MM Forgings (MMFL)’ numbers for 4QFY2016 have come in marginally below our
estimates. Its top-line for the quarter de-grew by 1.7% yoy to Rs124cr, which is below
our estimate of Rs129cr. The EBITDA declined by 4.5% yoy to Rs26cr while the EBITDA
margin declined marginally by 60bp yoy to 20.5% (against our estimate of 21.0%).
Further, the interest and depreciation expenses for the quarter stood more or less
flat in absolute terms on a yoy basis and other income increased by 90.4% yoy to Rs1.9cr.
Consequently, the net profit declined by 1.3% yoy to Rs11cr vis-à-vis our expectation of Rs12cr.
On-going capacity expansion to help cater to domestic as well as international
markets: The company derives ~70% of its revenues from North America and Europe
while the balance is contributed by the domestic markets. Automotives make up for
~78% of its revenue with higher concentration of commercial vehicles (CV) in the mix.
The company has been continuously increasing its capacity over the last two years and
is expected to touch the 65,000MT mark by the end of FY2017 from the current level of
53,000MT. Although the US CV industry is expected to post flat growth in sales for
CY2016 after having reported a sharp increase in CY2015, the demand from the
domestic CV industry is expected to continue to be strong. This, along with a stable
growth rate of ~7% estimated for the European CV industry in CY2016, should enable
the company to utilize its expanding capacity. At the moment, the company’s top-five
clients account for ~70% of its revenue. We expect the company to be aggressive in
terms of client acquisitions which should also compliment its growing capacity.
Outlook and valuation: Considering flattish CV growth in the US (although stable
growth in domestic and European CV sales), we have lowered our revenue expectation
for FY2017 and expect improvement only in FY2018. We expect MMFL to register a
revenue CAGR of 10% over FY2016-18E to Rs608cr. The company’s EBITDA margin is
expected to witness contraction in FY2017 on account of pricing pressure and higher
contribution from the relatively lower-margin domestic market, but improve thereon to
20.7% in FY2018. The net profit as a result is expected to remain flat in FY2017 and
improve to Rs59cr in FY2018. At the current market price, the company is trading at a
P/E of 9.4x its FY2018E earnings. We have a Buy rating on the stock with a target price
of Rs536 based on a target P/E of 11.0x its FY2018E earnings.

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