over and above base capacity, PV
forgings is adopted in a large press, which makes it unviable for vendors to take PV
volumes for a large press.
Chart 10: ROE movement at 90% utilsation in CV: PV rev mix Chart 11: ROE movement at 60% utilsation in CV: PV rev mix
Chart 12: ROE movement at 90% utilsation in CV: NA rev mix Chart 13: ROE movement at 60% utilsation in CV: NA rev mix
Source: Company. Industry Edelweiss research
0.0
5.0
10.0
15.0
20.0
25.0
50 CV: 50 PV
60 CV: 40 PV
70 CV: 30 PV
80 CV: 20 PV
90 CV: 10 PV
ROE ( %
)
At 90%
0.0
15.0
30.0
45.0
60.0
75.0
50CV: 50NA
60 CV: 40 NA
70 CV: 30 NA
80 CV: 20 NA
90 CV: 10 NA
ROE ( %
)
At 90% NA: Non Auto
(9.0)
(6.0)
(3.0)
0.0
3.0
6.0
50 CV: 50 PV
60 CV: 40 PV
70 CV: 30 PV
80 CV: 20 PV
90 CV: 10 PV
ROE ( %
)
At 60%
0.0
6.0
12.0
18.0
24.0
30.0
50CV: 50NA
60 CV: 40 NA
70 CV: 30 NA
80 CV: 20 NA
90 CV: 10 NA
ROE ( %
)
At 60% NA: Non Auto
Bharat Forge
25 Edelweiss Securities Limited
Best‐in‐class operating performance matrix Comparison of BHFC with domestic peers reveals superior operating profitability for the
former on most parameters, driven by better product mix and scale of operations. Unlike
peers, BHFC has been able to attain optimal utilisation across its press lines to generate
best‐in‐class RoEs driven by exports of large sized components both for CV and industrial
segments like oil & gas, construction & mining equipments, power etc.
Table 3: Per tonne comparison for BHFC with domestic peers
Source: Company, Industry, Edelweiss research
Table 4: BHFC has much lower breakeven level versus peers
Source: Company, Edelweiss research
Particulars Bharat Forge Ramkrishna MM ForgingsRevenue / ton 214,867 120,884 139,593
Direct costs / ton 82,196 60,135 57,503
Employee costs / ton 15,682 7,264 11,335
Other Expenses / ton 54,156 32,426 39,986
EBIDTA / ton 62,833 21,059 30,769
Depreciation / ton 11,835 5,075 9,827
PAT / ton 33,968 12,594 14,041
EBITDA Margin 29 17 22
ROE 23 20 23
Gross Block Turn 1.14 1.41 1.07
Particulars Bharat Forge RK Forgings MM ForgingsCapacity (in tons) 380,000 82,104 45,000
Util ization 211,668 61,508 36,000
Revenue 45,481 7,408 5,025
Non‐auto as a % of sales 40.0 15.0 NIL
Contribution margin (%) 39.6 24.6 38.2
Fixed Cost as a % of total cost 20.7 16.3 27.2
Breakeven (%) 22.3 44.7 48.5
ROE (%) 23.2 20.4 23.3
Fixed Asset Turn 0.8 0.6 1.2
High share of machined CV and non‐auto components leads to lower breakeven for BHFC.
Engineering and Capital Goods
26 Edelweiss Securities Limited
Aerospace, Defence: Next Stage of Value Addition
BHFC has successfully derisked its business across products and geographies over the past
decade by sharpening focus on developing new products in the non‐auto segment. This has
helped it reduce auto revenue exposure from 80% in FY00‐01 to 60% in FY15E. With rising
share of customised non‐auto business, BHFC’s business model is metamorphosing—from
forgings heavy revenue model to customised, high margin machining heavy business. The
company has been adding new revenue streams in defence, aerospace, among others, in
close nexus with OEM clients involving itself right from the conceptualising and designing
stage, which also helps in quicker product valuation, leading to early product revenues.
Chart 14: mix Auto versus non‐auto revenue over past decade Chart 15: New revenue streams in non‐auto revenues
Source: Company, Edelweiss research
0.0
10.0
20.0
30.0
40.0
50.0
0.0
15.0
30.0
45.0
60.0
75.0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(%)
(INR bn)
Auto revenues Non auto revenues
EBIDTA margins ROE's
Graduating to the next level, collaborative approach has helped BHFC build a global
business of more than USD300mn in non‐auto segments, which involve high value
addition and machining. Moving ahead on the learning curve, the company is
planning to extend its expertise to develop new products to gain entry into the global
aerospace (~USD5‐7bn market opportunity) and defence (INR10bn revenue potential
over 5 years) value chain, which we believe will help sustain superior profitability.
3.56.5
3.4
‐ 6.5 1.7
10.4
15.2
0.0
6.0
12.0
18.0
24.0
30.0
FY10 FY15 FY18E
(INrbn)
Oil & Gas Aerospace/Defence
Bharat Forge
27 Edelweiss Securities Limited
A) Aerospace: BHFC now equiped to tap ~USD5‐7bn opportunity
The civil aerospace industry in US and Europe is currently pegged at >USD211bn with
airframe, structures, engines and landing gear accounting for more than USD145bn
(~70% of total cost of an aircraft). While BHFC’s total potential in aircraft manufacturing
value chain is currently minuscule, given major concentration toward landing gears
only, we anticipate this to rise materially as the company expands its offerings to wing
structures, engine parts etc, which has large usage of titanium, other super alloys with
major value share (>20% of an aircraft weight). One of the largest examples of global
aerospace forgings— Precision Cast Parts), a company with USD10bn revenue
(USD2.5bn from pure aerospace forgings)—supplies large and complex titanium‐super
alloys forged components to OEMs/Tier‐I vendors from its 50,000‐30,000 tonnes
presses. Given BHFCs acquired capabilities in ’titanium forgings over the past 3‐4 years,
we believe the company could now generate revenue of USD70‐80mn over 2‐3 years
(3‐4% PCC’s size).
It has inked agreements with 4 global aerospace OEMs and Tier 1 suppliers—Boeing,
Rolls Royce, Lieberrah and Safran. BHFC recently signed a multi‐year supply contract
with Boeing for wing components for 737 and 737 Max aircrafts for which the company
has supply orders for 2,500 aircrafts. With Rolls Royce, the company has inked a
contract to supply components for its largest selling Trent engines. Thus, BHFC is
focusing on high value add and large volume products to attain its USD100mn revenue
target. The company had relentlessly pursued pre‐qualifications opportunities over the
past 2‐3 years, positioning it now to manufacture and ship pre‐machined titanium
components from Q1CY16 to Boeing. While we do not anticipate challenges to the
segment’s near‐term growth, any sizeable shift beyond USD100mn mark could entail
acquisition of new capabilities and PQs.
Chart 16: Annual market for aircraft components in US & Europe at USD145bn
Source: ASMI, Edelweiss research
Airframes38%
Engines27%
Systems14%
Avionics11%
Interiors6%
Landing gear4%
On a conservative
basis, we expect
BHFC’s overall
potential market for
aerospace forgings to
be over 5‐7 bn USD
for engine
components,
Airframe structures
Engineering and Capital Goods
28 Edelweiss Securities Limited
Factors that will drive BHFC’s aerospace revenue
Pressure on OEMs to reduce costs and focus on core activities: OEMs have been
facing pressure to reduce overall aircraft manufacturing cost. They will focus more
on core activities like aircraft design, architecture, integration, final assembly and
on‐time delivery.
Consolidation of vendor base: Key OEMs like Airbus, Boeing, EADS etc., are
shifting their production from Europe/North America to low cost countries like
China, India, Malaysia and Singapore, targeting 20‐30% cost savings. Rolls Royce
had around 250 suppliers for its Trent‐500 engines, which fell to 140 for Trent 900
and 75 for Trent 1000 engines. It is estimated that there will be 25‐35 suppliers for
single aisle/narrow body aircraft engines.
BHFC targeting high volume items: Adding significant scale, BHFC is targeting high
value products like components for Trent engines (>25‐30% of Rolls Royce engines)
& 737 series (70% of Boeing deliveries).
Fig 5: Aerospace manufacturing value chain and BHFCs current positioning
Source: Deloitte
To understand and get a better insight into how global tier II & III aerospace forgings
vendors have grown, we studied PCC’s growth over the past 2 decades.
BHFC a Tier‐3 player has moved up the value chain in make‐to‐print components from landing gears to titanium forged wing spares as seen in recent supply wins
Key forged components‐ Landing gear beams Bulkheads Wing structures Engine Mounts Struts Tail Flaps
Bharat Forge
29 Edelweiss Securities Limited
Precision Cast Parts (PCC)
Precision Cast Parts (PCC), set up in 1953, is a global supplier of complex metal
products for aerospace (70% of FY15 sales), power (17%) and general industrial (14%)
markets. It clocked ~USD10bn sales in FY15 across 3 segments—Investment Cast
Products (25% of sales), Forged Products (43%) and Airframe Products (32%).
Investment Cast Products is PCC's oldest business with aircraft engines and gas turbines
being key end markets. The company moved into forgings in 1999 with the purchase of
Wyman‐Gordon and subsequent acquisitions of Special Metals in FY07 and TIMET in
FY13 which vastly expanded PCC’s upstream capabilities in nickel and titanium,
respectively, rendering it more vertically integrated. The company bought SPS
Technologies in FY03, establishing itself as a manufacturer of aerospace fasteners and
followed this up with several other deals. In FY12, PCC acquired Primus, an
aerostructures manufacturer and the fastener units became Airframe Products.
As a manufacturer of both aircraft engines and gas turbines, General Electric is PCC's
largest customer—accounting for 13% of sales. PCC has been supplying castings for jet
engines to GE for more than 30 years castings for commercial and military jet engines
to Pratt & Whitney (a division of United Technologies). In addition, it has supplied small
structural investment castings to Rolls‐Royce for more than 15 years and recently
began supplying Rolls‐Royce large structural castings for use in its new Trent series of
jet aircraft engines. As PCC has scaled up capacity to cast larger and more complex
parts, manufacturers of large jet aircraft engines have made increasing use of its
structural castings.
PCC has achieved solid top‐ and bottom‐line growth not only through its legacy
operations, but also via acquisition of businesses specifically targeted to complement
its operations. With focus on aerospace and power markets, acquisition candidates are
selected in accordance with the company’s core capabilities—production of complex
components for critical applications, direct relationship with the original equipment
manufacturer, process control, similarity in metals or technologies and improvement of
underperforming assets.
During the early 1990s, when the cyclical commercial aerospace industry was in the
doldrums, PCC had commissioned a study to determine what other types of businesses
would generate profitable growth to smooth out the valleys of the aerospace cycle.
This study inspired a series of acquisitions from 1995 to the end of the decade that
drew the company into the machine tool and fluid management industries.
Beginning 1995, demand for aerospace investment castings strengthened, primarily
due to higher demand from the commercial aerospace industry. However, during FY99,
demand fell as worldwide aircraft production had reached its peak. PCC seized this
downturn as an opportunity. Confident in its operations’ ability to reduce cost
structures going forward, the company offered major aerospace customers
deflationary pricing in exchange for long‐ term contracts and market share gains. This
approach proved so successful that when the new contracts kicked in at the beginning
of 2003, the company had the largest number of parts under development in its
history. As these components moved into production and the cycle ramped up, PCC
sales touched unprecedented high levels.
Engineering and Capital Goods
30 Edelweiss Securities Limited
Chart 17: PCC—Mapping the evolution
Source: Company, Edelweiss research
Key learnings from PCC case study for BHFC:
1. Inorganic route essential to become a full service aerospace player: PCC inked 4 large
deals over 1999‐2013 to acquire capabilities to broaden its offerings in aerospace and
other segments. The company attained significant upstream capabilities from forgings
to complex metal technologies and eventually became a full service player with end‐to‐
end airframe and gas engine component manufacturer. Every deal was followed by a
significant ramp up in revenue driven by wider and higher value ad offerings for PCC.
2. Solid earnings CAGR of 19% over 25 years: PCC posted a robust revenue CAGR of 13%,
which coupled with sustainable upstream capability addition, led to operating margin
improving from 8‐10% to 22‐25%. This led to solid 19% earnings CAGR over 25 years,
which we believe was led by strong M&A track record with efficient integration helping
the company sustainably, add both scale and higher value addition.
3. Backward integration drove maximum value addition: Acquisition of Special Metals
and TIMET helped PCC sharply improve operating profitability, taking margin up by
more than 600‐700bps, rendering it the unique capability of a full‐service aerospace
company with significant cost synergies versus peers.
0.0
5.0
10.0
15.0
20.0
25.0
30.0
0
2,500
5,000
7,500
10,000
12,500
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
(%)
(USD
mn)
Revenue Operating Profit Margin (%)
Acquisition of TIMETValue ‐ $2500mnCapabilities ‐
Titanium melting technology Margin ‐ 16%
Acquisition of Wyman ‐ Gordon Value ‐ $721mnCapabilities ‐ForgingsMargin ‐ 12.13%
Acquisition of
SPS Technologies Value ‐ $729mnCapabilities ‐Fastener
Products Margin ‐ 3.4%
Acquisition of special metals Value ‐ $548mnCapabilities ‐
Melting technologyMargin ‐ 3%
Bharat Forge
31 Edelweiss Securities Limited
B) Defence: USD1.5‐2.0bn market opportunity over next 5 years
BHFC has already achieved significant milestones in the defence segment—indigenously
developed Bharat‐52, a 155 mm Howitzer gun entirely manufactured by the company
from scratch, except the electronic control systems. Given the structure of defence
manufacturing value chain, currently most (>80%) of the value addition is done by
defence PSUs with little scope for component suppliers. However, with the government
sharpening focus on promoting local manufacturing of defence equipment, the scope
for private sector players is likely to see quantum jump with PSUs focusing more on
system integration, vacating component manufacturing to the private sector.
We anticipate BHFC to be one of the key beneficiaries of manufactured components in
specific areas like Field Artillery Rationalisation Programme (FARP) which we believe is
likely to throw open ~USD5bn worth of total Howitzer gun manufacturing market,
implying ~USD1.5‐2.0bn worth of market opportunity for BHFC for barrel and breach
assembly, engine, track & wheel components. We also expect BHFC to participate in
other major projects for Navy and Army‐Submarine, combat vehicle projects etc, which
will throw open additional opportunities for the company, however, value addition in
FARP is expected to be greater by BHFC given its overall preparedness in our view.
Factors that will help BHFC scale up defence components participation over next3‐5
years:
a) Major shift in DPP is underway to enhance private sector participation in defence
manufacturing.
b) BHFC’s forgings capability aligns with some major defense equipment procurement
programmes.
c) Global OEMs from US, Europe, among others, are developing their India
manufacturing component vendor base.
Fig. 6: India’s defence manufacturing value chain and BHFC’s positioning
Source: Industry, Edelweiss research
Increasing pie for
component suppliers
in light of limited
players being ready to
cater to demand will
impart huge scale to
large players like
BHFC, L&T etc.
