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Alpha | Ramkrishna Forgings Ltd. – Equity Research Desk

June 24, 2024 . Equities Desk

Alpha . Equity Research

Ramkrishna Forgings Ltd. – Driving Innovation with Excellence

Incorporated in 1981 and headquartered in Kolkata, Ramkrishna Forgings Ltd. (RKFL) is a leading manufacturer and seller of forged components to various sectors including automotive, railways, farm equipment, bearings, oil & gas, power and construction, earth moving, and mining. With an installed capacity of 210,900 tonnes and over 2,000 products, RKFL is the second-largest forging company in India as of Q4FY24, serving 22 countries with a strong presence in North America and Europe.

Products and Services

Automotive: RKFL offers products such as beams, shafts, gears, knuckles, front hubs, and mounting brackets.
Farm Equipment: The company provides forged crankshafts, crown wheels & pinions, shafts, and gears.
Energy: Key products include wing nuts, valve bonnets, T-bolt socket joints, and tooth crusher hammers.

Subsidiaries: As of FY23, RKFL has 4 subsidiaries and no associate companies or joint ventures.

Growth Strategies

Acquisitions: Acquired MAPL and JMT Auto to bolster capabilities in castings, gears, and precision components.

Market Expansion: Secured contracts in North America’s Tier 1 light vehicle segment and also with a BHEL-led consortium for bogie frames.

Investments: Committing to a Mexico facility for PV/LV components and expanding forging capacities.
Diversification: Entered tractors and PV segments through ACIL Limited acquisition, enhancing market presence and product portfolio.

Financial Highlights

Q4FY24

Revenue Growth: Achieved Rs.1,023 crore, marking a 15% YoY increase.
Profitability: Operating profit rose by 12% YoY to Rs.217 crore, while net profit surged by 37% YoY to Rs.94 crore.
Challenges: Revenue impacted by the Red Sea issue during the quarter.
Export Milestone: Recorded highest-ever export sales of Rs.400 crore, with confidence in sustainability for the future.

FY24

Revenue Growth: Achieved Rs.3,955 crore, a robust 24% increase compared to FY23.
Operating Profit: Increased to Rs.840 crore, reflecting a significant 21% YoY growth.
Net Profit Surge: Posted Rs.341 crore in net profit, marking a notable 38% YoY increase.

Financial Performance (FY21-24)

Revenue and PAT CAGR: 45% and 153% respectively over the 3-year period
Average 3-Year ROE & ROCE: 19% and 17% respectively
Strong Balance Sheet: Robust debt-to-equity ratio of 0.45

Industry outlook

Dominated by the automotive sector with 62% market share in forge components.
Strong growth drivers include economic expansion, rising incomes, infrastructure investments, and manufacturing incentives.
Industry achieved Rs. 2.9 lakh crore (US$ 36.1 billion) turnover in H1 2023-24, with 12.6% revenue growth compared to H1 2022-23.
Export of auto components grew by 2.7% to Rs. 85,870 crore (US$ 10.4 billion) in H1 2023-24; anticipates US$ 7 billion (Rs. 58,000 crore) investment by FY28 for localisation efforts.

Growth Drivers

FDI Inflow: Automotive parts industry allows 100% FDI under the automatic route, attracting $36.26 billion during April 2000 – March 2024.
Government Policies: Includes The Bharat New Car Assessment Program (BNCAP), Automotive Mission Plan (AMP), Production Linked Incentive Schemes, FAME Scheme, and State Government initiatives.
Make in India Initiative: Enhanced by proximity to key automotive export markets like ASEAN, Europe, and Japan.

Competitive Advantage

Compared to competitors like Bharat Forge Ltd, Happy Forgings Ltd, etc., RKFL has consistently maintained stable return ratios that align with sales growth. This underscores RKFL’s ability to generate enhanced profitability relative to the capital invested.

Outlook

Expansion Strategy: Focused on sustainable growth through product diversification and geographical expansion.
Risk Management: Minimal counterparty risk with strong customer base and critical component expertise.
Financial Targets: Targeting margin improvement, volume growth via product mix changes and increased exports.
Profitability Goals: Aiming for sustained 50% gross margin and balanced export-domestic revenue mix for higher profitability.

Valuation

With a diversified revenue stream, new component introductions, expanded customer base, and increased market share, Ramkrishna Forgings Ltd. is poised for sustained medium to long-term growth. We recommend a BUY rating with a target price (TP) of Rs. 1,051, based on 40x FY26E EPS.

Risks

Forex Risk: Significant operations in foreign markets expose the company to forex fluctuations, which can adversely impact financial performance.
Socio-economic Risk: Instability affecting input costs (e.g., raw materials, freight) poses a threat to margins and profitability.

Note: Please note that this is not a recommendation and is intended only for educational purposes. So, kindly consult your financial advisor before investing.