Forgings - sector report-Jan-16-EDEL - Edelweiss Finbudget.edelweissfin.com/report/Forgings-sector_report-Jan-16-EDEL… · 1 Edelweiss Securities Limited Engineering and Capital

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 [email protected]

Swarnim Maheshwari+91 22 4040 [email protected]

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.

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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



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



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



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



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%

1



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%



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



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



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


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



Chart 10: Market size of CV forging industry around USD1.0‐1.5bn


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


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



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

[email protected]

Swarnim Maheshwari

+91 22 4040 7418

[email protected]

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



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


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


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



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


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)



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


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


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



Chart 6: BHFC’s utilisation has improved despite significant capacity addition


Chart 7: Sustained capacity addition ensures higher reliance of OEMs


(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


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



Chart 8: R&D spending on the rise


(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


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


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)



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


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


Table 4: BHFC has much lower breakeven level versus peers


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.



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


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


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



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


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.



Chart 17: PCC—Mapping the evolution


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


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


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.



Table 5: Select low hanging procurement plans could benefit BHFC


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


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)



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


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.



Table 7: Key assumptions


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


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


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



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


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


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


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


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



Financial Statements (Consolidated)

Income statement (INR mn)


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


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 (%)


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


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


Bharat Forge

Cash flow metrics


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


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


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


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)


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)


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


Market cap

(INR bn)

PE (x) P/BV (x) ROE (%)



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


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


M cap (INR bn/USD mn) : 12 / 177

Avg. Daily Vol. BSE/NSE (‘000) : 86.6

SHARE HOLDING PATTERN (%)


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


: NIL


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

[email protected]

Amit Mahawar +91 22 4040 7451

[email protected]

India M

idcaps


January 20, 2016

Financials (Standalone)


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


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



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


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


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



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%


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

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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)

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FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

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FY15

(%)

(%)

India MHCV growth rateRKFL's revenue growth (RHS)

Ramkrishna Forgings


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


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

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80.0

100.0

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

(%)

(%)

Steel Forging Ring Rolling facilities

Press Lines EBITDA Margins (RHS)



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

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Jul‐05

Jan‐06

Jul‐06

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Jan‐10

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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


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.



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


Fig. 2: Product profile


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%.



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


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



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


Fig. 5: Porters 5 force model


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



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


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

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(24.0)

(1.6)

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90

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130

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

(%)

(INR/Kg)

Revenue growth (%) Blended Resalisatoin (LHS)

Ramkrishna Forgings


Chart 7: EBITDA margins set to expand further


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


16 15

13

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21 21 23

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(INR mn)

EBITDA EBITDA margins

14

5 3

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(100)

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PAT ROE's (LHS)



Financial Statements

Income statement (Standalone) (INR mn)



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


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 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


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


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


Growth metrics (%)


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


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


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


PE (x) P/BV (x) ROE (%) Market cap

(INR bn)

Cash flow metrices


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


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


Interest coverage 3.2 2.9 3.4 4.0

Fixed assets t/o (x) 2.0 1.5 1.7 2.1


Adjusted debt/Equity 1.7 1.9 1.8 1.7

Operating ratios


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



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


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


Short term borrowings 2,460 3,710 3,710 3,710


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



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


Reported Profit 655 1,013 1,013 1,378

Add: Depreciation 490 576 576 639


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


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


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






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


: NIL


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

[email protected]


[email protected]

India M

idcaps


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



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


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


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



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).



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%



Table 2: Business description


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



MCIE’s product portfolio

Fig 3: Cars and utility vehicle

Fig 4: Medium & heavy vehicle

Source: Company Website



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.



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.




Income statement (Consol) (INR mn)



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


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


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


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)



Direct cost 44.6 45.1 41.1 46.0


S G &A expenses 23.1 24.7 26.3 24.4


Depreciation & amortization 4.6 5.0 4.6 4.3


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 (%)


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)


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




Short term borrowings 3,169 3,682 3,642 954


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



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


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




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)


Less: Capex 1,584 632 733 2,077

Free Cash Flow 880 386 1,378 1,145

Mahindra CIE


Cash flow metrices



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



ROAE (%) (on adjusted profits) 6.4 (13.5) (9.6) 13.3

ROACE (%) 7.2 (4.4) 0.5 11.3



Payable days 94 100 88 94




Interest coverage 2.2 (1.3) (0.1) 1.9

Fixed assets t/o (x) 2.1 1.9 2.2 2.6



Operating ratios







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


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






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


: NIL


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

[email protected]


[email protected]

India M

idcaps


January 20, 2016

Financials (Standalone)


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


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


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


Heavy Commercial Vehicle63%

Passenger car13%

Off Highway12%

Oil field 12%



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


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.




Income statement (Standalone) (INR mn)



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


EBITDA 605 578 789 1,108

Depreciation and amort. 231 211 360 354

EBIT 374 366 429 754

Interest expenses 61 71 77 91


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


Adjusted Basic EPS 32.3 40.5 23.0 41.9

No. of Dil. Sh.outstanding (mn) 6 6 12 12


Adjusted Cash EPS 82.6 75.5 54.1 71.2

Dividend Payout Ratio (%) 2.2 2.4 10.9 2.2



Direct cost 42.0 42.7 42.9 41.2


S G &A expenses 32.9 32.7 29.5 28.6


Depreciation & amortization 6.6 5.9 8.8 7.0


EBITDA margins 17.3 16.0 19.2 22.0

EBIT margins 10.7 10.1 10.4 15.0


Growth metrics (%)


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


As on 31st March FY12 FY13 FY14 FY15

Equity capital 121 121 121 121



Long term borrowings 603 424 348 829

Short term borrowings 730 743 1,025 918


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



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


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


Contingent liabilities 0.0 0.0 0.0 0.0



Reported Profit 244 293 505 3,922

Add: Depreciation 211 360 354 268


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


Cash flow metrices


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)



ROAE (%) (on adjusted profits) 13.9 15.1 15.1 23.3

ROACE (%) 14.2 12.9 14.3 20.9



Payable days 37 56 47 38




Interest coverage 6.1 5.1 5.6 8.2

Fixed assets t/o (x) 2.1 1.9 2.1 2.4



Operating ratios







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



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



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



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



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



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



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



\\\\

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: [email protected]

Nirav Sheth

Head Research

[email protected]

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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