Healthy New Order Wins and High Margin Territory to Aid Rerating
Ramkrishna Forgings (RMKF) delivered a strong performance in 2QFY22, with a historical high EBITDA margin of 24% and PAT rising by 24x YoY to Rs501mn (vs. our estimate of Rs413mn). Revenue grew by 129% YoY/39% QoQ to Rs5.8bn (vs. our estimate of Rs5.2bn), on the back of a volume increase of 82% YoY/29% QoQ to 28,279 tons, owing to a rise in M&HCV sales in the wake of an economic recovery post pandemic and healthy export volumes. EBITDA increased by 205% YoY (up 46% QoQ) to Rs1.4bn (surpassing our estimate by 23.2%), while EBITDA margin expanded by 600bps YoY (up 120bps QoQ) to 24% on better operating leverage, despite a 630bps QoQ (down 360bps YoY) rise in RM/sales to 45.1%. Despite a higher input cost, better product-mix with higher exports contribution led to better operating leverage, which benefited RMKF's margin. We expect a strong CV upcycle over the next 1-2 years, domestically as well as globally. Moreover, its new margin territory coupled with healthy order wins across segments and geographies will support its rerating. Thus, we reiterate our BUY recommendation on the stock, with a revised Target Price of Rs1,700 (vs Rs670 earlier - Previous note dated 16th Dec'20).
Cost Control, Higher Export Contribution and New Orders to help EBITDA Margin
RMKF has rationalised various costs post pandemic, which helped it to negate a higher commodity cost inflation. Moreover, the recent new order wins across segments and geographies of Rs6.2bn (annualised) for the next 4-5 years would drive a double-digit revenue growth. We expect domestic CV to grow by >50% in FY22E, while its export revenue will record a strong 111% YoY growth in FY22E. Improving product-mix, rising export contribution coupled with a favourable exchange rate would support EBITDA margin. We expect its EBITDA margin to improve by 580bps over FY21-FY24E to 23.6%.
Outlook & Valuation
We believe the company will continue to win more new orders in auto and non-auto segment over the coming years on the back of launch of new products and an expanding overseas reach. Increasing our volume estimate, we expect RMKF's volume to clock 27% CAGR over FY21-FY24E. We increase our revenue/EBITDA/EPS estimate by 26%/37%/44% and 37%/51%/68% for FY22E and FY23E respectively. We introduce FY24 estimates and expect the company to report an EPS of Rs113.3 in FY24E. In view of a CV upcycle and healthy margin profile, we reiterate our BUY on RMKF. We have shifted to a 1-year Target Price from the earlier 2-year. As we enter 2HFY22, we roll forward our P/E valuation to FY24E and increase the Target Price to Rs1,700, valuing the stock at 15x.
Link to the report
Shares of Ramkrishna Forgings Limited was last trading in BSE at Rs. 1187.05 as compared to the previous close of Rs. 1209.05. The total number of shares traded during the day was 26913 in over 2220 trades.
The stock hit an intraday high of Rs. 1238.00 and intraday low of 1182.65. The net turnover during the day was Rs. 32380546.00.