apr 27, 2017 pick of the month m.m. forgings limited...

CMP: Rs. 607 TARGET PRICE: Rs. 750 TIME : 12 months

SNAPSHOT

52 week H / L Mcap (INR mn)

629 / 383 7328

Face value: 10

BSE Code NSE CODE

522241 MMFL

Annual Performance

(Rs mn) FY14 FY15 FY16 FY17E

Sales (Net) 4114 5025 5023 5074

EBITDA 789 1108 1080 1040

EBITDA (%) 19.2 22.0 21.5 20.5

Other Income 15 24 54 65

Interest 77 91 83 126

Depreciation 360 354 358 391

PBT 368 687 693 588

PAT 293 505 501 444

Equity 121 121 121 121

EPS (INR) 24 42 41 37

Ratio Analysis

Parameters (Rs mn) FY14 FY15 FY16 FY17E

EV/EBITDA (x) 9.9 7.1 7.5 7.7

EV/Net Sales (x) 1.9 1.6 1.6 1.6

M Cap/Sales (x) 1.8 1.5 1.5 1.4

M Cap/EBITDA (x) 9.3 6.6 6.8 7.0

Debt/Equity (x) 0.8 0.8 0.7 0.6

ROCE (%) 12 18 14 12

Price/Book Value (x) 3.7 3.1 2.6 2.3

P/E (x) 26.5 14.4 14.5 16.9

Share Holding Pattern as on 31st Dec 2016

Parameters No of Shares %

Promoters 68,08,725 56.41

Institutions 19,06,259 15.79

Public 33,55,416 27.80

TOTAL 1,20,70,400 100.00

Quarterly Performance

Parameters (Rs mn) Mar 16 June16 Sept 16 Dec 16

Sales (Net) 1,245 1,190 1,186 1,203

EBITDA 256 233 213 244

EBITDA ( %) 21 20 18 20

Other Income 19 27 43 17

Interest 20 22 23 28

Depreciation 88 98 98 98

PAT 110 104 102 101

Equity ( Rs mn) 121 121 121 121

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Note: All the data is calculated as per Market Price on 26Apr 2017. Please Turn Over

Apr 27, 2017 PICK OF THE MONTH VOL-3, NO-8

M.M. Forgings Limited BUY

OVERVIEW: Industry: What is forging? Forging is defined as the method to form metal work pieces with heat and pressure. It is the process of shaping metals by using localized compressive forces. It is the manufacturing process where the metal is pressed, pounded under great pressure into parts called forgings. Forging process manufactures parts that are stronger compared to any other metal working process. Forging is an appropriate substitution to the casting methodology as it ensures greater efficiency, reliability and precision. Types of forgings: In forging, the material is deformed applying either impact load or gradual load. Based on the type of loading, forging is classified as hammer forging

or press forging. Hammer forging involves impact load, while press forging involves gradual loads.

Based on the nature of material flow and constraint on flow by the die/punch, forging is classified as open die forging, impression die forging and flashless forging.

On the basis of the temperature used, it can be classified into (a) Hot Forging High temperature which fills the complicated parts like crank shafts and connecting rods, and such components can be made only by hot forging, (b) Cold Forging at room temperature or near room temperature and (c) Warm Forging that is done at a temperature between room temperature and hot forging temperatures.

Global Forging Industry: The Global Forging market valued at USD57.42bn in 2015 is expected to reach USD86.9bn in 2021, growing at a CAGR of 7.2% between 2016 and 2021 (as per market research report). There has been a structural shift in the global forging market wherein the heavy and complex components are being outsourced to developing nations like India that have low cost skilled labour and raw materials.