Engineering and Capital Goods
32 Edelweiss Securities Limited
Table 5: Select low hanging procurement plans could benefit BHFC
Source: Industry, Edelweiss research
Artillery Guns Volume USD mn Players Current status
667
(for 145 guns)
Towed gun‐ 155 mm 52
calibre
400 + 1180 1788 (400 guns) Nexter‐L&T, Elbit‐Bharat Forge 5th RFP is out . No progress
Tracked self propelled gun‐
155 mm 52 calibre
100 800 Tata Power SED, Mahindra‐
RDM, BEML‐Rosoboronexport,
L&T‐Samsung, Ashok Leyland
L&T‐Samsung has been
shortlisted by MoD as per
media articles in Oct‐2016
Wheeled self propelled gun‐
155 mm 52 calibre
180 960 November 2011 RFP
cancelled. No further
progress
Mounted gun system‐ 155
mm 52 calibre
200 + 614 Archer, Ceaser, L&T, OFB, BEL,
Bharat Forge
Bids have been invited. Trials
underway
Total 3000+ 5400+
M‐777 Ultra Light Howitzers 145 + 290 BAE Systems Likely to be a Foreign military
service (FMS) deal
Bharat Forge
33 Edelweiss Securities Limited
Key Risks & Growth Concerns a) Subdued outlook for global Oil &gas capex
BHFC managed to reach USD100mn mark (FY15) in oil and gas component exports to NAFTA
market driven by strong product development focus and shale gas boom in NAFTA market.
Given a sharp fall in oil prices, outlook for capex has significantly worsened with the
company’s oil and gas export sales likely to plummet 50% plus in FY16E. While management
has been taking proactive steps to add new products to OEMs, we do not foresee any
improvement in the segment. However, we have not taken sharp cuts from our FY16
estimates, which could pose a downside risk to our earnings.
Chart 18: Decline in rig count in US reflects weaker capex outlook
Source: OPEC, Baker& Hughes, Edelweiss re search
b) Tepid outlook for Class 8 trucks
Given the sharp inventory correction led by weaker–than‐expected demand, order intake
over past 6‐8 months for Class 8 trucks in NAFTA has dropped sharply. Also, in line with
OEMs commentary we expect CY16‐17E industry drop of 15% and 5%, while we have
factored in better performance for BHFC at 8% for FY17E and assuming 5% growth for FY18E
on back of major OEM addition and new product ramp up. However, any further data point
impacting our industry growth assumption poses a downside risk to our growth
assumptions.
0
400
800
1,200
1,600
2,000
0.0
2.0
4.0
6.0
8.0
10.0
Mar‐11
Sep‐11
Mar‐12
Sep‐12
Mar‐13
Sep‐13
Mar‐14
Sep‐14
Mar‐15
Sep‐15
(x)
(mn bbl/d)
US crude production Rig count (RHS)
Engineering and Capital Goods
34 Edelweiss Securities Limited
Chart 19: Class 8 intake and sales trend Chart 20: Assumption for HVC‐ US & BHFC
Source: Bloomberg, Company, Edelweiss research
c) Domestic industrial market—Defence, railways etc
While BHFC’s non‐auto domestic market revenues over the past 3‐4 years have remained
flattish on account of weak industrial activity, we believe potential over the next 3‐5 years
remains buoyant, especially railways (locos), defence, power, mining etc, where BHFC has a
strong positioning. We have assumed revenue CAGR of 25% (FY15‐18E) implying
INR8.5bnrevenue by FY18E. However, any substantial delay in capex pick up in the
company’s key segments will impact our growth assumptions.
Table 6: Our assumption for non‐auto (domestic) businesses for 2‐3 major segments
Source: Edelweiss research
0
10,000
20,000
30,000
40,000
50,000
Dec‐10
May‐11
Oct‐11
Mar‐12
Aug‐12
Jan‐13
Jun‐13
Nov‐13
Apr‐14
Sep‐14
Feb‐15
Jul‐15
Dec‐15
(Nos.)
Net truck retail sales Net truck order
(INR mn) FY15 FY16E FY17E FY18E
Energy (Power) 1,400 1,540 1,771 2,037
Construction & Mining 2,000 2,200 2,750 3,438
Railways 525 578 693 1,040
Defence ‐ ‐ 500 1,500
Orthers 400 430 463 499
Total Domestic non auto 4,325 4,748 6,177 8,513
(25.0)
(5.0)
15.0
35.0
55.0
75.0
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(%)
Industry Growth NAFTA CV
BHFC growth in NAFTA CV
Bharat Forge
35 Edelweiss Securities Limited
Outlook and Valuation
We place our conviction on BHFC’s execution capabilities, particularly its ability to attract
new businesses which entail high scale and superior profitability. The company, by virtue of
prudent choice of most profitable markets (NAFTA, Europe) and components (large
tonnage) for its capital intensive press lines, has maintained best‐in‐class RoE and earnings
growth of ~25% each (long term) for the standalone entity. We estimate the company to
post a reasonable 16‐18% earnings CAGR with stable RoE over FY15‐18 led by higher market
penetration in CVs, exports contribution from new PVs and quantum leap up aerospace
from large OEMs.
BHFC has traded at an average PE of 25x (long term average) with 25% earnings CAGR and
~25% ROE (average long term) However, we value the company at 21x (25x earlier) as we
roll forward to FY18E earnings given reasonable earnings CAGR and stable RoE for FY16‐18E.
We build in key risks to FY16‐17E earnings from weak Class 8 and low oil & gas capex
outlook by cutting our EPS ~10% for FY16‐17E each. Recent sharp correction in stock (down
40% over 6M), we believe, is an excellent buying opportunity for long‐term shareholders’
value creation, given reasonable valuation (at 15x FY18EPS) and BHFC’s increasing presence
in niche and scalable global aerospace manufacturing value chain and expanding auto
product reach. These, we believe offer significant RoE accretion potential beyond FY18E.
Post our rationalisation of earnings, the stock trades at 15x FY18E PE (35% discount to long‐
term average). It now offers a favourable risk‐reward given most concerns are factored in,
with a significant potential scale of new markets added over the past 6‐12 months, which
will materialise over the 3‐5 years, imparting additional growth visibility. Maintain ‘BUY/SO’.
Chart 21: 1 year forward P/E band
Source: Bloom, Edelweiss research
0.0
10.0
20.0
30.0
40.0
50.0
Jan‐05
Jul‐05
Jan‐06
Jul‐06
Jan‐07
Jul‐07
Jan‐08
Jul‐08
Jan‐09
Jul‐09
Jan‐10
Jul‐10
Jan‐11
Jul‐11
Jan‐12
Jul‐12
Jan‐13
Jul‐13
Jan‐14
Jul‐14
Jan‐15
Jul‐15
Jan‐16
(x)
1 year forward P/E Average PE
Impact of NAFTA/India CV cycle
Impact of NAFTA CV cycle
BHFC has traded at an average PE of 25x (long term average) with 25% PAT CAGR and
~25% RoE over the past 14 years. We estimate the company to post a reasonable 18%
plus earnings CAGR with stable RoE over FY15‐18E. We value the company at 21x
FY18E earnings given reasonable earnings CAGR and stable RoE over FY16‐18E. We
believe recent sharp correction in stock (down 40% over 6M) is an excellent buying
opportunity for long‐term shareholders’ value creation.
Engineering and Capital Goods
36 Edelweiss Securities Limited
Table 7: Key assumptions
Source: Company, Edelweiss research
Table 8: Change in estimates (consolidated)
Segments (INR bn) FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Total Standalone revenues (Gross) ‐ (A) 35,082 32,005 35,000 47,180 48,216 56,085 66,252
% change 17.8 (8.8) 9.4 34.8 2.2 16.3 18.1
1) BHFC ‐ Passenger Vehicles (INR mn) 2,398 2,704 2,279 2,377 4,151 6,098 8,075
a) India 1,985 2,323 1,878 1,946 2,125 2,443 2,889
b) USA 0 8 53 70 1,487 2,998 4,353
c) Europe 408 323 262 262 435 548 718
d) Asia & Others 5 50 86 99 104 109 114
2) BHFC ‐ Commercial Vehicles (INR mn) 18,012 14,837 15,556 22,210 22,391 26,134 28,395
a) India 7,607 5,734 4,695 5,977 7,150 9,162 10,178
b) USA 4,469 4,565 4,841 10,457 8,652 9,303 9,672
c) Europe 4,498 3,594 4,723 4,286 5,024 6,025 6,820
d) Asia & Others 1,438 944 1,296 1,490 1,565 1,643 1,725
3) BHFC ‐ Non‐Auto (INR mn) 13,191 11,484 13,834 18,485 17,584 19,558 25,161
a) India 6,661 5,102 5,550 6,250 7,188 8,122 9,178
b) USA 3,638 4,381 5,250 8,750 6,563 7,219 11,550
c) Europe 2,852 1,940 2,960 3,400 3,740 4,114 4,320
d) Asia & Others 40 61 74 85 94 103 113
4) Other revenues (INR mn) 1,481 2,980 3,331 4,109 4,091 4,295 4,621
CDP Bharat Forge (B) 12,158 11,298 14,403 11,575 12,154 13,369 14,706
Aluminiumtechnik (C) 2,197 2,736 3,693 3,106 3,261 3,914 4,892
Bharat Forge Kilsta (D) 6,326 6,561 7,543 5,792 6,081 6,690 7,358
Bharat Forge International ltd. (E) ‐ ‐ 9,180 10,870 11,413 12,554 13,810
Gross Consolidated Revenues (A+B+C+D+E) 55,763 52,601 69,817 78,523 81,125 92,611 1,07,018
% change 87.3 (5.7) 32.7 12.5 3.3 14.2 15.6
Margins (%)
SA EBITDA margins (%) 24.8 22.7 25.4 29.2 29.1 29.2 29.7
Subs EBITDA margins(%) 5.8 5.1 6.3 3.7 4.0 4.6 5.0
Consolidated EBITDA margins (%) 15.9 15.3 15.3 18.9 18.9 19.5 20.3
FY16E FY17E
(INR mn) New Old % change New Old % change Comments
Net revenue 79,438 78,788 (3.5) 90,648 95,534 (5.1) Building in weakness in Class 8
volumes in NAFTA region
EBITDA 15,027 16,736 (8.0) 17,665 20,298 (9.0)
EBITDA margin 18.9 20.8 19.5 21.2
Adjusted PAT 7,612 8,475 (10.2) 9,560 10,070 (11.1)
PAT margin 9.8 10.8 10.8 11.8
Bharat Forge
37 Edelweiss Securities Limited
Growth profile of subsidiaries & JV
Management invested more substantially over past decade in gaining access to new market,
technology & products by 2‐3 large acquisitions & JVs. However, weak demand and sub‐
optimal utilization levels led the management to consolidate its presence over the past 3
years, exiting its stakes/assets in FAW Bharat Forge JV (China), BF America and David Brown
Bharat Forge Gear Systems (India) over the past 2‐3 years. The company is now focused on 3
three large overseas entities: CDP Bharat Forge (Germany), BF AT (Germany) and BF Kilsta
(Sweden). Improving growth outlook for European market, both CV and PV, augurs well for
these entities. We estimate BHFC’s overseas entities to clock overall EBIDTA CAGR of 20%
over FY15‐18E, implying INR270mn PAT by FY18 versus a loss of INR150mn in FY15.
Chart 22: Overseas performance of subsidiaries
Source: Company, Edelweiss research
Bharat Forge Aluminumtechnik (BFAT): Capex to drive earnings growth
BFAT is a leading supplier of aluminium chassis components & control arms to all major
European OEMs like Audi, BMW, Bentley, Daimler etc. The company in May 2015 bagged a
EUr250mn multi‐year contract from a leading German OEM for supply of suspension
components, for which it is incurring a capex of EUR31mn by adding new press lines.
Management expects to commence production during Q1CY16 post completion of
validation process. We expect the entity to clock decent 25% revenue and 125% PAT CAGR
over FY15‐18E, albeit on a low base.
Alstom‐Bharat Forge Power: PAT contribution from FY17E
The JV has already bagged 3 projects worth INR60bn plus for 9 sets of 660/800MW rating
for turbine supplies. The new plant at Sanand (Gujarat) has commenced commercial
operations in May 2015 and is likely to post revenue of INR10bn and INR15bn in FY16E and
FY17E, respectively. Post takeover by GE, we see improved potential for the JV given GEs
wider product portfolio and existing relation with BHFC.
0.0
1.5
3.0
4.5
6.0
7.5
15,000
21,500
28,000
34,500
41,000
47,500
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(%)
(INR mn)
Overseas Subs. Revenues Subs EBITDA margins(%)
We expect 9%
revenue & 20%
EBIDTA CAGR
driven by
improving industry
outlook
Engineering and Capital Goods
38 Edelweiss Securities Limited
Financial Outlook
Revenue to post 12% CAGR over FY15‐18E led by emerging business
We estimate BHFC to post 12% standalone revenue CAGR over FY15‐18E led by 50% and
12% CAGR in PV and non‐auto revenues, respectively. We believe growth in the CV business
will be moderate at around 5% primarily due to tepid industry growth in the US, even as
growth in the Indian market is anticipated to be strong over the next 2 years. Also, from a
peak of 53%, we expect CV contribution to revenue mix to decline by more than 8% over the
next 2 years. Importantly, in the non‐auto business, while we expect revenue to decline 10%
in FY16E led by fall in oil & gas exports, we believe aerospace, defence, Indian mining and
railways businesses will enhance the non‐auto business sizeably over the next 3 years.
At the consolidated level, revenue CAGR is expected to be 12‐13% over FY16‐18E as we
believe all major subsidiaries will report 5‐10% growth led by stable to improving outlook in
European CV & PV market.
Chart 23: Revenue growth to be led by new businesses
Source: Company, Edelweiss research
Firm margin on sustained high share of machined components
BHFC’s margin touched a historic high of 29% in FY15 led by robust growth in US CV and oil
& gas markets. BHFC has been able to maintain/improve its margins in H1FY16 at ~29.5%,
which we believe would be difficult to sustain in H2FY16E as the mix of CV and Non auto
drops. Over the next 3 years, we expect margins to remain stable to improving led by sharp
ramp up from the aerospace business.
13.918.0
14.8 15.6
22.2 22.426.1
28.4
13%
10.5
13.211.5
13.8
18.5 17.6
19.6
25.2
3.0
1.53.0
3.3
4.1 4.1
4.3
4.6
7%
(10.0)
6.0
22.0
38.0
54.0
70.0
(10.0)
5.0
20.0
35.0
50.0
65.0
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(%)
(INR bn)
CV PV Non Auto revenues Others % revenue change (RHS)
We estimate BHFC to post 12% standalone revenue CAGR over FY15‐18E led by 50%
and 12% CAGR in PV and non‐auto revenues, respectively. Over the next 3 years, we
expect margins to remain stable to improving led by sharp ramp up from the
aerospace business. BHFC’s free cash flow generation is expected to remain robust
and we estimate the company to generate INR15bn FCF over FY16‐18E.
