company update 10 sep 2018 ramkrishna forgings forgings - update - s… · company update 10 sep...

COMPANY UPDATE 10 SEP 2018

Ramkrishna Forgings BUY

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Changing orbit, finally Ramkrishna Forgings (RMKF) sailed through tough times and posted impressive recovery in FY18. During FY15-FY17, RMKF's profits dropped substantially (APAT slid from Rs 673mn in FY15 to Rs 110mn in FY17) owing to (1) Slowdown in US class 8 trucks, (2) Delayed ramp-up of its new plant due to elongated approval time from OEM's, and (3) Sharp jump in interest/depreciation cost driven by capex of Rs 7bn for new press line. However, there was earnings revival in FY18. With ramp-up in its heavy-tonnage press line, RMKF has evolved from relatively low-end forgings into complex and heavy components (front axles, bell crank, connecting rods, crankshafts, and knuckles). This has opened opportunities across the US, Europe and India.

Not surprisingly, margin expansion (~200bps in the trailing year) has kicked in. Management has guided for strong export growth on the back of robust US demand outlook (21/10% growth in the Class 8 market in CY18E/19E as per FTR’s Truck & Trailer Outlook) aided by addition of a new European OEM in 1QFY19. Co intends to set up a greenfield project by Dec-19 for the Railway, PV and LCV segments.

Management expects strong traction in CVs sales and the new axle load norms to help post double digit volume growth to >140-145k tons in FY19E vs 122k in FY18 (65% domestic and 35% exports). We expect RMKF to register Revenue/PAT CAGR of 17/24% over FY18-21E on the back of a robust domestic CV cycle, market share gains, increased content per truck (via producing new components) and favourable

operating leverage. However new capex will result in higher interest/depreciation) cost and limit free cash flow. We value the stock Rs 908 (18x Sept-20E EPS) and recommend a BUY.

Key highlights Improvement in product mix: RMKF’s concentration

in heavy forged components benefits from the recent changes in axle load capacity (requiring bigger and heavier axles). We foresee a domestic market driven ramp up of its heavy 12,500 MT press line. This should help margins.

Resilient export revenue: Co’s ability to manufacture heavier components enabled order wins in the US market from Tier-1 suppliers such as Meritor and Dana Corp. A new European OEM order should additionally drive FY19/20 exports.

Foray into PV and LCV segment: Management plans to reduce its concentration on HCV (95% to automotive segment currently) to 70% over the next 3 years by entering into PV and LCV segments, which will provide scalability and diversification.

Financial Summary (Standalone) Y/E Mar (Rs. mn) FY17 FY18 FY19E FY20E FY21E Net Sales 8,809 14,355 17,369 20,076 23,256 EBITDA 1,579 2,842 3,474 4,055 4,628 APAT 110 947 1,200 1,473 1,817 Diluted EPS (Rs) 3.8 29.1 36.8 45.2 55.8 P/E (x) 164.7 21.7 17.1 13.9 11.3 EV / EBITDA (x) 17.4 10.1 8.4 7.3 6.3 RoE (%) 2.4 15.4 14.8 15.7 16.7 Source: Company, HDFC sec Inst Research

INDUSTRY AUTOS

CMP (as on 10 Sep 2018) Rs 625

TP Rs 908

Nifty 11,438

Sensex 37,922

KEY STOCK DATA

Bloomberg RMKF IN

No. of Shares (mn) 33

MCap (Rs bn) / ($ mn) 20/281

6m avg traded value (Rs mn) 30

STOCK PERFORMANCE (%)

52 Week high / low Rs 891/525

3M 6M 12M

Absolute (%) (15.4) (16.8) 10.8 Relative (%) (22.4) (30.7) (8.9)

SHAREHOLDING PATTERN (%)

Promoters 44.41

FIs & Local MFs 16.34

FPIs 17.94

Public & Others 21.31

Source : BSE

Abhishek Jain [email protected] +91-22-6171-7314

RAMKRISHNA FORGINGS : COMPANY UPDATE

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Change in product mix With its heavy 12,500-MT press unit commercialized

in early FY17, RMKF gained considerable strength in manufacturing complex components. RMKF’s transition from lower-end forged products (like crown wheel, pinion and crown propeller shafts) to more complex and heavy forged components (crankshafts, front axle beams) has expanded its margin profile and exports oriented products portfolio. Now, RMKF produces more components/sub-components in the chassis (front/rear axles) as well as engine & transmission components (higher value addition/high value products).