Source: Market Research Reports

Source: IBEF

Source: Annual Report

Indian Forging Industry: The Indian forging industry has emerged as a major contributor to the manufacturing sector of the Indian Economy. It is a key element in the growth of the Indian automobile industry as well as other industries such as general engineering, construction equipment, oil, gas and power. The Indian forging industry is well recognised globally for its technical capabilities. The Indian forging industry is likely to grow at CAGR of 9.5% by 2018, production wise, and reach to 2.97mn MT in FY2017-18 from 2.25mn MT during FY2014-15, according to Association of Indian Forging Industry (AIFI). With an installed capacity of around 3.76 MT, the industry has a capability to forge a variety of raw materials like carbon steel, alloy steel, stainless steel, super alloy, titanium, copper, brass and aluminium. The Indian Forging units are classified based on installed capacity of the units which is described as under: There has been surge in demand for the forging industry on account of growing trend among Local & global automotive OEMs to outsource components from manufacturers in low-cost countries. The rise in demand is visible from the capacity utilization of Indian units from 56% to 65% from FY2012-13 to FY2015-16 respectively.




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Source: AIFI

Source: AIFI

Source: AIFI

Automobiles the key industry: The Automotive industry depends on forged metal components for the production of valve bodies, high-pressure valves, fittings and flanges. Forged parts are widely used in automobiles due to their high strength-to-weight ratio. Growth of the forging market is thereby directly proportional to the growth of the automotive sector. Also, the other way around as the forging components form the backbone of the Indian Automobile Industry, any changes in the Auto sector also impacts the Indian forging Industry directly. The Indian forging industry caters to the automotive sector, which accounts for around 61% and the rest caters to non-automotive sectors like solar, aerospace, railways, defence and wind sector. There are continuous efforts been put in by the industry in upgrading technologies and diversifying product range which would further enable it to expand its base of customers to foreign markets. Advantages of Forging:

The dimensional characteristics are stable. Also, the structural stability is incomparable to any other metal working pro-cess.

Forged products are attractive owing to the superior reliability, tolerance capabilities and efficiency Forged designs accommodate highest loads and stresses Industries that forging caters to: (a) Automotive sectors (b) Non-Automotive Industries Valve Fittings Agriculture Industries Railroad Equipments Tools and Hardware part General Equipment. Defense Equipment and Aerospace.

Positives for the sector:

Growth in the Automotive Industry Make in India initiative with Smart cities concept Outsourcing trend in the industry i.e. structural shift in global forgings, a positive for India Challenges that the forging industry faces:

Price parity of raw materials as compared of India with China and other European markets Lack of technological upgradation and innovation Inadequate supply of power and shortage of skilled manpower. About the Company: MM Forgings Limited (MMFL) was incorporated in 1946 as Madras Motors Limited and was renamed MM Forgings Limited in the year 1993. MMFL manufactures steel forgings in raw, semi-machined and fully machined stages in various grades of Carbon, Alloy, Micro-Alloy and Stainless Steels in the weight range of 0.2kg to 60kg. The company’s manufacturing plants are located at Singampunari Pasumpon Muthuramalingam District, Viralimalai Pudukkottai District and Karainaithangal Village Kanchipuram District (all in Tamil Nadu). The company has its Wind Farm at Panakudi Village Tirunelveli District and at Meenakshipuram, Theni District and the power generated is used for captive use. The management of the company has Mr. N. Srinivasan as the Chairman and Mr. Vidyashankar Krishnan as the Vice Chairman and Managing Director.




