indian forgings industry - spark capitalmailers.sparkcapital.in/uploads/mukesh/indian forgings...

Indian Forgings Industry

BSE Auto vs. Sensex

Performance (%)

1m 3m 12m

Sensex -6.1% -4.2% -3.2%

BSE Auto -10.1% -5.3% -2.9%

Market data

BSE SENSEX 26219

Nifty 7982

BSE Autos 17571

Auto Sector Report

Date 21st Sep 2015

-10%

-5%

0%

5%

10%

15%

20%

Sep-14 Dec-14 Mar-15 Jun-15 Sep-15

BSE Auto Sensex

Well positioned to benefit from structural exports story and cyclical domestic revival

We are optimistic on the Indian forging industry, driven primarily by the lucrative export prospects, on the back of a

combination of the cost arbitrage offered by India’s lower labor costs and its technical capabilities. Forging is becoming

increasingly uneconomical in the West on account of prohibitive labour and environmental compliance costs,

characterized by slowing capacity additions. We believe that large forging companies, with demonstrated execution

track record, and scalability of production would be in a favorable position to capture this huge market opportunity. On

the demand front, but for transient seasonality, we believe that US and European CV outlook continues to be stable;

similarly, domestic CV outlook too continues to be sturdy characterized by consistent sequential growth. On the

non-auto side, the opportunity currently lies in exports, however if ‘Make in India’ is a success, domestic non-auto could

also be a large opportunity to explore.

India has a significant cost edge: Average labour costs in India are ~25% of the labour costs in the West and countries like

Korea, who also possess forging technical capabilities, enabling Indian companies to gain a strong cost arbitrage. We also do not

see China as a threat, as though labor cost is comparable, China is a net importer of forgings; also, based on industry

interactions we understand that India’s engineering capabilities surpass China, resulting in India being preferred over China by

global OEMs/Tier-1 players. This lower cost has resulted in average EBIT margins of comparable global forging cos. being

significantly lower at ~ 8% vs. 19% for Indian peers.

US and European forging industry volumes have been tepid: Overall forging industry volumes in North America have

surpassed its 2008 highs in 2014, while that of Europe are still well below 2008. A survey conducted by Forgings

Magazine,(USA) indicates that forging companies in North America continue to be most concerned about the increasing

competition posed by imports and availability of skilled labor, given the “blue collar” nature of work. Also, despite increasing

capacity utilization, there are no significant brownfield or greenfield projects on the anvil, which assumes importance given the

high lead time involved in adding capacities.

Opportunity for domestic forging companies: Mindful of the lead time in bringing on-stream additional capacities, large Indian

companies have invested in capex over 5 years through FY16; the commissioning of which is expected to coincide with the

revival in demand in key domestic and overseas markets. While execution is a key success factor, companies such as Bharat

Forge and MM Forgings already derive a large portion of revenue through exports. Higher capacity presses would improve

product mix, value add potential and new customer acquisitions.

Positive on companies with execution capabilities and significant capacities coming on stream: We remain positive on

Bharat Forge (Buy, TP: Rs. 1,100) as we believe the concerns on weak US CV orders are overdone and the weakness would

be offset by new non-auto markets. We are also positive on Ramkrishna Forgings (Buy, TP: Rs. 760) as capacity is doubling and

more than 75% of the new capacity is tied up with new export orders. Also, the new orders are for more complex/heavier

products resulting in better profitability. We also believe MM Forgings (not rated) is stepping into the big league with expected

addition of a high tonnage press facility. Historically the company has seen a positive shift in revenue/margin mix with addition in

capacity. Shivam Autotech (not rated) is expected to see a significant shift in revenue mix away from Hero MotoCorp by way of

new capacities for supply of higher value added products to Bosch/Denso. This would also improve the product mix, which is

significantly skewed towards 2-wheelers

MUKESH SARAF [email protected] +91 44 4344 0041

RAMAKRISHNAN SESHAN [email protected] +91 44 4344 0020 Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset


Forging involves shaping of metal using localized

compressive forces, delivered with a power hammer or

upsetter or forging press. Depending on the temperature

at which it is performed: forging can be classified as cold

forging (at room temperature), warm forging, or hot forging.