We expect BFL to post 12% revenue
CAGR over FY15 to FY18E led by 50%
and 12% CAGR growth in the PV and
non auto revenues.
Bharat Forge
39 Edelweiss Securities Limited
On the international subsidiaries front, BHFC’s clear focus has been to increase margins
gradually led by operational efficiencies. We expect margins of subsidiaries to move from
3.5% in FY15 to 5% by FY18E.
Chart 24: EBITDA margin to remain stable over the next 2 years
Source: Company, Edelweiss research
PAT growth and FCF generation to be robust
With 12% revenue CAGR and stable margin over FY16‐18E, BHFC’s consolidated EPS is
estimated to post 18% CAGR over the period. BHFC’s free cash flow generation is expected
to remain robust and we estimate the company to generate INR15bn FCF over FY16‐18E.
We expect BHFC to go for inorganic expansion given improved management focus on
capability addition, especially in aerospace and defence given ambitious growth plans.
Capex over the next 3 years is expected to be ~INR10bn predominantly towards machining
and no new forging lines are expected to be added. RoAE and RoCE are expected to remain
healthy at standalone and consolidated levels. While RoAE is estimated to remain upwards
of 21%, RoACE is estimated at 25% by FY18E from 23% in FY16E.
Chart 25: Strong FCF growth over next 2 years
Source: Company, Edelweiss research
24 25 23
25
29 29 29 30
15 16 15 15
19 19 19 20
10.0
15.0
20.0
25.0
30.0
35.0
0
5,000
10,000
15,000
20,000
25,000
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
(%)
(INR mn)
SA EBITDA Consol EBITDA SA Margins Consol Margins
(20)
0
20
40
60
80
0.0
6.0
12.0
18.0
24.0
30.0
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(INR bn)
(%)
FCF generation (INR bn) ROAE (LHS)
INR 15bn FCF
expected over FY16‐18E
40 Edelweiss Securities Limited
Engineering and Capital Goods
Financial Statements (Consolidated)
Income statement (INR mn)
Year to March FY15 FY16E FY17E FY18E
Income from operations 76,247 79,438 90,648 104,500
Direct costs 28,836 42,090 47,448 53,809
Employee costs 9,051 8,060 9,088 10,337
Other Expenses 23,952 14,260 16,447 19,189
Total operating expenses 61,840 64,410 72,983 83,335
EBITDA 14,408 15,027 17,665 21,166
Depreciation 3,624 3,980 4,216 4,452
EBIT 10,784 11,048 13,449 16,714
Add: Other income 1,368 1,342 1,559 1,608
Less: Interest Expense 1,356 1,374 1,261 1,072
Add: Exceptional items 428 ‐ ‐ ‐
Profit Before Tax 11,223 11,016 13,747 17,250
Less: Provision for Tax 3,587 3,305 4,124 5,175
Less: Minority Interest (30) 77 96 145
Associate profit share ‐ (22) 33 231
Reported Profit 7,666 7,612 9,560 12,162
Exceptional Items 428 ‐ ‐ ‐
Adjusted Profit 7,238 7,612 9,560 12,162
Diluted shares o/s (mn) 233 233 233 233
Adjusted Diluted EPS 31.1 32.7 41.1 52.2
Dividend per share (DPS) 7.5 8.0 10.0 12.0
Dividend Payout Ratio(%) 24.1 24.5 24.4 23.0
Common size metrics
Year to March FY15 FY16E FY17E FY18E
Operating expenses 81.1 81.1 80.5 79.7
EBITDA margins 18.9 18.9 19.5 20.3
Net Profit margins 9.5 9.7 10.7 11.8
Growth ratios (%)
Year to March FY15 FY16E FY17E FY18E
Revenues 13.5 4.2 14.1 15.3
EBITDA 39.9 4.3 17.6 19.8
PBT 53.3 (1.8) 24.8 25.5
Adjusted Profit 71.8 5.2 25.6 27.2
EPS 71.8 5.2 25.6 27.2
FY15 FY16E FY17E FY18E
Macros
GDP(Y‐o‐Y %) 7.2 7.4 7.9 8.3
Inflation (Avg) 5.9 4.8 5.0 5.2
Repo rate (exit rate) 7.5 6.8 6.0 6.0
USD/INR (Avg) 61.2 65.0 67.5 67.0
Total SA revenues 47,180 48,216 56,085 66,252
1) BHFC ‐ Passenger Vehicles (INR mn) 2,377 4,151 6,098 8,075
2) BHFC ‐ Commercial Vehicles (INR mn 22,210 22,391 26,134 28,395
3) BHFC ‐ Non‐Auto (INR mn) 18,485 17,584 19,558 25,161
4) Other revenues (INR mn) 4,109 4,091 4,295 4,621
Total Subs revenues 31,342 32,909 36,526 40,766
SA EBITDA margins 29.2 29.1 29.2 29.7
Subs EBITDa margins 3.7 4.0 4.6 5.0
CAPEX 7,089 3,550 3,550 3,550
Tax rate 32 30 30 30
41 Edelweiss Securities Limited
Bharat Forge
Cash flow metrics
Year to March FY15 FY16E FY17E FY18E
Operating cash flow 10,293 7,055 9,854 10,306
Investing cash flow (4,616) (2,208) (1,991) (1,942)
Financing cash flow (3,599) (5,053) (5,485) (5,840)
Net cash Flow 2,077 (206) 2,379 2,524
Capex (7,089) (3,550) (3,550) (3,550)
Dividend paid (1,519) (2,179) (2,724) (3,268)
Profitability and efficiency ratios
Year to March FY15 FY16E FY17E FY18E
ROAE (%) 23.5 20.7 22.3 24.1
ROACE (%) 23.1 20.6 23.2 25.8
Inventory Days 131 112 127 127
Debtors Days 41 45 47 49
Cash Conversion Cycle 172 157 174 176
Current Ratio 2.3 2.2 2.3 2.4
Gross Debt/EBITDA 1.6 1.5 1.2 0.9
Gross Debt/Equity 0.7 0.6 0.4 0.3
Adjusted Debt/Equity 0.7 0.6 0.4 0.3
Interest Coverage Ratio 8.0 8.0 10.7 15.6
Operating ratios
Year to March FY15 FY16E FY17E FY18E
Total Asset Turnover 1.4 1.3 1.3 1.4
Fixed Asset Turnover 3.0 3.0 3.6 4.2
Equity Turnover 2.5 2.1 2.1 2.0
Valuation parameters
Year to March FY15 FY16E FY17E FY18E
Adj. Diluted EPS (INR) 31.1 32.7 41.1 52.2
Y‐o‐Y growth (%) 71.8 5.2 25.6 27.2
Adjusted Cash EPS (INR) 46.7 49.8 59.2 71.4
Diluted P/E (x) 24.9 23.7 18.9 14.8
P/B (x) 5.2 4.5 3.9 3.2
EV / Sales (x) 2.5 2.4 2.1 1.8
EV / EBITDA (x) 0.8 0.7 0.4 0.1
Dividend Yield (%) 1.0 1.0 1.3 1.5
FCFPS (INR) 13.8 15.1 27.1 29.0
Y‐o‐Y gr. in FCFPS (%) (54.0) 9.4 79.9 7.2
FCFPE (x) 56.3 51.5 28.6 26.7
Balance sheet (INR mn)
As on 31st March FY15 FY16E FY17E FY18E
Share capital 466 466 466 466
Reserves & Surplus 33,976 39,409 46,246 55,139
Shareholders' funds 34,442 39,875 46,711 55,604
Minority Interest (20) (20) (20) (20)
Short term borrowings 3,830 3,830 3,830 3,830
Long term borrowings 19,815 18,315 16,815 15,315
Total Borrowings 23,645 22,145 20,645 19,145
Long Term Liabilities 1,792 1,792 1,792 1,792
Def. Tax Liability (net) 1,638 1,638 1,638 1,638
Sources of funds 61,497 65,430 70,766 78,160
Gross Block 55,906 59,406 62,906 66,406
Net Block 25,668 25,247 24,596 23,713
Capital work in progress 8,586 8,586 8,586 8,586
Intangible Assets 619 610 596 577
Total Fixed Assets 34,873 34,443 33,777 32,875
Non current investments 389 389 389 389
Cash and Equivalents 11,386 11,180 13,559 16,083
Inventories 10,339 15,568 17,549 19,902
Sundry Debtors 8,535 10,882 12,418 15,747
Loans & Advances 5,066 5,572 6,129 6,742
Other Current Assets 11,752 13,514 16,217 19,461
Current Assets (ex cash) 35,691 45,536 52,313 61,851
Trade payable 11,016 15,683 17,679 20,049
Other Current Liab 9,826 10,435 11,593 12,989
Total Current Liab 20,842 26,118 29,272 33,039
Net Curr Assets‐ex cash 14,849 19,418 23,041 28,813
Uses of funds 61,497 65,430 70,766 78,160
BVPS (INR) 147.9 171.3 200.7 238.9
Free cash flow (INR mn)
Year to March FY15 FY16E FY17E FY18E
Reported Profit 7,666 7,612 9,560 12,162
Add: Depreciation 3,624 3,980 4,216 4,452
Interest (Net of Tax) 923 962 883 750
Others (3,159) (10,068) (8,428) (12,829)
Less: Changes in WC (1,240) (4,569) (3,624) (5,771)
Operating cash flow 10,293 7,055 9,854 10,306
Less: Capex 7,089 3,550 3,550 3,550
Free Cash Flow 3,204 3,505 6,304 6,756
Peer comparision valuations
Name of the companies CMP 2017E 2018E 2017E 2018E 2017E 2018E
Bharat Forge 775.0 180.4 18.9 14.8 3.9 3.2 22.3 24.1
Ramkrishna Forgings 421.0 11.6 11.4 8.4 2.1 1.7 19.6 22.1
Source: Edelweiss research
Market cap
(INR bn)
PE (x) P/BV (x) ROE (%)
42 Edelweiss Securities Limited
Engineering and Capital Goods
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*in last one year
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Holding – Top10 Perc. Holding Perc. Holding
Kalyani investment c 13.6 Sundaram trading & i 12.85
Ksl holding pvt ltd 9.94 Life insurance corp 5
Ajinkya invest & tra 4.22 Bf investment ltd 3.35
Reliance capital tru 2.66 Prudential icici ass 1.49
Blackrock 1.33 Uti asset management 1.32
*in last one year
Additional Data
Directors Data Mr. B. N. Kalyani Chairman & Managing Director Mr. S.M. Thakore Independent Director
Mr. G. K. Agarwal Deputy Managing Director Mr. S.D. Kulkarni Independent Director
Mr. Amit B. Kalyani Executive Director Mr. P.G. Pawar Independent Director
Mr. B.P. Kalyani Executive Director Dr. Uwe Loos Independent Director
Mr. S. E. Tandale Executive Director Mrs. Lalita D. Gupte Independent Director
Mr. Sunil K. Chaturvedi Executive Director Mr. P.H. Ravikumar Independent Director
Mr. Vimal Bhandari Executive Director Mr. Naresh Narad Independent DirectorMr. P.C. Bhalerao Non‐Executive Director Dr. T. Mukherjee Independent Director
Auditors ‐ S.R. Batliboi & Co. LLP
*as per last annual report
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Ramkrishna Forgings (RKFL) has catapulted into the global forgings industry’s big league underpinned by its strategy of transitioning from manufacture of lower‐end to higher‐margin and exports‐oriented complex & heavy forged components. This prudent scale up has opened new addressable opportunities of INR30‐35bn across US, Europe and India for the company. Moreover, deepening focus on the overseas market has lowered its dependence on the cyclical domestic CV market— revenue share dipped to 33% in FY15 from 75% in FY10. We envisage higher share of superior margin complex products to catapult RKFL’s revenue CAGR to 24%, margin to ~23% (17.5% in FY15) and EPS CAGR to 26%, in turn boosting RoE to ~22% versus 19% in FY15, over FY15‐18. Initiate with ‘BUY’ and TP of INR700, assigning 14x FY18E P/E (33% discount to Bharat Forge).
Diversification to complex products imparts scalability
The prudent shift from manufacturing lower‐end products to complex and heavy
forged components enhances RKFL’s presence in high‐margin and exports‐oriented
products, positioning it to tap new opportunities worth INR30‐35bn across US, Europe
and India. We estimate peak revenue potential of the 3 newly added 80,000tonne
production capacity at 2.5x FY15 revenue of INR7bn. Moreover, our deep dive analysis
indicates peak profitability potential of INR1.5bn (~2x FY15 PBT) for the 12,500tonne
press (production capacity of ~45,000tonne)
Deepening exports to insulate against domestic cyclical surprises
In order to insulate itself from vagaries of the cyclical domestic CV market, the
company has, over the past 2 years, deepened its overseas presence and sharpened
focus on adding global OEMs. Thus, RKFL has successfully lowered dependence on the
domestic CV segment to 33% in FY15 from 75% in FY10, reinforcing resilience of
business. We expect the exports revenue mix to sustain at~50% over the next 3 years.
Outlook and valuations: Flexing muscles; initiate with ‘BUY’
RKFL is at an inflexion point as it successfully scales up its heavy press forgings
capacity, lending heft to its medium‐ to long‐term growth trajectory. Initiate with
‘BUY’ and TP of INR700. It currently trades at a P/E of 11x and 8x on FY17 & FY18E EPS.
INITIATING COVERAGE
RAMKRISHNA FORGINGSOpportune diversification
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Growth
MARKET DATA (R: RKFO.BO, B: RMKF IN)
CMP : INR 419
Target Price : INR 700
52‐week range (INR) : 779 / 391
Share in issue (mn) : 28.7
M cap (INR bn/USD mn) : 12 / 177
Avg. Daily Vol. BSE/NSE (‘000) : 86.6
SHARE HOLDING PATTERN (%)
Current Q2FY16 Q1FY16
Promoters *
50.4 48.2 48.1
MF's, FI's & BKs 16.3 13.8 14.1
FII's 6.7 6.1 4.6
Others 26.6 31.9 33.2
* Promoters pledged shares (% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Sensex Stock
Stock over Sensex
1 month (6.5) (22.8) (16.3)
3 months (11.8) (34.2) (22.4)
12 months (16.7) 1.5 18.2
Swarnim Maheshwari +91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
Amit Mahawar +91 22 4040 7451
amit.mahawar@edelweissfin.com
India M
idcaps
India Equity Research| Engineering and Capital Goods
January 20, 2016
Financials (Standalone)
Year to March FY15 FY16E FY17E FY18E
Revenues (INR mn) 7,435 9,119 11,914 14,322
Rev. growth (%) 73.1 22.6 30.6 20.2
EBITDA (INR mn) 1,295 1,878 2,536 3,249
Adj. profit (INR mn) 700 655 1,013 1,378
Adj. Diluted EPS (INR) 25.5 23.9 36.9 50.2
EPS growth (%) 687.4 (6.4) 54.5 36.1
Diluted P/E (x) 16.5 17.6 11.4 8.4
ROAE (%) 19.1 14.9 19.6 22.1
Engineering and Capital Goods
44 Edelweiss Securities Limited
Investment Rationale
Shift to complex forged products to enhance scalability, profitability The single most factor propelling RKFL into the big league on the global forging stage is its
transition from lower‐end forged products to high‐margin and exports oriented complex
& heavy forged components. Addition of press lines, particularly the 12,500tonne, not
only improves scalability, but also enhances profitability considerably as realisations in
complex forged components are ~10‐15% higher versus traditional forgings, thus entailing
superior margins. We estimate peak revenue potential of the recent capacity addition
(80,000tonne) at 2.5x FY15 revenue of INR7bn. Importantly, our deep dive analysis of
12,500tonne press’ profitability indicates peak potential of INR1.5bn (~2x FY15 PBT). This
prudent transition expands RKFL’s addressable pie to INR30‐35bn across US, Europe and
India.