RoEs for large CV forge presses are higher than smaller presses (used for PVs) driven by three factors: a) Gain in tonnage is greater than gain in cycle time from a lower press to higher, optimizing a greater operating leverage. b) Large CV components enjoys better margin due to higher realisation c) Break even in large CV press lines is as low as ~25- 30%, which for a PV press line stands at >40-45%.

The recent debottlenecking at the new press line enhanced the production capability of the company. Now, RMKF is capable of producing 100k tons while the installed capacity remains at 80K ton.

Apart from change in mix, strong run up in domestic CV sales (FY18/ 1QFY19 by 20/50% YoY) led by strong traction in M&HCV demand with continued shift towards higher tonnage vehicles helped RMKF strengthening its margin and profitability profile.

Although, recent change in axle norms (increase in carrying capacity by 15-17%) is a near term concern for M&HCV demand, we believe stricter overloading ban, pick-up in infra, construction and mining activities pre-purchases for BS-VI in FY20 and introduction of scrappage policy in FY21 will continue to drive demand.

We believe, the new GVW norms is positive for RMKF as this will require bigger and heavier axle leading to higher utilization of heavier press line, increase in content per vehicle and thereby helping margin improvement.

RMKF’s Revenue-Geography Mix(FY18) Tonnage Capacity and Capacity Utilization

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

RMKF faced a difficult two years (FY16‐17), mainly as its key market of US Class‐8 trucks saw a sharp downturn and also because of the delayed ramp up of its new plant The company had spent Rs 7bn over FY14‐17 to set up four heavy presses units (3,100, 4,300, 6,300, and 12,500 MT), slow ramp up of these plants owing to delay in product approval and jump in interest and depreciation impacted profitability The company had raised equity capital Rs 2bn through equity (issued 3.92 mn share at Rs 510/share through QIP in 1HFY18 However, ramp up in its heavy press line expanded its margin profile and exports oriented products portfolio. RMKF is the only company after Bharat Forge to own a 12,500MT press. Current sub‐70% utilization of new press line could stretch up to 125% owing to change in product mix.

NAFTA25%

Europe4%

India71% 40%

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Tonnage Capacity utilisation (RHS)


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Strong export outlook India is amongst the most competitive manufacturers

of auto components, especially in metal intensive parts and forgings, which entail design engineering skills. Moreover, average wage in the country still stands at USD 1.1/hour, significantly lower than the minimum USD 7.25/hour in US and Europe. Employee cost to sales ratio is 10% for Indian companies; it is significantly higher at 30% for global companies, a predominant factor fuelling outsourcing.

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. This is driving demand for high quality forging components from Indian companies.

To balance out the cyclicality nature of domestic M&HCV segment, RMKF has increased its focus into export markets. Currently, North America accounts for ~80% of export revenue. With steady

improvement in the ISM New Orders Index and a pickup in freight demand, the Class-8 sales expected to grow by 21/10% in CY18/19 (as per FTR’s Truck & Trailer Outlook). This segment should report healthy double-digit growth in medium term. The company is also looking to enter into the PV space which will provide ample opportunity for long term revenue growth.

Unlike rivals in the domestic forging companies such as M.M Forgings, Bharat Forge and Mahindra CIE, RMKF has yet to build a significant presence in the EU truck market. Currently, RMKF is supplying small orders in countries such as Italy and Turkey. Going forward, the company is endeavoring to win more orders from key OEMs in other regions. We expect the export revenue mix to improve substantially in the coming years.