Forgings are superior to castings in respect of strength, lower defects,

dimensional stability and fatigue crack growth resistance

Forgings

Under the casting process, metal is heated until

molten. While in the molten or liquid state it is poured

into a mold or vessel to create a desired shape

There are many types of casting including sand

casting and high density casting

Castings are used for a wide range parts and components that are too

large, complicated, intricate or otherwise unsuitable for the forging

process

Castings are capable of using a large range of alloy choices

Castings

Segment wise usage of forged products Consumption (kgs) No. of parts

HCV 400-450 60-70

LCV 300-325 60-70

Tractors 300-350 60-70

2W 25-30 50-60

PVs 50 60-70

An overview and comparison of common metal forming processes

Forging vs. Casting

Property Forging Casting

Strength High Medium

Ductility High Low

Toughness High Medium

Fatigue crack growth resistance Good Poor

Directional strength capability Yes None

Heat treatment response Good Requires close control

Internal defects Possible Many

Production volume High High

Production rate High Low (sand casting) to high (die casting)

Initial tooling cost Medium Low (sand casting) to medium (die casting)

Production cost Low Low

Material waste Yes Yes

Shape complexity Limited Limited

Dimensional versatility High Limited

Dimensional accuracy Medium Medium

Surface finish Good to poor Poor

Material versatility High Limited

Source: Industry, Spark Capital


An overview and comparison of common forging technologies

Factors determining the forging technology employed

Availability of

Capital

Availability of

Technical Expertise Marketability

Technology Employed

Hammers Presses

Characteristics

Forging is done by slowly applying a continuous pressure or force.

Typically used for forging large and complex equipment including

crankshafts and front axles

Advantages/Disadvantages

Has the ability to deform the complete workpiece, uniformly.

Gives a good indicator of a new product's strain rate as the

compression rate of the press forging operation is controlled.

Large presses can be used to forge parts of any size.

Press forging is relatively time consuming, with the workpiece being in

contact with the dies for such an extended period of time, typically

measured in seconds.

The workpiece will cool faster because the dies are in greater contact

with workpiece; which may induce cracking if deformation continues.

Greater percentage of energy is used on the work piece itself.

Characteristics

Forging is done by the near-instantaneous impact of hammer.

Typically used for forging less complex equipment including flanges,

disks and light duty axles/shafts.

Advantages/Disadvantages

Usually only deforms the surfaces of the work piece in contact with the

hammer and anvil; with the interior of the workpiece staying relatively

un-deformed

Lesser control on compression rates inhibits accurate understanding of

new product strain rates

Size of the parts than can be forged using a hammer is restricted.

Hammers is a faster process with the workpiece being in contact with

the die for only milliseconds

The workpiece cools down at a slower pace due to lesser contact with

the die, thus reducing the need for re-heating

Lot of the work is absorbed by the machinery, instead of the work piece.

Denotes capability to operationalize dies

and the forging technology chosen

besides setting up post-forging capabilities

Upsetters and Ring Rollers: These technologies are used for specialized applications including drill pipes, large bolts, sprockets and clutch plates.



Though the forging technology is generally fungible across major product categories, presses are better suited for the manufacture of more complex and heavy products,

Hammers are used for forging comparatively simpler and lighter products, (see examples above)

Typically presses are more capital intensive, and are economical only beyond a certain scale of production, unlike hammers.

As they are used in the manufacture of complex products, the EBITDA margins of press would be higher than that of a hammer. However, the RoCE under both

technologies would be similar despite lower EBITDA margins of an hammer on account of lower capital costs of the same.

Hammers Upsetters Ring-rollers Presses

Forging presses yield higher EBITDA margins; however, RoCE% across forging technologies can be similar

Flanged axles

Drive shafts

Large bolts

Drill pipes

Tube products

Hand tools

Flanges and disks

Connecting rods

Spindles

Light duty crankshafts/ beams

Sprockets

Clutch plates

Flywheel rings

Crown wheels

Bearing rings

Heavy duty Crankshafts/

Axles

Turbine components

Chassis and drive components

Pipeline fittings/thick walled pipes

Best suited for production of..