RKFL, predominantly catering to the CV segment, has made prudent investments in capacity
augmentation and technology upgradation. The company’s transition from lower end forged
products like crown wheel, pinion and crown propeller shafts, among others, to more
complex and heavy forged components such as crankshafts, front axle beams, steering
knuckles, connecting rods, etc., has enhanced its presence in the high‐margin and exports
oriented products.
Entry in new, complex and heavy forging components has ramped up RKFL’s growth
opportunities manifold. We envisage the scale up to heavy forgings to open INR25‐30bn
opportunities across US, Europe and India. Peak revenue potential of the 3 newly added
80,000tonne production capacity is 2.5x FY15 revenue of INR7bn, which we believe will help
the company scale up rapidly.
Fig. 1: Scaling up the value chain
Source: Company, Industry, Edelweiss research
Existing market size (200kg)
INR 15‐20bn
Targe market size from
new presses (200‐250kg)
~INR 30 bn
Combined opportunity size for RKFL (400‐
450kg)
INR 40‐45bn
Ramkrishna Forgings
45 Edelweiss Securities Limited
We believe the recent addition of press lines, particularly the 12,500tonne press, not only
improves scalability, but also enhances profitability considerably as realisations in complex
forged components are ~10‐15% higher versus traditional forgings, thus entailing higher
margins.
Further, our deep dive analysis of the profitability of the 12,500tonne press indicates peak
profitability potential of INR1.5bn (~2x FY15 PBT). At 90% utilisation, RoCE of this press
can catapult as high as ~45%.
Table 1: Profitability analysis of a 12,500 tonne press
Source: Company, Industry Edelweiss research
Moreover, leveraging its strong relations with key global vendors, the company has already
secured orders for 20% of the upcoming ramped up production, in turn significantly
lowering its scale up risks. Commendably, RKFL has already been chosen by Tata Motors as
an alternate supplier of crankshafts and front axle beams (after Bharat Forge) post the
latter’s decision to reduce reliance on its internal foundry capacities.
Key assumptions:NSR(INR/Kg) (Blended for Exports and Domestic) 135
Util ization (%) 90.0
Cycle time per component(Seconds) 44
Avg product weight (Kg) 100
CAPEX per kg 85
CAPEX break up : 70% debt , 30% equity
Cost of debt (%) 4.0
Calculations : (INR mn)
Revenue 6,197
Contribution Margin (%) 39.5
Total Fixed cost 892
PBIT 1,559
Interest 98
PBT 1,461
ROCE's 45
Engineering and Capital Goods
46 Edelweiss Securities Limited
Deepening exports to insulate against domestic cyclical surprises
RKFL, in order to insulate itself from vagaries of the cyclical domestic CV market, is
deepening its overseas presence. Ergo, contribution of the domestic CV segment in the
overall revenue pie has dipped to 33% in FY15 from 75% in FY10. Moreover, the company
has been training focus on adding global OEMs—successfully bagged tier 1 component
supplier Dana Corp. This, along with successful addition of other marquee OEMs to its
kitty, will palpably expand its global opportunity basket.
Earlier, RKFL’s fortunes were inextricably tied with those of the domestic CV market,
rendering it susceptible to cyclicality—revenues moved in tandem with the domestic CV
industry’s growth at ~10% from FY08‐14. Moreover, exports were limited to 10%.
In order to insulate itself from vagaries of the cyclical domestic CV market, the company has,
over the past 2 years, deepened its overseas presence and has sharpened focus on adding
global OEMs. Its efforts have slowly but steadily started bearing fruits—it bagged a
USD100mn per annum deal from Dana Corp (tier 1 component supplier to global OEMs); it
has also inked an annual contract of USD14mn (potential to scale up to USD30mn per
annum over next 2 years) with another global OEM.
Thus, RKFL has successfully lowered its dependence on the domestic CV segment to 33% in
FY15 from 75% in FY10, reinforcing resilience of business. We expect the exports revenue
mix to sustain at ~50% levels over the next 3 years as the company ramps up its exports
revenues from the new press lines.
Chart 1: Exports’ share in revenue mix expected to stay Chart 2: Historical rev growth in tandem with industry
above 50%
Source: Industry, Company, Edelweiss research
66 74 70 70 65
49
33 33 39 39
10 9
6 5 8
9
6 5 4 3
8 5
11 9 12
24
47 51 47 50
11 8 9 10 9 13 12 9 7 7
0.0
20.0
40.0
60.0
80.0
100.0
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(%))
Auto Railways Mining Exports Others (Inc Scrap)
(40.0)
(12.0)
16.0
44.0
72.0
100.0
(50.0)
(30.0)
(10.0)
10.0
30.0
50.0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
(%)
(%)
India MHCV growth rateRKFL's revenue growth (RHS)
Ramkrishna Forgings
47 Edelweiss Securities Limited
Ample arsenal in place to clock 26% EPS CAGR over FY15‐18E
We estimate a robust 23% production volume CAGR over FY15‐18 (3% over FY12‐15) as
share of new press lines in the production mix jumps significantly (to~50% from 10% in
FY15) by FY18E on back of OEM additions. Moreover, higher share of superior margin
complex products will catapult RKFL’s revenue CAGR to 24%, margin to 22.5% from 17.5%
currently and EPS CAGR to 26% over FY15‐18. Hence, we anticipate RoE to improve
gradually to ~22% versus 19% in FY15.
Over FY12‐15, RKFL clocked revenue CAGR of 14% despite only 3% CAGR in production
volumes to 61.5K tonnes (new press lines constituted only 10% of total volumes). This was
primarily due to exports (realisations are at least 10‐15% higher than in domestic market)
share catapulting to ~45% in FY15 from 10% in FY12. The company had also benefited from
the favourable currency movement.
Over FY15‐18, we estimate production volumes to clock 23% CAGR to more than 110K
tonnes as the mix shifts significantly in favour of new press lines—40% of total production
mix by FY18E; our estimate assumes addition of global OEMs for supply of complex forged
products. As a consequence, the blended capacity utilization is expected to improve to 75%
by FY18E (on total capacities of ~1,50,000tonne) as against 70% (on total capacities of
87,000 tonne). Hence, over FY15‐18, we estimate RKFL to clock 24% revenue CAGR and its
margins to improve further by ~300bps from the current ~20% (in H1FY16) as the share of
higher margin complex products catapults. This is expected to drive EPS CAGR of ~26% over
FY15‐18E.
Chart 3: Change in revenue mix to propel margins
Source: Company, Edelweiss research
RKFL’s major capex is behind with no major plans on cards over the next 2 years. Though the
company’s profitability will improve, capex in FY16 will suppress RoE for the next 1 year.
However, we estimate it to improve gradually to 22% in FY18 from 19% in FY15.
69 64 58 61 48 41 39 37
31 36 42 39
35
29 27 23
‐ ‐ ‐16
30 34 40
10.0
13.0
16.0
19.0
22.0
25.0
0.0
20.0
40.0
60.0
80.0
100.0
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(%)
(%)
Steel Forging Ring Rolling facilities
Press Lines EBITDA Margins (RHS)
Engineering and Capital Goods
48 Edelweiss Securities Limited
Valuation RKFL’s entry in heavy forged components will catapult it into the higher league where the
company’s visibility in the global forging industry will increase substantially. While one
now draw a parallel with BHFC, we believe RKFL is still not in direct competition with
BHFC given the size and scale of the latter’s operations (BHFC capacity is 2.7x RKFL’s).
RKFL’s transition from lower‐end forged products to more complex and heavy forged
components (crankshafts, front axle beams) has expanded its presence in higher
margin and exports oriented products. The company’s strategy of adding global OEMs will
help sustain high growth with higher product offerings.
While RKFL is only the second company (other than BHFC) in India which has set up heavy
press lines, it is still not in direct competition with BHFC given the size and scale of the
latter’s operations (BHFC capacity is 2.7x RKFL’s). Nevertheless, RKFL’s entry in heavy forged
components will catapult it into the higher league where the company’s visibility in the
global forging industry will increase substantially.
We initiate coverage with ‘BUY’ recommendation and target price of INR700, assigning PE of
14x on FY18E, assigning 33% discount to BHFC target multiple of 21x given size, scale and
positioning of latter in the Global forging industry. Also, Bharat Forge derives more than
40% of revenues from Non Auto industry, where margins are much richer than auto industry.
Key triggers and value drivers
Sustainable addition of global OEMs will reinforce confidence in RKFL’s scalability
potential.
Given the inherent teething issues in operation of heavy forging lines, RKFL’s ability to
successfully operate the new press lines will be critical to it gaining credibility in the
exports market.
Higher revenue contribution from new press lines will entail higher margins, in turn
driving profitability.
Chart 4: One‐year PE band (TTM)
Source: Bloomberg, Edelweiss research
0.0
20.0
40.0
60.0
80.0
100.0
Jan‐05
Jul‐05
Jan‐06
Jul‐06
Jan‐07
Jul‐07
Jan‐08
Jul‐08
Jan‐09
Jul‐09
Jan‐10
Jul‐10
Jan‐11
Jul‐11
Jan‐12
Jul‐12
Jan‐13
Jul‐13
Jan‐14
Jul‐14
Jan‐15
Jul‐15
Jan‐16
(x)
1 year forward P/E Average PE
Ramkrishna Forgings
49 Edelweiss Securities Limited
Key Risks
Heavy concentration: RKFL derives >80% revenue from the automobile industry (CV
segment). Any major global slowdown in CV segment can adversely impact the company’s
revenue and margin.
Risk of ramping up production in new presses: The company has taken a major initiative of
installing a heavy 12,500 tonne press at capex of INR3.5bn, specifically to cater to heavy
forging products. Initial teething issues in operating the press and delay in adding new OEMs
can pose growth challenge.
Relatively low focus on R&D compared to OEMs and tier‐I players.
Engineering and Capital Goods
50 Edelweiss Securities Limited
Company Description
RKFL, set up in 1981, is one of the largest and most integrated forging companies in Eastern
India, primarily catering to OEMs and tier‐1 auto‐component suppliers in the CV segment. The company has 5 manufacturing facilities—3 in Jamshedpur (Jharkhand), 1 in Saraikhela‐
Saraiwan (Jharkhand) and 1 in Kolkata. In the domestic market, it supplies auto components
to all CV manufacturers such as Tata Motors, Eicher Motors and Ashok Leyland Except M&M.
Internationally, Arvin Meritor is RKFL’s key client. Product portfolio includes machine forged
engine, steering components, gearbox components and axle components. The company has
current capacity of ~1.5 lakh tone, of which ring rolling is 24K tonnes, forging 45K tonnes
and press lines another 80K tonnes.
Table 2: RKFL’s evolution
Source: Company
Year Event
1981 Incorporated as a Private Limited Company
1995 Converted into a Public Limited Company
1997 Undertook major expansion whereby they increased their forging and die
making capacity at Jamshedpur.
2005 Installed 2 double acting ram type drop hammers of 6 ton and 3 ton
capacity.
Commissioned an upsetter forging machine l ine.
Installed a new ring rolling machine.
Set up a new CNC unit at Jamshedpur and commenced commercial
production.
2008 Commencement of Ring‐roll ing facil ity.
2009 Augmented their machining facil ities.
2010 Installed a press of 2,000 T.
2011 Increased their Billet cutting facil ities by importing fully automatic
horizontal bandsaw machine.
Added 50 new products in the Turing section, 22 new products in the Gear
Section and 12 new products in HMC/VMC section.
Increased the installed capacity of the forgings section by 3,600 MT with
the installation of Maxi‐Press at its Plant 1 at Jamshedpur.
2012 Entered into an agreement for the acquisition of Globe Forex and Travels
Limited.
2013 Procured 12,500 T pressline
Developed 32 new products in the ring‐roll ing l ine
2015 Commissioned 3,150 T and 4,500 T press
2016 Fully Commissioned new press l ines including 12,500 T which translated
into 80,000T of the installed capacity.
Ramkrishna Forgings
51 Edelweiss Securities Limited
Fig. 2: Product profile
Source: Company, Industry, Edelweiss research
Forging Capabilities 1. Ring‐rolling
State‐ of‐ the art ring rolling press (2500Tonne) with robotics which can roll crown
wheels up to 500 diameters and 200mm in height which can manufacture product
up70 Kg in weight. It can manufacture 65,000 pieces annually. Also, the company
has machining facilities for the same.
Used for production of ring shaped components like crown wheels, bearings
rings, etc.
Installed capacity 24,000 MT; current capacity utilisation of 100%.
Engineering and Capital Goods
52 Edelweiss Securities Limited
2. Hammers and upsetters
Used for production of forged engine, transmission and axle group components
Forgings done through hammers and upsetters.
Installed capacity of 45,000MT, capacity utilisation of ~75%. Also, the company has
machining facilities for the same.
3. Press lines (brownfield expansion)
Brownfield project, currently partly operational.
Used for production of heavy duty and complex forged products like front axle
beams, crank shafts and knuckles.
Includes presses of 3150MT, 4500MT (operational since Jul14), 6300MT and
12500MT (operational since Sep’15 and Dec’15, respectively).
Table 3: Plant details
Source: Company
Fig. 3: Forging facility
Source: Company
Source: Company
Plant Locations Products Supplied
Plant 1 ‐ Jamshedpur Hammer Forging, Upset Forging, Press Forging, Die Making, Heat
Treatment, Shot Blasting, Testing
Plant 2‐ Liluah Machining / Assembly, Light Fabrication, Functional Testing
Plant 3 & 4 ‐ Jamshedpur CNC Machining, HMC & VMC Machining Gear Cutting, Ring Rolling,
ISO Annealing, Sealed Quenching, Plug, Quenching, Induction
Hardening
Plant 5 ‐ Jamshedpur Press Project
Ramkrishna Forgings
53 Edelweiss Securities Limited
Marquee clientele
RKFL caters to domestic as well as international clients. Domestic OEM players served by the
company are Tata Motors, Ashok Leyland, SAIL, BHEL and Indian Railways, among others.