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Source: MMFL Website

Source: AIFI

INVESTMENT RATIONALE (A) Product offerings and portfolio enhancement: MMFL manufactures raw, semi-machined and machined forging products like spindles, knuckles, axle beam, gears, hub, yoke & other transmission parts with weight ranging from 0.3-60 kg. The Company caters to the forging requirements of almost all sections of industry. MMFL is introducing newer and heavyweight products, which have improved its average weights per product from 2/kg in 2009 to 3.5/kg in 2016. This shift in focus towards critical & heavier parts (especially CV segment) will improve its realisation. The company is phasing out its Hammers (forging process) and moving towards more productive and margin accretive press forgings, realizing the fact that higher tonnage presses generate superior ROEs, higher operating leverages and better contribution margins. The company is flexible in volumes and aims to provide a one-stop shop for its customers with value added services. (B) Robust Exports and Distribution: In terms of the segment wise sales contribution, the company’s prime focus is the auto segment that contributed 84% of the total sales in FY16 with the CV (commercial vehicles) and PV (passenger vehicles) contributing 66% and 18% of the total auto sales while the remaining (16%) comes from off-highway, valve & oilfields & other segments. MMFL continues to be one of the largest exporter of forgings from India and has received 25 consecutive annual awards from The Engineering Exports Promotion Council since 1989. The company reported export of Rs3,374mn in FY16 constituting 69% of the total turnover. MMFL has a diversified revenue mix geography-wise, with Europe & US being the major contributor of the total revenues of the company. (C) Sufficient capacity to cater to demand: The company has a capacity of 53,000MT currently which it plans to ramp up to 65,000MT by end of the current fiscal. It is focusing on optimum capacity utilisation to take advantage of the production capacities created by it. MMFL mainly caters to the global market with a focus on the CV industry. The CV industry contributed 66% to the company’s sales in FY2016. With the gradual pick in the Indian as well as other economies, we expect that there should be a gradual pick up in the demand in the CV industry. According to Automotive Component Manufacturers Association (ACMA), the production in domestic CV industry grew at a CAGR of 22% over FY2008-12 and is expected to grow at a CAGR of 11% over FY2012-21E to 23.5lakh units. With the CV industry being the key for MMFL, we believe that strong growth opportunities await the company in near future backed by the strong relations with its customers.

(D) Better operational efficiency expected: Along with increasing the capacity utilization, the company has also been taking measures to improve its operational efficiency but getting its major costs of production under control. Backed by the different energy conservation methods undertaken by the company, the power and fuel costs should reduce for the company over time. Also, the company’s continuous efforts for conservation of raw material by improving design and layout of dies has led to reduction in raw material consumption as well. MMFL also passes on changes in the steel prices to its customers. There has a been a gradual improvement in the operational efficiency, due to the efforts of the company to curb costs. The operating margins have been improving from 16% in FY13 to 21.5% in FY16 and expected to improve further. While MMFL has steadily increased its capacity, it has used a good combination of debt and equity to finance its expansion. The D-E ratio has traditionally been maintained at low levels and at present it is at 0.73. The management believes in sustainable growth, but not at the cost of high debt.




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INVESTMENT RATIONALE (contd.) (E) Demand pick up seen in US: Recently there have been signs of recovery seen in the demand in US for heavy trucks. Exports to North America constitute nearly 25-40% of the total sales of the major forging companies in India. The order inflows of Class 8 order, an indicator of heavy truck sales to North America, gained 20% YoY to 21,600 units in January. This is the second time in the past two years that order inflows of such trucks have posted a growth. According to Freight Transportation Research, US fleet operators are more confident about the market conditions now, than they were four months back and fleet rates have started improving since December. Also, Paccar, a US commercial vehicle maker, has indicated that dealers are turning positive and expecting a better 2017. MMFL had reported 25% of the total revenues from the US in the last fiscal. With the expected pick up for the year, the company is strongly placed to benefit from the same. The company has chalked the following targets for the future:

Focus on improving sales in keeping with market conditions. Increase the production capacity to 65,000 Tons. Focus on cost reduction continuously, particularly on reducing energy consumption and improving productivity. Enhance IT systems with the continued development of the ERP system in place. Continue the evolution into green sources of energy in the coming months. Reduce the impact on the environment. Financials: We have noticed that the company has been reporting very flat performance in the last couple of years. This trend is expected to change in near future as the fruits from the internal restructuring that the company had adhered to shall be visible in its performance. The operating margins shall come back to its earlier attractive levels.

Risks and concerns: Slowdown in the CV industry could impact the performance of the company. Currency fluctuations is another risk to the company. Margins may be impacted by fluctuations in prices of Steel.

Outlook and valuations: The stock is quite illiquid and thus we could see sharp movements. We are currently giving a target of only 25% price increase and this shall be revised in line with improvement in performance of the company. We initiate a BUY on the stock with a target price of Rs750.




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apr 27, 2017 pick of the month m.m. forgings limited...

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