HOT/COLD Forgings

Lower capital costs Better EBIDTA margins

RoACE can be similar across Forging Technologies

with optimal product mix / utilisation



Hammer size Process time (sec) Minimum part

temperature (oF)

Maximum

temperature (oF) Load (tons)

4000 lb, 1 blow 0.003 2143 2359 850

2500 lb, 3 blows 2.00 2110 2219 874

1500 lb, 6 blow 5.00 2031 2158 818

100 lb, 12 blow 11.00 1970 2117 389

Characteristics of Hammers for forging a 4.45lb Steel Gear Blank

Press size Process time (sec) Minimum part

temperature (oF)

Maximum

temperature (oF) Load (tons)

250 lb, slow 1.60 1458 2159 250

500 lb 0.75 1533 2181 500

1000 lb 0.33 1639 2194 676

2000 lb 0.18 1721 2198 705

Comparison of typical production parameters using the hammer and press production technology

Characteristics of Hydraulic presses for forging a 4.45lb Steel Gear Blank

Highlighted above are the process time taken and minimum operating temperature for a closely comparable hammer (1500lb) and press (1000lb).

While the hammer requires 5 seconds to complete one process cycle, the press requires only 0.33 seconds for one process cycle, enabling larger scale

of production.

Also, while the minimum operating temperature for a press is lower than that of a hammer, resulting in savings in energy costs.

However, as pressline forging machines are typically more expensive than forging hammers, the decision to adopt either technology would be

a factor of product mix and scalability of production

The process time required and

minimum operational temperature for a

forging press is lower than that of a

forging hammer across sizes, aiding

improved scale and production

efficiencies.



An overview of Cold and Hot Forging and Equipment Capabilities

Typical equipment Capabilities - Forging Process wise

Forging Process Equipment Type Unit Equipment Capacity

Hot Closed Die

Hammer Kilojoules Up to 160

Counter Blow Hammer Kilojoules Up to 1400

Press Tons Up to 16,000

Up Setter In Inches Up to 13

Extrusion Tons Up to 2500

Cold Closed Die Press Tons Up to 2500

Cold Heading Tons Up to 800

Open Die Hammer Tons Up to 12

Press Tons Up to 9,000

Ring Rolling Ring Rolling In Millimeter (O.D) Up to 5,000

Factors of Choice for selection of forging process for

steel

Forging processes selection

Cold Warm Hot

Material costs Higher Medium Lower

Deformation pressure Very High Medium Low

Energy Costs Low Medium High

Tolerances Closest Close Generous to close

Tooling costs Highest High Lowest

Size range Smallest (1/4-20lb) Small to med. (1/2-

30 lb) Virtually unlimited*

Equipment. capital** High Medium Lowest

Size/shape restrictions Limited Limited Virtually unlimited

*Includes open-die forging processes; ** Per pound of forging.

Increasing dimensional accuracy Increasing degree of deformation

While the absolute

equipment costs would be

relatively higher for hot

forging process, the same

has the lowest capital per

pound of forging.

This combined with better

realizations for hot forged

products (on account of

typically more complex

products manufactured)

resulting in greater

revenues and asset turns.



Has emerged as a major contributor to the manufacturing sector of

Indian economy

Key element in growth of Indian automobile industry & other

industries like general engineering, construction equipment, oil and

gas, and power

Indian forging industry well recognised globally for its technical

capabilities

Indian forging industry has capability to forge variety of raw materials

like carbon steel, alloy steel, stainless steel, super alloy, titanium, like

aluminum as per the requirement of end user industry

Indian forging industry traditionally labour intensive; due to change in

requirement of the end user industries forging units of all sizes have

invested in capital intensive manufacturing technologies

Today the industry provides employment to large number of people

exceeding one lakh in the country

Quality standards in the industry have improved significantly and the

sector is now well known globally for its high quality

Changes in Indian automobile industry directly impact Indian forging

industry, because the forging components form the backbone of the

Indian automobile industry

Indian forgings industry has made rapid strides and currently meets

almost all the domestic demand and also emerged as a large

exporter of forgings

Based on its technological competence, the industry is increasingly

addressing opportunities arising out of the growing trend among

global automotive OEM's.