Meritor (US) HEMA Endustri (Turkey), Sisamax (US) etc., are international tier I auto
component suppliers served by the company.
Fig. 4: Key clients of Ramkrishna Forgings
Source: Company
Engineering and Capital Goods
54 Edelweiss Securities Limited
Key personnel
Mr. Mahabir Prasad Jalan, Chairman
Mr. Mahabir Prasad Jalan is RKFL’s promoter. A Mechanical Engineering graduate from BITS,
Pilani, he has >30 years’ work experience in the forgings industry. In his career span he has
served many companies including Orient Paper Mills, Spinning Accessories (Jaipur), Shalimar
Wires and Calicut Engg Works. Mr. Jalan started his career on the shop floor and eventually
became Managing Partner of Tribeni Steel Forgings in 1974. In 1981 he promoted RKFL and
has been heading the organization since its inception. He is the driving force behind
expansion and introduction of new technologies in the company.
Mr. Naresh Jalan, Managing Director
Mr. Naresh Jalan is an MBA in marketing from Symbiosis, Pune. He has ~15 years’
experience in the forging industry and is currently RKFL’s Managing Director. Under his
dynamic leadership, the company’s turnover has catapulted significantly.
Mr. Alok Kumar Sharda, Executive Director & Chief Financial Officer
Mr. Alok Kumar Sharda is a Chartered Accountant (CA) as well as a Cost & Works Accountant
(CWA). He did his B.Com graduation from St. Xavier’s College, Kolkata In 1988. He has more
than 23 years of work experience in the finance division of various companies. Prior to
joining RKFL in Sep 08, Mr. Sharda was a CFO with Adhunik Metaliks for 3 years. He has also
work with Hindalco and Usha Martin.
Ramkrishna Forgings
55 Edelweiss Securities Limited
Fig. 5: Porters 5 force model
Source: Company, Industry, Edelweiss research
Industry Rivalry (Medium)
Compeition is high
Bargaining
Power (Low)
OEM's/tier 1 comonent supplier is aware about the conversion cost and production
time
Threat of new entrants (Low)
Highly capital intensive, cusomer acquisition process takes 3‐4 years
Threat of substitute products
(low)
Forging components forms the back bone of a
vehicle
Suppliers bargaining power
(low)
Raw materials is widely available
Engineering and Capital Goods
56 Edelweiss Securities Limited
Financial Outlook
Ramp up in new press lines to spur 24% revenue CAGR
We estimate RKFL’s top line to post 24% CAGR over FY15‐18 led by 10x jump in volumes
from new press lines as the company expands its new product offerings in India, US and
Europe. The revenue spurt will be led by 23% volume CAGR and >10% jump in realisations.
Though slowdown in domestic automobile industry led to sluggish top line CAGR of 2.2%
during FY11‐14, exports grew at a good pace. We expect the company’s exports mix to
remain at ~50% as the company adds new OEMs to its kitty.
Chart 5: Volumes to ramp up substantially Chart 6: 24% Revenue CAGR ; realisations to improve further
Source: Company, Edelweiss research
Stable margin to clock modest improvement
We estimate a strong 500bps improvement in RKFL’s EBITDA margin over FY15‐18 riding
change in business mix in favour of higher margin heavy press lines. With the 12,500tonne
press kick‐starting operations from Q4FY16 and potential improvement in exports demand
by H2FY17, we believe ~22.5% margin is achievable in FY18 as we expect the capacity
utilization of ~60% from the new press lines pushing the overall capcity utilization to ~75%
by FY18E. With the company focused on maximising mix of higher margin engine forging
parts, running of the 6,300tonne and 12,500tonne presses beyond 75% utilisation will be
crucial for any positive margin surprise over 22.5% level.
0
25,000
50,000
75,000
1,00,000
1,25,000
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(Tonnage)
Total Production (In tonnage)
22.4
(19.4)
6.3
73.1
22.6 30.6
20.2
(24.0)
(1.6)
20.8
43.2
65.6
88.0
80
90
100
110
120
130
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(%)
(INR/Kg)
Revenue growth (%) Blended Resalisatoin (LHS)
Ramkrishna Forgings
57 Edelweiss Securities Limited
Chart 7: EBITDA margins set to expand further
Source: Company, Edelweiss research
Profit CAGR of 26%; RoE to improve gradually
Following 24% revenue CAGR and 500bps margin expansion over FY15‐18E, we estimate
RKFL to post EPS 26% CAGR over the same period even as depreciation and interest cost is
expected to double to ~1.3bn by FY18E due to the recent capacity addition. We believe, its
recent >INR4bn capex will suppress RoE for the next 1 year, post which we expect it to
improve to 22% from the 19% in FY15 . We estimate operating cash flows to improve
considerably (INR3.3bn over next 3 years) riding higher profitability though cumulative Free
cash flow would be negative due to recent as well as ongoing maintenance CAPEX to be
done by the company. We further expect Debt/ equity to remain stable at ~1.7x.
Chart 8: PAT & ROE’s set to improve further
Source: Company, Edelweiss research
16 15
13
17
21 21 23
0.0
5.0
10.0
15.0
20.0
25.0
0
700
1,400
2,100
2,800
3,500
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(%)
(INR mn)
EBITDA EBITDA margins
14
5 3
19
15
20
22
(100)
200
500
800
1,100
1,400
0.0
5.0
10.0
15.0
20.0
25.0
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(INR mn)
(%)
PAT ROE's (LHS)
Engineering and Capital Goods
58 Edelweiss Securities Limited
Financial Statements
Income statement (Standalone) (INR mn)
Year to March FY15 FY16E FY17E FY18E
Income from operations 7,435 9,119 11,914 14,322
Direct costs 3,699 4,254 5,467 6,034
Employee costs 447 617 814 1,030
Other expenses 1,994 2,371 3,098 4,010
Total operating expenses 6,140 7,241 9,379 11,073
EBITDA 1,295 1,878 2,536 3,249
Depreciation and amort. 312 490 576 639
EBIT 983 1,388 1,959 2,610
Interest expenses 308 473 571 646
Other income 61 22 58 93
Add: Exceptional items 75 ‐ ‐ ‐
Profit before tax 811 936 1,447 2,057
Provision for tax 37 281 434 679
Reported Profit 775 655 1,013 1,378
Less: Exceptional Items 75 ‐ ‐ ‐
Adjusted Profit 700 655 1,013 1,378
No. of Sh. outstanding (mn) 27 27 27 27
Adjusted Basic EPS 25.5 23.9 36.9 50.2
Dil. Sh.outstanding (mn) 27 27 27 27
Adjusted Diluted EPS 25.5 23.9 36.9 50.2
Adjusted Cash EPS 39.6 41.7 57.8 73.4
Dividend per share (DPS) 2.0 2.0 3.0 4.0
Dividend Payout Ratio (%) 8.5 10.0 9.7 9.5
41.7%
Common size metrics‐ as % of net revenues
Year to March FY15 FY16E FY17E FY18E
Direct cost 49.7 46.6 45.9 42.1
Employee expenses 6.0 6.8 6.8 7.2
S G &A expenses 26.8 26.0 26.0 28.0
Operating expenses 82.6 79.4 78.7 77.3
Depreciation 4.2 5.4 4.8 4.5
Interest expenditure 4.1 5.2 4.8 4.5
EBITDA margins 17.4 20.6 21.3 22.7
EBIT margins 13.2 15.2 16.4 18.2
Net Profit margins 9.4 7.2 8.5 9.6
Growth metrics (%)
Year to March FY15 FY16E FY17E FY18E
Revenues 73.1 22.6 30.6 20.2
EBITDA 129.6 45.0 35.0 28.1
PBT 535.1 15.4 54.5 42.2
Adjusted Profit 728.7 (6.4) 54.5 36.1
EPS 687.4 (6.4) 54.5 36.1
Key Assumptions
FY15 FY16E FY17E FY18E
Macros
GDP(Y‐o‐Y %) 7.2 7.4 7.9 8.3
Inflation (Avg) 5.9 4.8 5.0 5.2
Repo rate (exit rate) 7.5 6.8 6.0 6.0
USD/INR (Avg) 61.2 65.0 67.5 67.0
Total Production (MT) 61,508 73,361 96,126 113,280
Domestic 31,832 36,017 51,484 58,080
Exports 29,676 37,344 44,642 55,200
Blended resalisatoin (INR/MT) 117,939 122,071 123,852 126,555
Gross Revenues (INR mn) 8,058 9,836 12,867 15,469
Steel Forging ‐ (A) 3,997 3,963 4,235 4,343
Ring Rolling facilities ‐ (B) 2,552 2,916 2,975 3,004
Press Lines ‐ (C) 705 2,076 4,696 6,989
Other revenue (scrap revenue & duty) ‐ (D) 804 880 961 1,133
Tax rate 20 30 30 33
Ramkrishna Forgings
59 Edelweiss Securities Limited
Peer comparision valuations
Name of the companies CMP 2017E 2018E 2017E 2018E 2017E 2018E
Bharat Forge 775.0 180.4 18.9 14.8 3.9 3.2 22.3 24.1
Ramkrishna Forgings 421.0 11.6 11.4 8.4 2.1 1.7 19.6 22.1
Source: Edelweiss research
PE (x) P/BV (x) ROE (%) Market cap
(INR bn)
Cash flow metrices
Year to March FY15 FY16E FY17E FY18E
Operating cash flow 489 731 1,000 1,294
Financing cash flow 2,104 1,461 581 473
Investing cash flow (2,731) (1,978) (642) (607)
Net cash flow (138) 214 939 1,160
Capex (2,000) (700) (700) (500)
Dividends paid (31) (65) (98) (131)
Profitability & liquidity ratios
Year to March FY15 FY16E FY17E FY18E
ROAE (%) (on adjusted profits) 19.1 14.9 19.6 22.1
ROACE (%) 11.0 11.5 13.7 15.9
Inventory days 164 165 165 186
Debtors days 92 120 119 126
Payable days 116 122 116 124
Cash conversion cycle 140 163 169 188
Current ratio 2.1 2.3 2.6 3.0
Gross Debt/EBITDA 5.3 4.7 4.0 3.5
Interest coverage 3.2 2.9 3.4 4.0
Fixed assets t/o (x) 2.0 1.5 1.7 2.1
Gross Debt/Equity 1.7 1.9 1.8 1.7
Adjusted debt/Equity 1.7 1.9 1.8 1.7
Operating ratios
Year to March FY15 FY16E FY17E FY18E
Total asset turnover 0.8 0.7 0.8 0.8
Fixed asset turnover 2.0 1.5 1.7 2.1
Equity turnover 2.0 2.1 2.3 2.3
Valuation parameters
Year to March FY15 FY16E FY17E FY18E
Diluted EPS (INR) 25.5 23.9 36.9 50.2
Y‐o‐Y growth (%) 687.4 (6.4) 54.5 36.1
CEPS 39.6 41.7 57.8 73.4
Diluted P/E (x) 16.5 17.6 11.4 8.4
Price/BV (x) 2.8 2.5 2.1 1.7
EV/Sales (x) 2.5 2.2 1.7 1.4
EV/EBITDA (X) 14.2 10.8 8.1 6.4
Dividend yield (%) 0.5 0.5 0.7 1.0
Balance sheet (INR mn)
As on 31st March FY15 FY16E FY17E FY18E
Equity capital 275 275 275 275
Employee stock option O/S 58 58 58 58
Reserves & surplus 3,778 4,368 5,283 6,530
Shareholders funds 4,111 4,701 5,616 6,863
Long term borrowings 4,430 5,180 6,430 7,680
Short term borrowings 2,460 3,710 3,710 3,710
Total Borrowings 6,890 8,890 10,140 11,390
Long Term Lia. & Prov 61 61 61 61
Def. tax liability/asset 344 344 344 344
Sources of funds 11,406 13,996 16,161 18,658
Gross Block 6,801 8,801 9,501 10,201
Net Block 5,207 6,723 6,853 6,920
Capital work in progress 3,157 3,157 3,157 3,157
Intangible Assets 32 25 19 13
Total Fixed Assets 8,396 9,904 10,028 10,089
Non current investments 67 67 67 67
Inventories 1,756 2,098 2,846 3,306
Sundry debtors 2,619 3,373 4,407 5,493
Cash & cash equivalents 5 220 1,159 2,319
Loans and advances 1,003 1,003 1,003 1,003
Other current assets 215 323 485 727
Total curr. assets (ex cash) 5,593 6,796 8,740 10,529
Sundry creditors & others 1,334 1,515 1,947 2,149
Provisions 1,320 1,477 1,886 2,198
Total CL & provisions 2,654 2,992 3,833 4,347
Net current assets 2,939 3,805 4,907 6,182
Uses of funds 11,406 13,996 16,161 18,658
Adj. BV per share (INR) 149.7 171.1 204.4 249.8
0 0
Free cash flow
Year to March FY15 FY16E FY17E FY18E
Reported Profit 655 1,013 1,013 1,378
Add: Depreciation 490 576 576 639
Interest (Net of Tax) 331 400 400 433
Others (1,668) (2,124) (2,091) (2,431)
Less: Changes in WC (680) (866) (1,102) (1,275)
Operating cash flow 489 731 1,000 1,294
Less: Capex 2,904 2,000 700 700
Free Cash Flow (2,415) (1,269) 300 594
Engineering and Capital Good
60 Edelweiss Securities Limited
Holding ‐ Top 10
Perc. Holding Perc. Holding
Reliance Capital Asset Mgmt Ltd 3.93 International Finance Corp 3.8
Kotak Mahindra 3.19 UTI Asset Management Co Ltd 1.94
SBI MF 2.07 BNP Paribas AMC 0.76
HSBC AMC India 0.67 PNB MF 0.56
Pramerica Investmenet 0.39 Birla Sun Life Ins 0.26
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*as per last available data
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
No Data Available
*as per last available data
Additional Data
Auditors ‐ Singhi & Co.
Directors Data
Mr. Mahabir Prasad Jalan Chairman Mr. Naresh Jalan Managing Director
Mr. Pawan Kumar Kedia Whole Time Director Mr. Padam Kumar Khaitan Independent Director
Mr. Satish Kumar Mehta Independent Director Mr. Ram Tawakya Singh Independent Director
Mr. Yudhisthir Lal Madan Independent Director Mr. Ravi Lekhrajani Nominee Director
Mr. Amitabha Guha Additional Independent Ms. Aditi Bagri Additional Independent
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Mahindra CIE Automotive (MCIE) is among the top global forging players, with strong presence in both Europe and India. MCIE was formed following amalgamation of Mahindra's auto components business and CIE Automotive's (CIE) European forgings business. From being a low‐margin player, currently a structural transformation is underway at MCIE in terms of diversification of product offerings, geographical presence and customers, which will lend fillip to margins over next 2‐3 years. Thereon, MCIE will look at inorganic growth through transfer of few more CIE forging assets, coupled with scouting for acquisition of top large Asian OEMs. ‘Not Rated’.
