Ahmednagar Forgings Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Castings/Forgings

Company

Ahmednagar Forgings Ltd

Reco Price
Rs. 316
Price Target (12 Months)
Rs. 630
Upside
99.37%

Date

29 May 2014
Sensex
24234.15
CNX Nifty
7235.65

Exchange

Code

NSE
AHMEDFORGE
BSE
513335

Large capex done will help company to improve margins by 2%-3% in next two years.

Strong Revenue mix:
Ahmednagar Forgings Ltd (AFL) has a diversified revenue mix, with about 35-40% comes from Commercial Vehicles, 25-30% from the Passenger Vehicles, 10% from Two-Wheelers, while the balance comes from Non-Auto Segment. Diversification across automobile segments, with no sub-segment accounting for over 40% of the revenues derisks the company’s business model. Further, the Non-Auto segment is expected to increase by FY16, reducing the company’s dependence on the automobile segment significantly. This will help the company to grow its strong business models with improving product mix.

Significant Synergies expected from recent acquisition of Amtek Group:
AFL enjoys significant synergies from the group due to the group’s presence in the entire value chain of a machined/assembled product from forging and casting to machining and assemblies, leading to a significantly higher profitability. The company also benefits from the centralized raw materials sourcing. Acquisition of new companies recently like Neumayer Tekfor by Amtek Auto, Kuepper by Amtek India and JMT Auto by Amtek Auto, has led to a significant increase in the global footprint of the group, adding new client base, product portfolio and geographies. AFL Forgings is likely to benefit from these acquisitions immensely going forward as these will help company’s exports to go up.Also export sales are more lucrative for company in terms of margins and currently that business is negligible in size, leading a good scope for growth.

AFL’s Non Auto business to boost up:
AFL’s holding company, Amtek Auto had formed a JV with American Rail Car, for manufacturing wagons for the Indian Railways. Although the company’s facility is ready for production and has successfully completed the design and prototypes stages, it did not get any wagon order due to lack of initiative by the Indian Railways. The company has recently bid for 500 wagons for the Indian Railways and is expected to win the order and start delivering wagons to the Indian Railways by August 2014. This will kick in the order inflows from the private transport companies, like Concor etc. Both, Amtek India and AFL will immensely benefit from the start of commercial production of this JV as it will help AFL to boost its Non Auto Business.

Large capex to boost AFL’s margins:
AFL invested about Rs 1700 crores in FY13 in expanding and upgrading its manufacturing facilities, while the balance Rs 200-300 crores will be spent this year. This led to the capacity going up from 225,000 MTPA to 280,000 MTPA in FY13 and it will further go up to 325,000 MTPA by September 2014. Also, a large part of the capex went into upgrading its facilities from the Hammer Route to the Automated Press Route, leading to a significant reduction in the overheads. Also the company added a heavy press of 8,000 MT, which enabled it to increase its presence in the MCV & LCV segments and also to produce complete Axle Beams Assemblies for the Heavy Commercial Vehicles. This has led to significant increase in the realizations and margins. The company enjoys about 2-3% higher margin on the Press Route. Also, the Axle Beam Assemblies fetch significantly higher margins. Currently, Press Route forgings account for 60-70% of entire production.

Consolidation in forging industry:
Despite a recession in the Indian Automobile Industry, AFL was able to grow significantly by adding new product offerings, increasing market share, targeting new segments and especially, due to shut-down of smaller forging companies. The slowdown has led to significant consolidation of the previously fragmented Indian forging industry. Also, the OEMs have been down-sizing their vendor list, by sourcing entire forging-machining value chain from a select list of large vendors. This has immensely benefitted the large integrated forging players like AFL as they are one of the preferred player in the Industry.

Stock Data

CMP (Rs)
314.95
Face value (Rs)
10
52 Week Range (Rs)
347.90 - 72.55
Market cap (Rs Crores)
1157.44
Price To Book Value (x)
1.16
P/E Ratio (x)
6.68
EV/EBIDTA (x)
7.33

One Year indexed Stock Performance

Ahmednagar Forgings LtdSensex
Ahmednagar Forgings Ltd
Performance (%)
 
1m
3m
Absolute
129.17
213.99
218.07
Sensex
8.68
17.18
20.52

Shareholders

(in %)
31-Mar
Promoter
64.77
FII
9.6
DII
9.1
Others
16.53
Total
100

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research@stockaxis.com

 

Industry

The Indian Forging industry has now emerged as a major contributor to the manufacturing sector of the Indian economy. Forging industry is a basic industry and such industries tend to grow in a country in relation to the rate of growth of its GDP. As far as India is concerned, we expect our GDP to continue to grow and therefore, the basic industries will grow and so will the industry. Since the forging industry is largely dependent on the automotive sector, the forging industry will also continue to grow and do well. Thanks to outsourcing, opportunities for exports are huge. An increasing number of companies from all over the world are coming to India to procure components and products. Many companies are working hard to capitalize on this. Hence there is an optimism that the forging industry will continue to grow and do well in the immediate future.

