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MM Forgings (Accumulate)
CMP: ₹657.95
Target: ₹719
Improved capacity utilisation to take advantage of the production capacities created recently, increasing share of margin accretive machining products (currently about 25 per cent of overall sales) and focus on cost reduction should help OPM stand at 19.5 per cent and 20.0 per cent in FY19 and FY20 respectively. Interest cost, which already witnessed an uptick of 51.9 per cent in H1FY19 due to increase in borrowings to fund the company’s planned capex, should see further rise, restricting PAT growth to 16.3 per cent in FY19 and 21.2 per cent in FY20.
The stock currently trades around 19.7x FY19e EPS of ₹32.95 and 16.3x FY20e EPS of ₹39.93. With stable outlook for CV and PV industry (constituting 92 per cent of its sales), introduction of new products and MM Forgings’ plans to ramp up its production capacity to about 1.2 lakh tonne by FY20 (65,000 tonne last fiscal) entailing capex of about ₹650 crore, we expect its revenue to grow at a CAGR of 34.0 per cent in the next two years, with volume growth of 42.3 per cent and 35.4 per cent in FY19 and FY20 respectively.
Uncertainty in global economies, especially in North America and Europe cannot be overlooked either. Higher financial leverage (D/E expected to stand at 1.7 in FY20) would also restrict P/E expansion.
On balance, we recommend ‘accumulate’ rating with TP of ₹719 based on 18x FY20e EPS of ₹39.93 over a period of 9-12 months.
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