With CIE alliance, auto components business reaches critical scale
CIE has an excellent track record of profitability. Since past 5 years, Its EBITDA margin
has been consistently at ~13% levels gaining support from its unique business model,
which is focused on operational efficiency, low corporate costs and customer and
product diversification. MCIE has emerged an important player to reckon with in the
Indian automobile component industry post its alliance with CIE. Benefits will accrue
by way of getting 3 forging assets in the EU, which will provide it access to the EU PV
market, obtain access to CIE’s client in India for future platforms, diversification into
plastic component business in coming years, among others.
Orchestrating strategy to turn around profitability
To turn around profitability and explore new growth prospects, MCIE has chalked out
business transformation in 2 phases. In first phase, the focus will clearly be on turning
around Metalcastello (focus on cost reduction and increasing revenues via new
customers) and Mahindra Forgings Europe by focusing on better internal efficiency. In
second phase, the company will explore synergies with CIE Forgings, optimise product‐
process‐location combined evaluation of new products in the medium term.
Outlook and valuations: On re‐rating cusp; NOT RATED
CIE is well known for giving significant autonomy to plant managers, which creates a
leaner structure with minimal centralised functions. With CIE bringing in its own
experts at top management, profitability has already started improving. While the near
term lull is expected to remain, MCIE is all set for strong revenue growth and
profitability post FY18E, which though hinges on execution of its strategy.
COMPANY PROFILE
MAHINDRA CIE AUTOMOTIVEOn the go
EDELWEISS RATINGS
Absolute Rating NOT RATED
MARKET DATA (R: MAFR.BO, B: MACA IN)
CMP : INR 210
Target Price : NA
52‐week range (INR) : 314 /184
Share in issue (mn) : 323.3
M cap (INR bn/USD mn) : 68 / 996
Avg. Daily Vol. BSE/NSE (‘000) : 331.4
SHARE HOLDING PATTERN (%)
Current Q2FY16 Q1FY16
Promoters *
74.8 74.8 74.8
MF's, FI's & BKs 6.6 6.6 6.9
FII's 5.6 5.6 5.1
Others 12.9 12.9 13.2
* Promoters pledged shares (% of share in issue)
: NIL
PRICE PERFORMANCE (%)
BSE Midcap Index
Stock Stock over
Index
1 month (6.5) (18.3) (11.8)
3 months (11.8) (19.3) (7.5)
12 months (16.7) (10.4) 6.3
Amit Mahawar +91 22 4040 7451
amit.mahawar@edelweissfin.com
Swarnim Maheshwari +91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
India M
idcaps
India Equity Research| Engineering and Capital Goods
January 20, 2016
Financials (Consolidated)
Year to March FY12 FY13 FY14 FY15
Revenues (INR mn) 24,403 22,164 25,908 55,699
Rev. growth (%) 26.8 (9.2) 16.9 115.0
EBITDA (INR mn) 2,089 448 1,143 4,637
Adj. profit (INR mn) 534 (1,093) (676) 1,699
Adj. Diluted EPS (INR) 5.8 (11.9) (7.3) 5.3
EPS growth (%) 331.0 NM NM NM
Diluted P/E (x) 42.6 NM NM NM
ROAE (%) 6.4 (13.5) (9.6) 13.3
Engineering and Capital Goods
62 Edelweiss Securities Limited
Existing business
MCIE was formed through a strategic alliance between Mahindra Group and CIE
Automotive after combining their forging and other auto components businesses. CIE
Automotive now has majority control (~53% equity stake) in MCIE, with M&M being a
significant minority shareholder (the second largest shareholder with ~20% direct stake and
26.6% including indirect stake through its interest in CIE Automotive). As part of this
partnership, CIE acquired majority stake in the automotive component companies of the
Mahindra Group, earlier known as Systech. All these companies were brought under MCIE
through merger or acquisition, along with the 3 forgings plants of CIE in Europe.
MCIE is currently operating out of India and Europe, catering across segments like
passenger vehicles (PVs), tractors, vehicles and to some extent two‐wheelers (2Ws) and
electrical equipment. By acquiring the Chakan‐based forging assets of Amforge in CY05, it
started its journey in the forging business on a larger scale. It later acquired the forging
assets in the EU based out of Germany, Italy and the UK. At present, these EU subsidiaries
are collectively renamed as Mahindra Forgings Europe. With 3 plants of CIE coming into the
merged business, forgings currently contribute close to 70% of consolidated revenue.
Within the standalone India business, MCIE owns various other businesses over and above
forgings, like the foundry and magnetics businesses (Mahindra Hinoday), composites
business (Mahindra Composites) and stampings business (MUSCO).
Fig. 1: MCIE – Line of business
Source: Company
Mahindra CIE Automotive
63 Edelweiss Securities Limited
Rationale of alliance with CIE
Globally, automotive suppliers consolidating via M&A/partnerships to attain critical
mass.
Suppliers increasingly expected to have global presence and standards.
Emerging markets are becoming increasingly important for the auto industry.
CIE has presence in 5 continents and is constantly increasing its footprint especially in
emerging markets. India was the key emerging market missing from its portfolio.
M&M continues its commitment to the automotive components business ‐ from
majority owner of a small 2 continent business to a minority 2nd largest shareholding in
a large global components company of ~USD3bn (CIE)
Table 1: MCIE differentiators
Source: Company, Edelweiss research
CIE Automotive: CIE's expertise can lead to turn around in profitability
CIE is a ~EUR2.2bn revenue entity listed on the Madrid Stock Exchange. The company
started operations in 1996 in Spain with primary focus on the fragmented tier‐2 supplier
market. The promoters saw an opportunity to create value through consolidation and went
on a big globalisation drive through a combination of acquisitions and greenfield
investments. The company has grown its revenues at ~13% CAGR in past 15 years (when
the European car industry broadly remained flat) and is well known for its cost focus. It has
grown EBITDA at ~15% CAGR and largely maintained EBITDA margins at ~14% levels.
It is present across many product lines like forgings, castings, stampings, machining, plastics
and aluminium components in Europe, US, Mexico, Brazil, Russia and China. At present, 3
plants of CIE based out of Lithuania and Spain have been transferred to MCIE, with few
more plants in China and LATEM expected to be added in coming years, subject to
improvement in its cash flows.
Parameters Description
Operational Excellence 1) MCIE aims to be among the ‘best in class’ operationally in each of our verticals 2) Guided
by the five key CIE parameters* (viz. RONA%, EBIT%, FCF/ EBITDA, NOA/ EBITDA, Debt/ EBITDA)
Organisational model MCIE is imbibing the CIE philosophy of reducing overheads by creating a networked
organization with minimal centralized functions backed by significant autonomy to plant
managers
Diversification in products,
customers & geographies
MCIE is present across multiple technologies viz. forgings, castings, stampings, gears,
magnetic products & composites in India, Germany, Italy, UK, Spain & Lithuania
Forgings : Leading producer of forged crankshafts both in India & Europe; significant player
in common rail forgings in Europe −
Castings: MCIE is among India’s leading producers of ductile iron castings including
turbocharger housings, differential housings & exhaust manifolds
Magnetics: India’s leading producer & exporter of cores & magnets for car & 2Wheeler
industry −
Stampings: Among the largest automotive stamping companies in India
Positioned between Tier 1 &
Tier 2 player
Engineering and Capital Goods
64 Edelweiss Securities Limited
Orchestrating strategy to improve overall efficiencies
To turn around its profitability and explore new growth prospects, MCIE has chalked out
business transformation under 2 phases. Under first phase, the focus will clearly be on turning
around Metalcastello (focus on cost reduction and increasing revenues via new customers)
and Mahindra Forgings Europe by focusing on internal efficiency improvements. Under second
phase, the company will explore synergies with CIE Forgings; optimising product‐ process‐
location combination apart from evaluation of new products in the medium term.
Fig. 2: MCIE strategy
Source: Company
Revenue mix
While Europe constitutes 2/3rds of revenue, it is split between commercial vehicles (MFE
primarily caters to commercial vehicles ‐ CVs) and PVs (CIE Forgings Europe). Hence, any
exposure to any particular segment is not more than 1/3rds. The company also has high
customer diversification in both CVs (where it serves all major OEMs like Daimler, Volvo,
Scania and MAN, etc) and PVs (where it serves all European and USA based OEMs like
Renault, Ford, VW and GM, etc).
Mahindra CIE Automotive
65 Edelweiss Securities Limited
Within India, the largest share of revenue comes from PVs. The biggest client is its previous
parent, M&M, which constitutes ~45% of Indian revenue (autos + tractors combined)
followed by Tata Motors and Maruti Suzuki. At aggregate level, MCIE is well diversified with
no particular vehicle segment or customer.
Chart 1: Diversified revenues
Source: Company Annual Report
Europe CV35%
India CV4%
India PV18%
Europe PV25%
Overseas revenues
4%
Europe others6%
India Others8%
Engineering and Capital Goods
66 Edelweiss Securities Limited
Table 2: Business description
Source: Company Annual Report
The company offers forging and casting components to PVs in India and supplies forging
components to CVs and PVs in international markets. It is a leading player of forged
crankshafts for PVs in both India and Europe. It is also amongst the largest suppliers of
forged and machined parts to heavy trucks in Europe (supplies most of the components
barring crankshafts). MCIE also has decent positioning in India in both ductile iron castings
and gears.
Verticles Geography Main Products Focus Areas Key Customers % of total
revenue
Forgings Division India Crankshafts ‐ As forged and
machined, Sub‐Axles ‐ As
forged and Machined
Passenger & Utility Vehicles
and Tractors
M&M, Maruti Suzuki India
Limited, Tata Motors
6.6
Mahindra
Forgings Europe
Europe Forged and Machined parts,
Front Axle Beams and Steel
Pistons
Heavy Commercial Vehicles Daimler AG, Scania, Man, AF,
KS, Mahle, ZF, KION, Linde,
AGCO
35.0
CIE Forgings Europe Forged steel parts for
industrial vehicles and
crankshafts, common rail ,
stubs, tulips for passenger
cars
Passenger Vehicles VW, BMW, Mercedes, Audi,
Renault, Fiat
26.7
Stampings
Stampings
Division
India Sheet Metal Stampings,
Components and Assemblies
Passenger & Utility Vehicles M&M, Tata Motors 11.9
Castings
Castings Division India Turbocharger Housings, Axle
& Transmission Parts
Passenger & Utility Vehicles,
Construction Equipment &
Earthmoving, Tractors and
Tier 1, Exports
M&M, Hyundai, John Deere,
JCB, Cummins Turbo
7.4
Magnetic Products
Magnetic Prodcuts
Division
India Soft and Hard Magnets,
Magnetic Induction Lighting
Tier 1 of Passenger & Util ity
Vehicles, Two Wheelers,
Exports
Denso, Varroc, Lucas TVS,
Nippon Electricals, Bajaj Auto
2.2
Composites
Composites
Division
India Compounds, Components,
and Products
Electrical Switchgear, Auto
Components
L&T Switchgear, M&M, Volvo
Eicher
1.4
Gears
Mahindra Gears
and
Transmissions
India Engine Gears, Timing Gears,
Transmission Gears,
Transmission Driveshafts
Passenger & Utility Vehicles,
Tractors, Exports
M&M, Turner, Eaton, NHFI,
Truck Tractor (CNH)
2.5
Metalcastello Europe Engine Gears, Transmission
Driveshafts, Crown Wheel
Pinion
Tractors, Construction &
Earthmoving Equipment,
Exports
John Deere, Eaton, CNH 6.3
Mahindra CIE Automotive
67 Edelweiss Securities Limited
MCIE’s product portfolio
Fig 3: Cars and utility vehicle
Fig 4: Medium & heavy vehicle
Source: Company Website
Engineering and Capital Goods
68 Edelweiss Securities Limited
Key Personnel Mr. Hemant Luthra ‐ Chairman
Mr. Hemant Luthra joined Mahindra & Mahindra (M&M) in 2001 as Executive Vice President
of Corporate Strategy and became President of the Components Sector, internally known as
Systech, in 2004. Mr Luthra has built Systech through a combination of organic growth and
selective acquisitions to obtain access to customers, technology and management. He has
graduated from IIT, Delhi and participated in the Advanced Management Program of the
Harvard Business School. He has a remarkable 35 years of varied and rich work experience in
operations, finance, business development and private equity.
Mr K. Ramaswami – Managing Director
Mr K Ramaswami is a B.Tech Mechanical Engineer from the College of Engineering ‐ Guindy,
in Chennai. Thereafter, he did his MBA from Milton Keynes, UK. Mr Ramaswami joined the
Mahindra Group in 2011 as Managing Director of Mahindra Forgings. One year later he took
additional responsibility as Executive Director of Mahindra Hinoday Industries. He is
currently serving as Managing Director of Mahindra CIE Automotive since Oct’14
Mr Pedro Echegaray – Executive Director
Mr. Pedro has over 35 years of industry experience and at CIE Automotive Group, having
worked in Spain, USA, Brazil and now in India.
Mr. Pedro holds a bachelor’s degree in Mechanical Engineering from the ETSII de Bilbao and
an MBA from the Universidad de Valencia, Spain. He left Spain 16 years ago and settled
down in Brazil, having also lived in USA while working for IBM.
Mahindra CIE Automotive
69 Edelweiss Securities Limited
Key Risks Slowdown in Europe: European forgings and gear business accounts for 67% of MCIE’s
consolidated revenues. Any slowdown will impact revenue and earnings in turn. Margin
turnaround in MCIE is a key near term earnings driver. Thus, a slowdown in economic
activities would pose downside risk to our earnings estimates.
Currency risk: As bulk of MCIE earnings accrue from the EU, any adverse movement in
EUR:INR would deflate earnings in INR terms. It has already dipped from levels of 82 a year
back to ~70 now.
Technological changes: Lighter weight auto components and greater usage of aluminum
and plastics may substitute their products.