Briefly, the composition of the Indian forging industry can be categorized into four sectors- large, medium, small and tiny. By and large, the Indian forging industry (an important segment of the Indian auto component industry) still remains highly fragmented, with around 400 units (out of which only 9 -10 are large units scattered all over India). These SMEs form the backbone of the industry.

Profile

Ahmednagar Forgings was incorporated under the Companies Act and registered with the Registrar of Companies, Mumbai on March 21, 1977. The registered office of AFL is currently situated at Gat No. 614 at Village Kuruli, Khed Taluka, Pune District, 410501. Amtek acquired AFL in order to establish a manufacturing business in western India, as there were a number of automotive companies which were being supplied by AFL in that region.AFL is a manufacturer of forging and machined automotive components, cold forged parts and high tensile fasteners. AFL operates four plants; two of them are located at Ahmednagar, Maharashtra and the other two near Pune, Maharashtra. One of AFL's plants at Ahmednagar also manufactures high tensile fasteners and cold-formed components. It supplies products to its customers based on the technical specifications provided by them.

Group

AFL was a group company of Amtek Group. Amtek has a long and distinguished experience in handling large-scale automotive manufacturing operations. It has been successful in meeting the ever-increasing demands of the global automotive giants in terms of product quality, development, delivery and cost control while improving the company's profitability and ensuring a consistent growth for the last nearly two decades. Amtek registered its presence across North America, Europe & Asia to cater to a number of clients. And is poised to explore new global frontiers to invent new products and to scale new heights.

Products

AFL is the second largest manufacturer of forged automotive components, cold forged parts and high tensile fasteners in India. Its product portfolio consists of a range of components for 2/3 wheelers, cars, tractors, light commercial vehicles (LCV), heavy commercial vehicles (HCV) and stationary engines. The categories of components manufactured are camshafts, connecting rods, crankshafts, crown wheel, hub and shafts. The company products are exported to a number of countries.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
FY 2011
FY 2012
FY 2013*
FY 2014E
FY 2015E
Income:-
  • Sales
  • Total Expenditure
  • EBIDTA
  • EBIDTA Margin (%)
  • Other Income
  • Operating Profit
  • Interest
  • Profit Before Depreciation & Tax
  • Depreciation
  • Profit Before Tax
  • Tax
  • PAT
  • Adjusted (EPS)
  • 935.16
  • 688.58
  • 246.58
  • 26.37
  • 2.09
  • 248.67
  • 46.38
  • 202.29
  • 49.95
  • 152.34
  • 44.18
  • 108.16
  • 29.43
  • 1,214.05
  • 918.95
  • 295.10
  • 24.31
  • 4.39
  • 299.49
  • 66.83
  • 232.66
  • 61.30
  • 171.36
  • 50.49
  • 120.87
  • 32.89
  • 1,718.49
  • 1,302.08
  • 416.41
  • 24.23
  • 43.01
  • 459.42
  • 104.51
  • 354.91
  • 97.95
  • 256.96
  • 83.67
  • 173.29
  • 47.15
  • 2150.5
  • 1615.03
  • 535.47
  • 24.90
  • 2.5
  • 537.97
  • 145
  • 392.97
  • 145.5
  • 247.47
  • 76.56
  • 170.91
  • 46.50
  • 2810.65
  • 2090
  • 720.65
  • 25.64
  • 3.5
  • 724.15
  • 218.5
  • 505.65
  • 170.5
  • 335.15
  • 110.5
  • 224.65
  • 61.12
Note: FY2013 Results are for 15 months due to change in month for year eanding.
Source: Stockaxis Research, Company Data

Outlook

Considering the large capex done where capacity is expanded from 225,000 MTPA to 280,000 MTPA in FY13 will also improve margins by 2 – 3%.Further, the recent up-gradation of its facilities will generate much higher realizations as the company is now able to supply much larger assembles, like Front Axle assemblies for Heavy Commercial Vehicles.Hence company is in much better situation to improve its financials in next two years. Company is likely to benefit from recent acquisitions done by parent company as these will help company’s exports to go up where margins are more lucrative improving company’s overall margins.

Hence we recommend buy on stock with target price Rs 630 where it trades at 10.30x FY 2015 E which is very reasonable valuation for the stock considering its grow prospects in next 2 years after recent capacity expansion done.

 

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