An overview of the Indian Forging Industry

Major Location:

Ludhiana

Faridabad

Ghaziabad

Gurgaon

Major Location:

Pune

Rajkot

Mumbai

Northern

Cluster

(38%)

Western Cluster

(38%)

Southern

Cluster

(19%)

Eastern

Cluster

(5%)

Major Location:

Kolkata

Jamshedpur

Major Location:

Chennai

Coimbatore

Bangalore

Hyderabad



India has a cost –competitive cost structure, with low labor costs

Source: AIFI, Spark Capital

Continued diversification towards the non-auto segment


Overall production to continue on an upward trajectory;

unorganized, small scale producers dominate in number


Indian forging industry poised to capitalize on its cost competitiveness aided by steady domestic demand

* include selling and distribution, administrative and miscellaneous expenses

2.11 2.15 2.3

2.45 2.64

2012-13 2013-14 2014-15 2015-16 2016-17

Pro

du

cti

on

(M

MT

)

Raw Material 66%

Energy 12%

Salary & Wages 10%

Other Manufacturing

Expenses 7%

Others* 5%

61% 61% 61% 60% 59%

39% 39% 39% 40% 41%

2012-13 2013-14 2014-15 2015-16 2016-17

Automotive Non-automotive

5%

8%

87%

> 30,000 MT

12,500- 30,000 MT

<12,500 MT

One of the biggest advantages of the Indian forging industry is the

cheaper labour cost

Labour is an extremely high requirement in a forging process despite

significantly high level of automation. This is on the back of high post-

forging activities such as heat treatment, machining etc. which require

significant manual intervention.

Our interaction with companies in this space suggest that while labour

cost as a % of sales in India could range between 7-10%, this could be as

high as 30%+ in US and Germany


….a growth rate that is mirrored by the forging revenue growth in

North America

Source: Forging Industry Association, Spark Capital

India has capitalized on its low cost manufacturing base and has

bridged the slowdown in western production

Source: Industry, Spark Capital * median of forging / heavy engineering companies

Country (region) wise contribution to global forging production –

2013

Source: Euroforge, Spark Capital

Subdued forging production growth in Europe …..

Source: Euroforge, Spark Capital Research

5,3

26

5,6

56

5,7

89

5,9

18

6,4

66

6,5

48

4,4

06

5,4

07

5,9

50

5,7

32

5,8

39

5,9

97

0

1000

2000

3000

4000

5000

6000

7000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

China 39%

Europe 23%

Japan 9%

India 8%

USA/Canada/ Mexico

8%

Taiwan 4%

Russia 3%

Korea 3%

Brazil 2%

Australia 1%

Highest capacity, however

majority of capacity sufficient

only for domestic

consumption

European and North American forging industry experiencing sluggishness on account of dwindling cost competitiveness

-1000

1000

3000

5000

7000

9000

11000

13000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Sale

s in

$m

n

Impression Die Open Die Seamless Rings

United States

Europe

China

Japan

South Korea

Taiwan

India

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

EB

ITD

A M

arg

in

5 year revenue CAGR

Low labour

costs Net importer

of forgings;