Engineering and Capital Goods
70 Edelweiss Securities Limited
Financial Statements
Income statement (Consol) (INR mn)
Year to March FY12 FY13 FY14 FY15
Income from operations 24,403 22,164 25,908 55,699
Direct costs 10,875 10,005 10,648 25,608
Employee costs 5,798 6,236 7,298 11,867
Other expenses 5,640 5,475 6,819 13,587
Total operating expenses 22,313 21,716 24,764 51,062
EBITDA 2,089 448 1,143 4,637
Depreciation and amort. 1,129 1,104 1,200 2,375
EBIT 960 (655) (57) 2,262
Interest expenses 431 493 629 1,211
Other income 40 54 128 429
Add: Exceptional items (16) (11) (83) (2,261)
Profit before tax 554 (1,106) (641) (781)
Provision for tax 36 (1) 118 (219)
Reported Profit 518 (1,105) (759) (562)
Less: Exceptional Items (16) (11) (83) (2,261)
Adjusted Profit 534 (1,093) (676) 1,699
No. of Sh. outstanding (mn) 92 92 92 323
Adjusted Basic EPS 6 (12) (7) 5
No. of Dil. Sh.outstanding (mn) 92 92 92 323
Adjusted Diluted EPS 6 (12) (7) 5
Adjusted Cash EPS 18 (0) 5 6
Dividend Payout Ratio (%) ‐ ‐ ‐ (2)
Common size metrics‐ as % of net revenues
Year to March FY12 FY13 FY14 FY15
Direct cost 44.6 45.1 41.1 46.0
Employee expenses 23.8 28.1 28.2 21.3
S G &A expenses 23.1 24.7 26.3 24.4
Operating expenses 91.4 98.0 95.6 91.7
Depreciation & amortization 4.6 5.0 4.6 4.3
Interest expenditure 1.8 2.2 2.4 2.2
EBITDA margins 8.6 2.0 4.4 8.3
EBIT margins 3.9 (3.0) (0.2) 4.1
Net Profit margins 2.2 (4.9) (2.6) 3.1
Growth metrics (%)
Year to March FY12 FY13 FY14 FY15
Revenues 26.8 (9.2) 16.9 115.0
EBITDA 16.2 (78.5) 155.0 305.6
PBT 1,098.6 (299.9) (42.0) 21.8
Adjusted Profit 352.1 (304.9) (38.2) (351.4)
EPS 331.0 (304.9) (38.3) (171.9)
Balance sheet (INR mn)
As on 31st March FY12 FY13 FY14 FY15
Equity capital 922 922 923 3,230
Minority Interest 0 0 0 155
Share Warrants 61 65 54 28
Reserves & surplus 7,733 6,557 5,583 15,608
Shareholders funds 8,716 7,544 6,560 19,020
Long term borrowings 1,801 2,686 3,158 14,229
Short term borrowings 3,169 3,682 3,642 954
Total Borrowings 4,971 6,367 6,800 15,183
Long Term Liabilities & Prov. 1,280 1,662 1,890 2,416
Deferred tax liability/asset (570) (596) (600) (974)
Sources of funds 14,396 14,978 14,650 35,645
Gross Block 21,895 22,506 27,032 46,977
Net Block 5,849 5,542 6,081 14,812
Capital work in progress 534 513 291 1,263
Intangible Assets 6,063 6,048 6,033 16,426
Total Fixed Assets 12,446 12,103 12,404 32,501
Non current investments 23 413 578 570
Inventories 3,800 3,023 3,683 6,850
Sundry debtors 2,942 2,668 1,610 4,225
Cash & cash equivalents 175 365 436 893
Loans and advances 290 275 785 2,718
Other current assets 41 22 16 775
Total current assets (ex cash) 7,073 5,988 6,092 14,568
Sundry creditors & others 3,098 2,393 2,720 10,477
Provisions 2,223 1,499 2,141 2,410
Total CL & provisions 5,321 3,892 4,861 12,887
Net current assets 1,753 2,097 1,232 1,681
Uses of funds 14,396 14,978 14,650 35,645
Adj. BV per share (INR) 94.6 81.8 71.0 58.9
Free cash flow (INR mn)
Year to March FY12 FY13 FY14 FY15
Reported Profit 518 (1,105) (759) (562)
Add: Depreciation 1,129 1,104 1,200 2,375
Interest (Net of Tax) 418 503 690 1,779
Others 900 2,022 2,195 (1,472)
Less: Changes in WC 502 1,506 1,216 (1,103)
Operating cash flow 2,464 1,018 2,110 3,223
Less: Capex 1,584 632 733 2,077
Free Cash Flow 880 386 1,378 1,145
Mahindra CIE
71 Edelweiss Securities Limited
Cash flow metrices
Year to March FY12 FY13 FY14 FY15
Operating cash flow 2,464 1,018 2,110 3,223
Financing cash flow (909) 192 (1,164) (2,937)
Investing cash flow (1,572) (1,020) (876) (1,840)
Net cash flow (17) 191 70 (1,554)
Capex (1,584) (632) (733) (2,077)
Dividends paid 0 0 0 0
Profitability & liquidity ratios
Year to March FY12 FY13 FY14 FY15
ROAE (%) (on adjusted profits) 6.4 (13.5) (9.6) 13.3
ROACE (%) 7.2 (4.4) 0.5 11.3
Inventory days 118 124 115 75
Debtors days 46 46 30 19
Payable days 94 100 88 94
Cash conversion cycle 70 71 57 0
Current ratio 1.4 1.6 1.3 1.2
Gross Debt/EBITDA 2.4 14.2 5.9 3.3
Interest coverage 2.2 (1.3) (0.1) 1.9
Fixed assets t/o (x) 2.1 1.9 2.2 2.6
Gross Debt/Equity 0.6 0.8 1.0 0.8
Adjusted debt/Equity 0.6 0.8 1.0 0.8
Operating ratios
Year to March FY12 FY13 FY14 FY15
Total asset turnover 1.7 1.5 1.7 2.2
Fixed asset turnover 2.1 1.9 2.2 2.6
Equity turnover 2.9 2.7 3.7 4.4
Valuation parameters
Year to March FY12 FY13 FY14 FY15
Diluted EPS (INR) 5.8 (11.9) (7.3) 5.3
Y‐o‐Y growth (%) 331.0 (304.9) 38.3 171.9
CEPS 17.9 (0.0) 4.8 5.6
Diluted P/E (x) 42.6 (20.8) (33.7) 46.8
Price/BV (x) 2.6 3.0 3.5 4.2
EV/Sales (x) 1.1 1.3 1.1 1.7
EV/EBITDA (X) 13.2 64.0 25.5 20.2
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
MM Forgings (MMFL) engaged in the manufacture of steel forgings boasts of an illustrious clientele from across industries including automotive, valve and oil‐field, engineering and off highway segments. The company is primarily focused on the automotive industry (mainly CVs ‐ commercial vehicles), which accounted for ~75% of its FY15 revenues. In past 7 years, exports have been a key growth driver logging 17% CAGR versus domestic CAGR of 10%. In same period, MMFL augmented production capacity (added higher tonne press) and recorded significant jump (refer slide 6) in average realisation per tonne (MT). Plans are afoot to introduce 8,000 MT press in FY17. ‘NOT RATED’.
Margins to jump on upgrade to higher MT press
MMFL currently has forging press in the range of 1,600T to 4,000T and its product
range currently varies between 0.2kg to 60kg. The company is at the initial stages of
adding 8000MT of press by FY17 which will bring heavy forging products under its
ambit and allow it to manufacture up to 90kgs. MMFL will not only be able to increase
capacity from 45,000MT to ~70,000MT but also record higher realisation and margins.
Past decade marked by stable financials
Past 10 years have seen MMFL log 13%/17% revenue/ PAT CAGR, primarily driven by
exports market. Exports registered 17% CAGR in past 7 years versus domestic CAGR of
10%. Average RoE for the same period is ~17%.
Outlook and valuations: Embarked on next level; ‘NOT RATED’
In past decade, MMFL has not only been able to introduce new presses, but also
spruced up its financial trajectory. Going forward, the company plans to introduce
8000MT press, which will boost production capacity by ~40%. While there would be
some challenges with respect to new customer additions for higher products, it could
be a significant growth driver for MMFL given that these products fetch higher
realisations and margins. ‘NOT RATED’.
COMPANY PROFILE
MM FORGINGS Pushing the boundaries
EDELWEISS RATINGS
Absolute Rating NOT RATED
MARKET DATA (R: MMFO.BO, B: MMFG IN)
CMP : INR 464
Target Price : NA
52‐week range (INR) : 751 / 461
Share in issue (mn) : 12.1
M cap (INR bn/USD mn) : 6 / 82
Avg. Daily Vol. BSE/NSE (‘000) : 19.8
SHARE HOLDING PATTERN (%)
Current Q2FY16 Q1FY16
Promoters *
56.4 56.4 56.4
MF's, FI's & BKs 13.5 13.5 9.8
FII's 3.2 3.2 3.3
Others 26.9 26.9 30.5
* Promoters pledged shares (% of share in issue)
: NIL
PRICE PERFORMANCE (%)
BSE Midcap Index
Stock Stock over
Index
1 month (6.5) (9.7) (3.2)
3 months (11.8) (15.1) (3.3)
12 months (16.7) (20.8) (4.1)
Amit Mahawar +91 22 4040 7451
amit.mahawar@edelweissfin.com
Swarnim Maheshwari +91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
India M
idcaps
India Equity Research| Engineering and Capital Goods
January 20, 2016
Financials (Standalone)
Year to March FY12 FY13 FY14 FY15
Revenues (INR mn) 3,502 3,611 4,114 5,025
Rev. growth (%) 28.7 3.1 13.9 22.1
EBITDA (INR mn) 605 578 789 1,108
Adj. profit (INR mn) 195 244 277 505
Adj. Diluted EPS (INR) 32.3 40.5 23.0 41.9
EPS growth (%) (3.5) 25.3 (43.3) 82.4
Diluted P/E (x) 16.5 13.2 23.3 12.8
ROAE (%) 13.9 15.1 15.1 23.3
MM Forgings
73 Edelweiss Securities Limited
Company Description
MM Forgings (MMFL) was incorporated in 1946 as Madras Motors. The company’s forging
division was set up in 1974. It was renamed as MM Forgings in 1993. The company
manufactures steel forgings in raw, semi machined and fully machined stage in various
grades of carbon, alloy, micro‐alloy and stainless steel in weights range from 0.20kgs to
60kgs and caters to forging requirements of almost all industries. The company’s
manufacturing plants are located in Tamil Nadu at Singampunari, Viralimalai and
Karainaithangal villages. It has wind farms at Panagudi and Meenakshipuram villages both
in Tamil Nadu. Power generated from these plants is utilised for captive use.
Automotive, valve and oil field, engineering and off highway are some of the industries that
MMFL serves. The company’s primary focus is on the auto segment (CV’s and PV’s), which
account for ~76% of sales. Exports, mainly from US and Europe, contributed ~73% of FY14
revenues.
MMFL's clientele include Ashok Leyland, BEML, BHEL, Audco Valves and Tractor Engineers.
During 1994‐95, the company was awarded the ISO 9002 certificate. The technical
collaboration with Tokai Corporation of Japan has enabled the company to improve its
quality and productivity.
Chart 1: Revenue mix
Source: Company Annual Report
Heavy Commercial Vehicle63%
Passenger car13%
Off Highway12%
Oil field 12%
Engineering and Capital Goods
74 Edelweiss Securities Limited
Product Portfolio
MMFL manufactures steel forgings in raw, semi‐machined and fully machined stages in
various grades of carbon, alloy, micro‐alloy and stainless steels in weights ranging from
0.20kg to 60kg. The company caters to forging requirements of almost all sections of
industry.
Fig. 1: Product profile
Source: Company
Infrastructure
MMFL manufactures battery of 10 hammers with capacities ranging from 0.75T to 6.0T. The
company has both friction drop hammers (belt type) and air hammers. These hammers are
used to produce jobs with difficult profiles and lower volumes. Selection of press or hammer
is decided by the engineering team after analysing production feasibility and economic
viability.
The company has a battery of forging presses in the range of 1600T to 4000T. All the presses
are equipped with induction billet heaters and infra‐red pyrometers for accurate
temperature control.
All 3 plant locations of MMFL are well connected by road to the nearest sea port. The
company enjoys the strategic advantage of being able to ship from 2 major ports (Chennai
and Tuticorin). Both these ports are equidistant from the company’s plants.
MM Forgings
75 Edelweiss Securities Limited
Key personnel Mr. N.Srinivasan – Chairman
Mr. N. Srinivasan (65) is a Post Graduate in Chemical Engineering from the Illinois Institute of
Technology, USA. He is currently Vice Chairman and Managing Director of India Cements, a
major corporate entity in South India, with turnover of ~INR2,000cr whose activities span
cement, sugar, trading and finance. He is currently President of the Tamil Nadu Cricket
Association as well as Honorary Secretary of the Board of Control for Cricket in India (BCCI).
Mr Srinivasan is also President of the All India Chess Federation. He has been on the Board
of MMFL since the company went public, i.e. in 1994. With effect from October 24, 2012, Mr
Srinivasan was appointed Chairman of the company.
Mr. Vidyashankar Krishnan – Vice Chairman & Managing Director
Mr. Vidyashankar Krishnan (44) is an Post Graduate in Engineering from IIT, Chennai. He has
20 years of experience. He has been on the company’s Board since April 1997. In February
1999, Mr Krishnan became Managing Director. His accomplishments include major
expansion at Viralimalai plant, setting up a new plant near Chennai, setting up a wind farm
and the company’s foray into machined components. MMFL has posted considerable
growth under his stewardship. With effect from October 24, 2012, he was appointed as Vice
Chairman and designated as Vice Chairman & Managing Director.
Mr. K. Venkataraman – Joint Managing Director
Mr Venkataraman is an engineering graduate with more than 2 decades of experience in the
forging industry. He was appointed as Joint Managing Director in 1999. Mr Venkatraman
serves on various committees of the Finance Ministry and Commerce Ministry.
