Technology

For 2QFY2016, MM Forgings (MMFL) reported disappointing numbers on the topline
and bottom-line fronts. The top-line during the quarter grew marginally by
1.8% yoy to Rs128cr. The raw material cost declined by 111bp yoy to 38.2% of
sales, but the benefits were offset by an increase in employee and power costs.
Employee and power costs rose by 162bp yoy and 17bp yoy to 11.1% and 10.4%
of sales, respectively. As a result, the EBITDA margin witnessed a slight decline of
37bp yoy to 21.9%. The other income came in at Rs1.3cr vs Rs0.4cr in 2QFY2015.
The net profit remained flat at Rs13cr.
Sufficient capacity to cater to improving demand across the globe: MMFL is in the
midst of increasing its capacity to 65,000MT, which should be in place by
4QFY2016. The company mainly caters to global markets (Europe and USA) with a
focus on the commercial vehicle (CV) industry. The company is witnessing healthy
demand from USA and we expect demand from the region to remain intact over the
next 12-15 month period. We expect demand from Europe to be subdued in the near
term and recover thereafter. Additionally, appreciation of the USD against the INR will
provide a boost to the company’s top-line by way of higher realization in INR terms.
Improvement in demand from domestic CV industry: The domestic CV industry’s
performance over the past three years had been lackluster amidst a pronounced
slowdown. However, there has been an evident recovery in the domestic CV
industry, ie in the medium and heavy commercial vehicle (MHCV) segment, where
vehicle sales have grown by 54.9% in 1HFY2016. Going ahead, the outlook on the
domestic CV industry remains positive on the back of increase in government
spending on infrastructure coupled with stable diesel cost and possible interest rate
cuts in the near future.
Outlook and valuation: We expect MMFL to register a revenue CAGR of 10.6%
over FY2015-17E to Rs615cr with an EBITDA margin of 21.6% in FY2017E. The
profit is expected to improve to Rs67cr in FY2017E. At the current market price, the stock is
trading at a P/E of 9.3x its FY2017E earnings. We have a Buy rating on the stock with a
revised target price of Rs614 based on target P/E of 11.0x for FY2017E.

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