Sanghvi Forging Engineering - Visit Note - SBICap Securities

Sanghvi Forging Engineering Ltd (SFEL) is a Baroda based small size forging company supplying forging equipments to non-automobile industries like Oil & Gas, Fertilizers, Power, Defence etc. The company is specialized in both open and closed die forging. We recently visited the facilities of SFEL and interacted with the management and followings are the key takeaways our meeting.

Key Takeaways of the meet:

Rapid capacity addition to yield fruits in coming quarters:

The company has recently expanded the forging capacity from existing 3,600 MT to 18,600 MT with a total investment of Rs130 crore. SFEL has already spend Rs125 crore and has started booking the orders for new plant. The company is expected to start the trial production in the month of September 2012 and commercial production is scheduled to begin from October 2012 onwards. The company also expects to increase in average ticket size of the order by 10 fold going forward.

The new facility is located just near to exiting plant on 12 acres of land acquired at historical cost. The company has also secured the gas supply from GAIL which would further help SFEL to cut down the fuel cost and enhance the margins. The management believes to generate over Rs200 crore revenue at full capacity. The company has term debt of Rs80 crore which comprises of rupee loan, ECB and others. The effective cost of debt is 8 percent.

One of leading player in open die forging up 40 MT

The company supplies both open and close die forging equipments to its clients. In case of close die forging it can produce up to 25 kgs and under open die forging it can serve its clients up to 40 MT of equipments. There is no closes competitor in these segments.

High entry barriers for new players

The average lead time requirement for the product approval is 2-3 years and SFEL has prominent clientele base such as ONGC, SIEMENS, GNFC, IOC, BHEL, NPCIL, NTPC etc which helps them to get repeated orders infact top 10 clients contribute over 50 percent of revenue. SFEL presently exports close to 25-30 percent product which the company plans to maintain going forward.

Robust Financial Numbers

The sales and net profit of the company has grown at 14 and 28 percent CAGR to R42 and Rs5 crore respectively between 2009A and 2012A. The EBITDA too has grown 25 percent CAGR to Rs9 crore. The EBITDA margin improved by 500 bps to 20 percent level whereas the Net margin too has improved by 200 bps to 11 percent level.

The company expects to improve its margins due to gas linkage form GAIL to its new plant and increase in order ticket size.

Financials & Valuations:

At current price of Rs46, the stock is trading at 12.3x of its TTM June earnings whereas on P/bv front, the same is available at 1.0x. Currently we do not have any rating for the stock but looking at its growth prospects we believe SFEL would report good set of numbers going forward.

Source : Equity Bulls

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