Market Size of HCV forging Industry USD ~1.4bn Market Size of PV forging Industry USD ~7bn

Source: HDFC sec Inst Research Source: HDFC sec Inst Research

New GVW axle norms is positive for RMKF as this will propel the demand for bigger and heavier axle and uses of 12500 MT press line will go up(current capacity utilization ~60%) Currently, North America accounts for ~80% of RMKF’s export Key international clients includes Meritor and Dana Corp Focus on complex & heavy exports‐oriented components will help the company to improve its operating performance While Q1 FY19 export growth was flat due to re‐adjustment of inventory, we expect strong export growth for the rest of the year and in FY20, driven by higher demand/sales in North America and Europe HCV industry across US, Europe and India are estimated at ~1mn vehicles. Based on our calculation of 650kg of forged components used per HCV, we estimate Industry size of USD ~1.4bn.

India0.43

NAFTA0.47

Europe0.52

India0.86

NAFTA3.06

Europe3.60


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FTR –Forecast Class 8 Truck –North America Revival in Class-8 Truck Orders Particulars CY17 CY18E CY19E US 197,226 239,550 267,500 YoY(%) 0 21 12 Canada 26,141 32,844 29,400 YoY(%) 13 26 -10 Mexico 22,462 26,382 29,600 YoY(%) -8 17 12 Export 6,122 5,774 8,500 YoY(%) 10 -6 47 Total 251,951 304,550 335,000 YoY(%) 1 21 10

Source: Company, HDFC sec Inst Research

Source: Bloomberg, HDFC sec Inst Research

Entry into new segment

HCV contributes 95% to RMKF’s automotive segment revenue. Management plans to reduce this concentration to 70% over the next three years. Management is setting up a new Greenfield project, to be completed by Dec-19, dedicated to the Railway, PV and LCV segments which will expand its target market. Although, management has not disclosed the capex amount yet, they have indicated ~40% of the new capex would be funded through internal accruals, while balance would be funded through debt. It aims to maintain current net D/E ratio with +/- 5%, going forward.

We believe incremental capex will lead to higher interest cost and depreciation, hence limit free cash flow.

However, entry in the PV market not only opens up a new revenue potential, but also reduces cyclicality. The PV segment volume is almost 5x the HCV segment. Typically, in a PV, forging components account for ~120-130kg compared to 650-700kg in a HCV.

RMKF has also forayed into manufacturing components for oil and gas industry. Although, the revenue from this segment is insignificant, management expects revenue of USD 7-8 mn in FY19 on the back of new orders.

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PV industry across US, Europe and India is pegged at ~40mn vehicles. Based on our calculation of 125kg of forged components used in a PV, we estimate industry size USD ~7bn Over a longer horizon, opportunity in passenger vehicles and industrial components, offer additional upside Typically, the weight of forged components in a passenger vehicle is ~120‐130kg, almost 20% of the HCVs. However, being volume driven, the size of PV forgings industry is way bigger than CV


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Financials Strong Revenue Growth And Margin Expansion Revenue Mix: Shift Towards High Margin Export


Net D/E Likely To Go Down Return Ratios On Upward Trajectory


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ROAE % ROACE %

We expect operating margin to remain strong above 20% on the back of – i) Operating leverage benefit through higher capacity utilization, ii) Increase in mix of higher margin heavy duty forged products along with higher Export and iii) Higher machining mix However, interest cost (including forex loss) will jump by 25% in FY19 owing to Rupee depreciation and new capex Driven by top line growth and operating margin expansion, we expect 24% CAGR in earnings over FY18‐21E By adding higher‐end forging segments and penetrating lucrative export markets, we expect RMKF’s RoE to improve in medium term towards a sustainable +17%.