Engineering and Capital Goods
76 Edelweiss Securities Limited
Financial Statements
Income statement (Standalone) (INR mn)
Year to March FY12 FY13 FY14 FY15
Income from operations 3,502 3,611 4,114 5,025
Direct costs 1,470 1,542 1,765 2,070
Employee costs 276 309 345 408
Other expenses 1,152 1,182 1,215 1,439
Total operating expenses 2,898 3,033 3,325 3,918
EBITDA 605 578 789 1,108
Depreciation and amort. 231 211 360 354
EBIT 374 366 429 754
Interest expenses 61 71 77 91
Other income 1 5 15 24
Add: Exceptional items 72 ‐ 16 0
Profit before tax 386 300 384 687
Provision for tax 118 56 91 181
Reported Profit 268 244 293 505
Less: Exceptional Items 72 ‐ 16 0
Adjusted Profit 195 244 277 505
No. of Sh. outstanding (mn) 6 6 12 12
Adjusted Basic EPS 32.3 40.5 23.0 41.9
No. of Dil. Sh.outstanding (mn) 6 6 12 12
Adjusted Diluted EPS 32.3 40.5 23.0 41.9
Adjusted Cash EPS 82.6 75.5 54.1 71.2
Dividend Payout Ratio (%) 2.2 2.4 10.9 2.2
Common size metrics‐ as % of net revenues
Year to March FY12 FY13 FY14 FY15
Direct cost 42.0 42.7 42.9 41.2
Employee expenses 7.9 8.6 8.4 8.1
S G &A expenses 32.9 32.7 29.5 28.6
Operating expenses 82.7 84.0 80.8 78.0
Depreciation & amortization 6.6 5.9 8.8 7.0
Interest expenditure 1.8 2.0 1.9 1.8
EBITDA margins 17.3 16.0 19.2 22.0
EBIT margins 10.7 10.1 10.4 15.0
Net Profit margins 5.6 6.8 6.7 10.1
Growth metrics (%)
Year to March FY12 FY13 FY14 FY15
Revenues 28.7 3.1 13.9 22.1
EBITDA 12.7 (4.4) 36.6 40.3
PBT 1.4 (22.2) 28.0 78.7
Adjusted Profit (3.5) 25.3 13.3 82.4
EPS (3.5) 25.3 (43.3) 82.4
Balance sheet (INR mn)
As on 31st March FY12 FY13 FY14 FY15
Equity capital 121 121 121 121
Reserves & surplus 1,398 1,600 1,837 2,259
Shareholders funds 1,518 1,721 1,958 2,379
Long term borrowings 603 424 348 829
Short term borrowings 730 743 1,025 918
Total Borrowings 1,333 1,167 1,373 1,747
Long Term Liabilities & Provisions 9 6 6 6
Deferred tax liability/asset 101 107 114 123
Sources of funds 2,961 3,001 3,452 4,256
Gross Block 3,692 3,981 4,380 4,989
Net Block 1,879 1,958 1,997 2,254
Capital work in progress 26 38 67 111
Total Fixed Assets 1,905 1,995 2,063 2,365
Non current investments 1 1 1 1
Inventories 852 712 763 787
Sundry debtors 233 341 289 291
Cash & cash equivalents 15 13 253 890
Loans and advances 137 417 300 381
Other current assets 255 152 178 182
Total current assets (ex cash) 1,478 1,623 1,531 1,640
Sundry creditors & others 177 299 156 275
Provisions 261 333 241 366
Total CL & provisions 437 632 397 641
Net current assets 1,040 991 1,134 999
Uses of funds 2,961 3,001 3,452 4,256
Adj. BV per share (INR) 125.8 142.6 162.2 197.1
Contingent liabilities 0.0 0.0 0.0 0.0
Free cash flow (INR mn)
Year to March FY12 FY13 FY14 FY15
Reported Profit 244 293 505 3,922
Add: Depreciation 211 360 354 268
Interest (Net of Tax) 57 58 69 215
Others (59) (81) (928) (3,228)
Less: Changes in WC (24) 56 (353) 121
Operating cash flow 479 575 353 1,056
Less: Capex 589 302 413 655
Free Cash Flow (110) 273 (60) 401
MM Forgings
77 Edelweiss Securities Limited
Cash flow metrices
Year to March FY12 FY13 FY14 FY15
Operating cash flow 479 575 353 1,056
Financing cash flow 111 (279) 59 213
Investing cash flow (588) (297) (398) (632)
Net cash flow 2 (1) 15 637
Capex (302) (413) (655) (356)
Dividends paid (42) (42) (70) (70)
Profitability & liquidity ratios
Year to March FY12 FY13 FY14 FY15
ROAE (%) (on adjusted profits) 13.9 15.1 15.1 23.3
ROACE (%) 14.2 12.9 14.3 20.9
Inventory days 185 185 153 137
Debtors days 34 29 28 21
Payable days 37 56 47 38
Cash conversion cycle 182 158 134 120
Current ratio 3.4 2.6 4.5 3.9
Gross Debt/EBITDA 2.2 2.0 1.7 1.6
Interest coverage 6.1 5.1 5.6 8.2
Fixed assets t/o (x) 2.1 1.9 2.1 2.4
Gross Debt/Equity 0.9 0.7 0.7 0.7
Adjusted debt/Equity 0.9 0.7 0.7 0.7
Operating ratios
Year to March FY12 FY13 FY14 FY15
Total asset turnover 1.3 1.2 1.3 1.3
Fixed asset turnover 2.1 1.9 2.1 2.4
Equity turnover 2.5 2.2 2.2 2.3
Valuation parameters
Year to March FY12 FY13 FY14 FY15
Diluted EPS (INR) 32.3 40.5 23.0 41.9
Y‐o‐Y growth (%) (3.5) 25.3 (43.3) 82.4
CEPS 82.6 75.5 54.1 71.2
Diluted P/E (x) 16.5 13.2 23.3 12.8
Price/BV (x) 4.2 3.7 3.3 2.7
EV/Sales (x) 1.3 1.2 1.8 1.5
EV/EBITDA (X) 7.5 7.6 9.6 6.6
78 Edelweiss Securities Limited
Engineering and Capital Goods
Annexure "Forging" is the generic term for all methods to form metal workpieces with heat and
pressure. Forging is manufacturing process where metal is pressed, pounded or squeezed
under great pressure into high strength parts known as forgings. The process is normally
(but not always) performed hot by preheating the metal to a desired temperature before it
is worked. It is important to note that the forging process is entirely different from the
casting (or foundry) process, as metal used to make forged parts is never melted and poured
(as in the casting process). The forging process can create parts that are stronger than those
manufactured by any other metalworking process. This is why forgings are almost always
used where reliability and human safety are critical.
Forge and press products make the world go round. Whether it‘s titanium turbine blades for
jet engines, heavy‐duty drive and axle components for motor vehicles, extruded sections for
automotive, aircraft or railway applications or the construction industry, whether it‘s huge
anti‐friction bearings for wind turbines or precision gears for motors..
Advantages of Forging
Forged components make possible designs that accommodate the highest loads and
stresses.
Economically, forged products are attractive because of their inherent superior
reliability, improved tolerance capabilities, and the higher efficiency with which
forgings can be machined and further processed by automated methods.
The degree of structural reliability achieved in a forging is unexcelled by any other
metalworking process.
Consistency of material from one forging to the next, and between separate quantities
of forgings is extremely high
Dimensional characteristics are remarkably stable
Applications of Forgings
Forgings are failure‐safe and reliable components due to their favourable material
properties, the high repeatability of the process during their production, as well as the good
testing possibilities. They are implemented anywhere where reliability and service life at
high power density or high stresses play an important role.
1
79 Edelweiss Securities Limited
Engineering and Capital Goods
Table 1: Application of Forgings
Source: FIA, EF Industry, Edelweiss Research
Types of Forgings:
To determine the best economic solution to produce quality parts, development of the
forging process begins with part design, and must simultaneously consider material
selection, process technology, production stages and die processes. Basically there are 6
types of Forging :
1. Reduction: Reduction is a forging process in which the workpiece is forced through an
opening in the die, fully or in part, involving a reduction in its cross section. Tapering of
solid bodies results in a reduction in cross section, whereas hollow bodies, by contrast,
are necked.
2. Extrusion: Extrusion is a single or multi‐station production process for creating both
hollow and solid bodies. The process is distinguished according to the direction of
material flow: forward, backwards or lateral. The workpiece is forced through an
opening in the die with reduced cross section giving the workpiece its shape.
3. Ironing: Ironing is carried out by pulling the workpiece through an ironing ring with the
help of a punch. The wall thickness of the hollow body is reduced in this process.
Parameters Automotive & Truck Aerospace Off‐Highway Renewable Energy
Area of usage Forged components are
commonly found at
points of shock and
stress
off‐highway, heavy
construction equipment,
mining machinery
wind power, solar power
(thermal, photovoltaic
and concentrated), hydro‐
electric power, tidal
h lNo. Of forging
components used
250 forgings, most of
which are produced
from carbon or alloy
steel.
450 structural forgings as
well as hundreds of forged
engine parts
NA NA
Key Components Connecting rods,
crankshafts,
transmission shafts and
gears, differential gears,
drive shafts, clutch
hubs
Bulkheads, wing roots and
spars, hinges, engine
mounts, brackets, beams,
shafts, bellcranks, landing‐
gear cylinders and struts,
wheels, brake carriers and
discs, and arresting hooks
In addition to engine
and transmission parts,
forgings are used for
gears, sprockets, levers,
shafts, spindles, ball
joints, wheel hubs,
rollers, yokes, axle
beams, bearing holders,
and l inks
Generator blades,
bearing rings and plenty
of parts in the powertrain
of a wind turbine
generator system.
Importance All components requires
extra strength and
toughness
High strength‐to‐weight
ratio and structural
reliabil ity improve
performance, range, and
payload capabilities of
aircraft. That's why
ferrous and nonferrous
forgings are used in
helicopters, piston‐engine
planes, commercial jets,
and supersonic military
aircraft
NA NA
80 Edelweiss Securities Limited
Engineering and Capital Goods
4. Closed Die Forging: Closed die forging is a forging process in which dies move towards
each other and cover the workpiece in whole or in part. The heated raw material, which
is approximately the shape or size of the final forged part, is placed in the bottom die.
The shape of the forging is incorporated in the top or bottom die as a negative image.
Coming from above, the impact of the top die on the raw material forms it into the
required forged form.
5. Open Die Forging /Upsetting: Upsetting and open die forging are also forging
procedures. Upsetting is principally used for preliminary distribution of the material. In
contrast to closed die forging, the workpiece is not completely enclosed during this
forging process.
6. Piercing/Trimming: Piercing is used for incorporating holes and openings into a
workpiece, which can have a wide range of shapes and sizes. Trimming involves
removing surplus material (flash) from the workpiece.
Table 2: Type of Forgings
Source: Indsutry
Table 3: Type of Forgings
Source: Compass & Anvil
Parameters Cold Forging Hot Forging
Application 1. Long Shaft Components (Drive shafts, Axle shafts,
Transmission shafts, Truck axles)
1. Chassis Components, Crankshafts, Flanges, Connecting
rods, Turbine blades, Hot Tools
2. Parts of (Engines, Drives components, Suspensin
components Fasterners etc.)
Advantage 1. High‐precision workpieces 1. High‐stroke rate2. Low die wear due to low‐speed 2. Low operating cost
3. Increased flexibil ity with more forging station 3. High reliabil ity and avail ibii lty
4. High stabil ity of the overall strucutre
Parameters Open Die Forging Close die Forging
Meaning Open die forging is the process of deforming a piece of
metal between multiple dies that do not completely
enclose the material. The metal is altered as the dies
“hammer” or “stamp” the material through a series of
movements until the desired shape is achieved. Products
formed through open forging often need secondary
machining and refining to achieve the tolerances
required for the finished specifications
Also known as Impression die forging , it pounds or
presses metal between two dies (called tooling) that
contain a precut profile of the desired part. Parts from a
few ounces to 30 tons can be made using this process.
Some of the smaller parts are actually forged cold.There
are two types of equipment that are commonly used for
closed die forging: mechanical forging presses and
hydraulic forging presses.
Application Safety‐relevant components for motor vehicles, aircraft
and machines l ike :
Large individual components such as shafts for ship
propulsion systems or power station turbines
Crankshafts, Heavy‐duty parts for modern power plants
Connecting Rods Axles for high‐speed trains
Gear Wheels and tie end rods Offshore pipes for extreme environmental conditions
Steering & tranmsission parts, Turbine discs & blades Flawless and reliable components for aerospace
applications
Advantages More freedom of forgind, Machining to exact
specifications,
Open die forgings allow the freedom of forging a rough
piece of metal and then machining it to your exact
specifications
1
81 Edelweiss Securities Limited
Engineering and Capital Goods
Fig. 1: Temperature in various forging processes
Source: Schulergroup
Forgeability and forging force required in various metals
All metals and metal alloys, with very few exceptions, are suitable for forging. There is a
range of more than 2,500 types of steel from which to choose to achieve the most
economical production process.
Fig. 2: Metals forgeability
Source: Industry
82 Edelweiss Securities Limited
Engineering and Capital Goods
Fig. 2: Bharat Forge at a glance
Source: Company
Bharat Forge
Standalone
Manufactures a widerange of highperformance, critical& safety componentsfor the auto &non‐auto sector.FY 15 Revenue:INR45,481mn FY 15 EBIDTA: 29%
Leading supplier offorged chassis,engine componentsand non‐auto systems.FY 15 Revenue:INR11,575mnFY 15 EBIDTAMargin: 7%
Provides aluminiuforging solution forthe auto industry. FY15 Revenue:INR3,106mnFY15 EBIDTAMargin: 8%
Specializes in heavycrankshafts, frontaxle beams,steering knuckelsand other steeringcomponents.FY15 Revenue:INR5,792mnFY15 EBIDTA: 2%
Supplies forged andmachined parts likegate valve bodies,chokes, rings for highpressure and criticalapplications. FY15 Revenue:INR10,870mnFY15 EBIDTA: 1.5%
CDP Bharat Forge Aluminiumtechnik Bharat Forge KilstaBharat ForgeInternational ltd.
1
83 Edelweiss Securities Limited
Engineering and Capital Goods
Company Absolute
reco Relative
reco Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
ABB India REDUCE SU L Bajaj Electricals HOLD SP M
Bharat Forge BUY SO M Bharat Heavy Electricals HOLD SP M
Crompton Greaves HOLD SP M Cummins India BUY SO L
Greaves Cotton BUY SO M Havells India BUY SO M
Kalpataru Power BUY SO M KEC International BUY SP M
Larsen & Toubro BUY SO M Praj Industries BUY None None
Siemens REDUCE SP L TD Power Systems BUY None None
Techno Electric & Engineering BUY SO M Thermax REDUCE SU L
Triveni Turbine BUY None None VA Tech Wabag BUY None None
Voltas BUY SO L
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
84 Edelweiss Securities Limited
Engineering and Capital Goods
\\\\
500
700
900
1,100
1,300
1,500
Jan‐15
Feb‐15
Mar‐15
Apr‐15
May‐15
May‐15
Jun‐15
Jul‐15
Aug‐15
Sep‐15
Oct‐15
Nov‐15
Nov‐15
Dec‐15
Jan‐16
(INR)
Bharat Forge
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91‐22) 4009 4400, Email: research@edelweissfin.com
Nirav Sheth
Head Research
nirav.sheth@edelweissfin.com
Coverage group(s) of stocks by primary analyst(s): Engineering and Capital Goods
ABB India, Bharat Heavy Electricals, Bharat Forge, Bajaj Electricals, Crompton Greaves, Greaves Cotton, Havells India, KEC International, Cummins India, Kalpataru Power, Larsen & Toubro, Praj Industries, Siemens, TD Power Systems, Techno Electric & Engineering, Thermax, Triveni Turbine, VA Tech Wabag, Voltas
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 155 45 8 208* stocks under review
Market Cap (INR) 151 54 3
Date Company Title Price (INR) Recos
Recent Research
20‐Jan‐16 TechnoElectric & Engineering
Honing capabilities; Visit Note
469 Buy
10‐Dec‐15 Havells India Dims light on Sylvania; Event Update
307 Buy
09‐Dec‐15 Havells India Sylvania exit on cards; EdelFlash
292 Buy
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation
Buy appreciate more than 15% over a 12‐month period
Hold appreciate up to 15% over a 12‐month period
Reduce depreciate more than 5% over a 12‐month period
Rating Expected to
One year price chart
300
400
500
600
700
800
Jan‐15
Feb‐15
Mar‐15
Apr‐15
May‐15
May‐15
Jun‐15
Jul‐15
Aug‐15
Sep‐15
Oct‐15
Nov‐15
Nov‐15
Dec‐15
Jan‐16
(INR)
Ramkrishna Forgings
1
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