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Revenue (Rs mn) OPM % - RHS

90 8676

53 5470 71 69 67 65

10 1424

47 4630 29 31 33 35

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Net debt (Rs mn) Net debt/equity (x) - RHS


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Peer comparison (operating metrics) FY18(Standalone) Ramakrishna Forgings Bharat Forge MM Forgings Capacity (in tons) 1,50,000 3,80,000 65,000 Utilization 82% 65% 77% Revenue(Rs mn) 14,355 53,160 6,206 Domestic 71% 43% 41% Export 29% 57% 59% Non-auto as a % of sales 18 38.3 8 Gross margin (%) 50.28 64.5 58.4 ROE (%) 15.14 18 17 ROCE (%) 9.50 13 12.3 EBITDA Margin (%) 19.80 28.91 29.97 Fixed Asset Turn(x) 1.0 2.2 1.8 Revenue (Rs) / ton 1,17,983 2,14,251 1,24,120 Direct costs(Rs) / ton 58,667 76,053 51,592 Employee costs(Rs) / ton 7,182 17,568 12,516 Other Expenses(Rs) / ton 28,772 58,693 22,812 EBIDTA(Rs) / ton 23,362 61,937 37,200 Depreciation(Rs) / ton 6,937 12,363 8,398 PAT(Rs) / ton 7,780 28,506 13,700 EPS 29 18# 28 PE(x) 22 37 22 Source: Company, HDFC sec Inst Research, # conso

RMKF’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. However, we believe RMKF is still not in direct competition with Bharat Forge given the size, diversification and scale of the latter’s operations

Transitioning from lower-end component manufacturer to higher-margin and exports-oriented complex & heavy forged components manufacturer will help RMKF to improve its operating performance.

The company trades at ~60% discount to Bharat forge’s multiples, we expect this to narrow down to 30-35% in coming years as operating metrics improves.

Higher share from domestic business and lower share of non‐auto business, leads to lower margin profile of RMKF compared to its peers Bharat Forge’s majority revenue share from large components both for CVs and non‐auto segments (>70% of standalone) has been a key driver for best‐in‐class RoE with lowest breakeven levels and superior gross margins.


Page | 7

Key risks RMKF 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.

Depreciation in Rupee vs USD/Euro will impact its profitability as the company has high exposure to foreign debt (~50%).We have already incorporated forex losses into interest cost.

Key Assumption FY16 FY17 FY18 FY19E FY20E FY21E Domestic sales (MT) 48,234 62,124 92,503 101,753 109,894 118,685 % YoY 37.4 28.8 48.9 10.0 8.0 8.0 Exports sales (MT) 28,690 20,271 29,164 36,163 43,396 52,075 % YoY 12.9 (29.3) 43.9 24.0 20.0 20.0 Total volumes (MT) 76,924 82,395 121,667 137,917 153,290 170,760 % YoY 27.1 7.1 47.7 13.4 11.1 11.4 Domestic ASP (Rs/MT) 102,765 94,814 108,049 116,693 121,361 126,216 % YoY (7.4) (7.7) 14.0 8.0 4.0 4.0 Exports ASP (Rs/MT) 139,934 126,905 141,493 145,738 150,110 154,613 % YoY 1.2 (9.3) 11.5 3.0 3.0 3.0 Source: Company, HDFC sec Inst Research

Peer Set Comparison

MCap (Rs bn)

CMP (Rs/sh) Rating TP

Adj EPS (Rs/sh) P/E (x) EV/EBITDA (x) RoE (%) FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E

Exide Industries 230 271 BUY 304 8.4 11.3 13.3 32.9 24.3 20.6 20.1 18.4 13.8 14.9 13.9 17.1 Jamna Auto 31 77 BUY 100 3.1 4.0 5.0 23.8 18.6 15.0 12.7 10.4 8.5 33.1 33.9 33.9 Suprajit Engineering 31 220 BUY 289 9.9 12.9 15.2 22.2 17.1 14.5 13.2 11.2 9.3 23.5 24.0 22.7 Swaraj Engines 22 1736 BUY 2476 66.1 78.5 91.8 26.1 22.0 18.8 15.7 12.7 10.6 31.3 38.5 38.2 Subros 20 336 BUY 435 10.4 14.7 19.8 33.4 23.6 17.6 19.7 17.2 14.3 16.6 20.1 22.8 Ramkrishna Forgings 20 625 BUY 908 29.1 36.8 45.2 21.7 17.1 13.9 10.0 8.4 7.3 15.4 14.8 15.7 NRB Bearings 17 172 BUY 217 9.4 10.5 12.1 18.4 16.3 14.3 10.9 9.4 8.2 26.6 24.7 23.9 JBM Auto 14 353 BUY 560 17.0 24.6 31.1 20.5 14.2 11.3 9.4 7.0 5.8 18.0 22.7 21.7 Lumax Autotech 14 200 BUY 216 6.9 9.7 12.0 29.9 21.1 17.0 10.3 8.4 6.5 11.7 13.2 14.6



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Income Statement (Standalone) Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Revenues 8,809 14,355 17,369 20,076 23,256 Growth (%) (1.8) 63.0 21.0 15.6 15.8 Material Expenses 3,679 7,138 8,598 9,897 11,419 Employee Expenses 790 874 1,129 1,305 1,581 Other Operating Expenses 2,761 3,501 4,169 4,818 5,628 EBITDA 1,579 2,842 3,474 4,055 4,628 EBITDA Margin (%) 17.9 19.8 20.0 20.2 19.9 EBITDA Growth (%) (10.7) 80.1 22.2 16.7 14.1 Depreciation 747 844 901 962 1,052 EBIT 831 1,998 2,573 3,093 3,576 Other Income (Including EO Items) 82 42 40 42 45 Interest 750 698 873 969 948 PBT 163 1,342 1,740 2,166 2,672 Tax (Incl Deferred) 54 396 539 693 855 RPAT 110 947 1,200 1,473 1,817 EO (Loss) / Profit (Net Of Tax) - - - - - APAT 110 947 1,200 1,473 1,817 APAT Growth (%) (80.0) 763.4 26.8 22.7 23.4 Adjusted EPS (Rs) 3.8 29.1 36.8 45.2 55.8 EPS Growth (%) (80.0) 659.7 26.8 22.7 23.4


Balance Sheet (Standalone) As at March (Rs mn) FY17 FY18 FY19E FY20E FY21E SOURCES OF FUNDS Share Capital - Equity 287 326 326 326 326 Reserves 4,409 7,266 8,334 9,719 11,427 Total Shareholders’ Funds 4,696 7,592 8,660 10,044 11,754 Long Term Debt 5,049 4,781 5,081 5,381 4,981 Short Term Debt 4,306 3,452 3,652 3,852 4,052 Total Debt 9,355 8,232 8,732 9,232 9,032 Net Deferred Taxes 229 344 571 895 1,296 Long Term Provisions & Others 23 70 72 112 137 TOTAL SOURCES OF FUNDS 14,305 16,238 18,035 20,284 22,220 APPLICATION OF FUNDS Net Block 10,183 10,679 10,278 10,516 10,764 CWIP 504 436 936 1,736 1,936 Investments 193 193 193 193 193 LT Loans & Advances 146 125 137 151 166 Total Non-current Assets 11,027 11,432 11,544 12,595 13,059 Inventories 2,286 2,994 3,902 4,510 5,225 Debtors 3,937 4,722 5,710 6,600 7,646 Other Current Assets 665 792 904 1,033 1,180 Cash & Equivalents 11 4 106 246 370 Total Current Assets 6,898 8,511 10,622 12,389 14,420 Creditors 2,758 2,831 3,331 3,850 4,460 Other Current Liabilities & Provns 864 875 800 850 800 Total Current Liabilities 3,622 3,706 4,131 4,700 5,260 Net Current Assets 3,277 4,806 6,491 7,689 9,160 TOTAL APPLICATION OF FUNDS 14,303 16,238 18,035 20,284 22,220



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Cash Flow Statement(Standalone) Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E Reported PBT 163 1,342 1,740 2,166 2,672 Non-operating & EO items - - - - - Interest expenses 750 698 873 969 948 Depreciation 747 844 901 962 1,052 Working Capital Change 711 (1,468) (1,594) (1,032) (1,337) Tax Paid (54) (396) (539) (693) (855) OPERATING CASH FLOW ( a ) 2,318 1,021 1,381 2,373 2,481 Capex (1,741) (1,272) (1,000) (2,000) (1,500) Free cash flow (FCF) 577 (251) 381 373 981 Investments (126) (0) - - - Non-operating Income 25 137 166 325 401 INVESTING CASH FLOW ( b ) (1,842) (1,135) (834) (1,675) (1,099) Debt Issuance/(Repaid) 520 (1,304) 500 500 (200) Interest Expenses (750) (698) (873) (969) (948) FCFE 347 (2,253) 7 (97) (168) Others - 1,968 - - - Dividend (69) (39) (72) (88) (109) FINANCING CASH FLOW ( c ) (479) 107 (445) (558) (1,257) NET CASH FLOW (a+b+c) (3) (7) 102 140 124 Closing Cash & Equivalents 11 4 106 246 370


Key Ratios (Standalone) FY17 FY18 FY19E FY20E FY21E PROFITABILITY (%) GPM 58.2 50.3 50.5 50.7 50.9 EBITDA Margin 17.9 19.8 20.0 20.2 19.9 APAT Margin 1.2 6.6 6.9 7.3 7.8 RoE 2.4 15.4 14.8 15.7 16.7 RoIC (or Core RoCE) 3.6 9.1 10.3 11.0 11.5 RoCE 4.4 9.5 10.6 11.2 11.7 EFFICIENCY Tax Rate (%) 32.8 29.5 31.0 32.0 32.0 Fixed Asset Turnover (x) 0.8 1.2 1.4 1.4 1.5 Inventory (days) 94.7 76.1 82.0 82.0 82.0 Debtors (days) 163.1 120.1 120.0 120.0 120.0 Other Current Assets (days) 27.5 20.1 19.0 18.8 18.5 Payables (days) 114.3 72.0 70.0 70.0 70.0 Other Current Liab & Provns (days) 35.8 22.2 16.8 15.5 12.6 Cash Conversion Cycle (days) 135.3 122.1 134.2 135.3 138.0 Debt/EBITDA (x) 5.9 2.9 2.5 2.3 2.0 Net D/E (x) 2.0 1.1 1.0 0.9 0.7 Interest Coverage (x) 1.1 2.9 2.9 3.2 3.8 PER SHARE DATA (Rs) EPS 3.8 29.1 36.8 45.2 55.8 CEPS 29.9 55.0 64.5 74.7 88.1 Dividend 2.0 1.0 1.8 2.3 2.8 Book Value 163.8 233.0 265.8 308.3 360.7 VALUATION P/E (x) 164.7 21.7 17.1 13.9 11.3 P/BV (x) 3.8 2.7 2.4 2.0 1.7 EV/EBITDA (x) 17.4 10.1 8.4 7.3 6.3 EV/Revenues (x) 3.1 2.0 1.7 1.5 1.3 OCF/EV (%) 8.5 3.6 4.7 8.0 8.5 FCF/EV (%) 2.1 (0.9) 1.3 1.3 3.4 FCFE/Mkt Cap (%) 1.9 (11.0) 0.0 (0.5) (0.8) Dividend Yield (%) 0.3 0.2 0.3 0.4 0.4



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RECOMMENDATION HISTORY

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Ramkrishna Forgings TP

Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 11-Oct-17 664 BUY 742 31-Oct-17 762 BUY 913 9-Jan-18 875 BUY 913

12-Apr-18 828 BUY 913 10-Sep-18 625 BUY 908


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Disclosure: I, Abhishek Jain, MBA, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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