also lacks

technical

expertise

Prohibitive labour and

pollution control

compliance costs


EU HCV: CV growth has remained strong in the last three months

Source: Bloomberg, Spark Capital

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

0

10

20

30

Sep-1

0

Dec-1

0

Mar-

11

Jun

-11

Sep-1

1

Dec-1

1

Mar-

12

Jun

-12

Sep-1

2

Dec-1

2

Mar-

13

Jun

-13

Sep-1

3

Dec-1

3

Mar-

14

Jun

-14

Sep-1

4

Dec-1

4

Mar-

15

Jun

-15

Th

ou

san

ds

EU HCV Volumes YoY Growth

US Class 8 trucks : Production levels are at a peak


0

10

20

30

Oct-

11

Nov-1

1

Dec-1

1

Jan-1

2

Fe

b-1

2

Mar-

12

Apr-

12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Fe

b-1

3

Mar-

13

Apr-

13

May-1

3

Jun-1

3

Jul-13

Aug-1

3

Sep-1

3

Oct-

13

Nov-1

3

Dec-1

3

Jan-1

4

Fe

b-1

4

Mar-

14

Apr-

14

May-1

4

Jun-1

4

Jul-14

Th

ou

san

ds

Retail Sales Production

US class 8 trucks: Net orders have declined in the last four months


Europe and US HCV industry has remained buoyant thus far

US HCV truck industry demand determined by a monthly

survey of truck OEMs; usually lags sales by one to two

quarters

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Aug-0

8

Fe

b-0

9

Aug-0

9

Fe

b-1

0

Aug-1

0

Fe

b-1

1

Aug-1

1

Fe

b-1

2

Aug-1

2

Fe

b-1

3

Aug-1

3

Fe

b-1

4

Aug-1

4

Fe

b-1

5

Aug-1

5

US class 8 truck net orders have on an average declined 20% yoy in the

last four months

While, these orders will reflect in production over the next two quarters,

industry experts suggest that August is typically a seasonally weak month

and that the growth in orders typically would start from November

(seasonal trends)

Moreover, there are indications of large fleet owners increasing fleet size

on the back of superior profitability rather than availability of freight.

Truckload shipping rates have increased in the last few months

European HCV continue to remain stable and post yoy growth in terms of

new registrations.


Greater capex in the higher capex

class indicates significant pent up

replacement demand being fulfilled

Capex in 2015, primarily

replacement, to be higher than

2014

Expansionary capex on a decline; replacement capex dominates the

overall capex spend

Source: Forgings Magazine (USA), Spark Capital Research

7% 14% 7% 4%

26% 19% 17%

11%

60% 64% 59%

59%

25% 20% 26%

26%

0%

20%

40%

60%

80%

100%

120%

140%

2012 2013 2014 2015

Greenfield expansion Brownfield expansion

New equipment (Replacement) None

30%

12% 33%

24%

< $300k $500k

$1m - $10m $11m +

47%

41%

12%

Capex: 2015 vs. 2014

About the same Increase Decrease

North American Forging industry: Not in the pink of health, as per the annual survey conducted by Forgings Magazine


Increasing investments in nature of pollution control and robotics


Increased capacity utilization in FY14, with no significant greenfield

projects lined up, could bode well for Indian exporters


26%

61%

14%

2013 capacity utilisation %

10-50 51-80 81-99

16%

37% 32%

16%

2014 capacity utilisation %

10-50 51-80 81-99 100+

33% 48% 39% 39%

54%

20%

21% 32% 20%

50%

10%

22% 27%

16%

30%

9%

9% 8%

2%

12%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2011 2012 2013 2014 2015

Natu

re o

f in

vestm

en

ts

(%

of

resp

on

den

ts)

Heating systems Forging machines Robots/manipulators Pollution control Lead time to set up large press shops takes ~3 years on an average


Availability of qualified workers is a major worry across the industry..


….and so is the increasing threat posed by imports


While the auto sector is expected to drive growth, oil and gas,

aerospace and infra too are expected to be important


Energy and labor costs, along with foreign competition continue to

be concerns


35% 46% 26%

41% 38%

25% 20%

18%

23% 21%

20% 19%

34%

35% 27%

23% 13% 11%

18% 15%

20% 19% 17%

17%

16%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2011 2012 2013 2014 2015

Energy costs Labour costs and availability Foreign competition EPA Others

25%

20% 18%

11% 7%

5% 4%

9%

2%

0%

5%

10%

15%

20%

25%

30%

Oil/n

atu

ral g

as

Airc

raft/a

ero

space

Oth

er a

uto

com

ponents

Infra

Fuel e

fficie

nt c

ars

Nucle

ar e

nerg

y a

nd

alte

rnativ

e e

nerg

y

Medic

al e

quip

ment

Oth

ers

Lig

hte

r com

posite

s fo

r tra

nsporta

tion

North American Forging industry: Not in the pink of health, as per the annual survey conducted by Forgings Magazine

47% 46% 51% 35%

5% 10% 2% 16%

14% 15% 11% 20%

27% 19% 17%

14%

7% 9% 19% 14%

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015

Avlb. of qualified workers Retention of workers

Lack of continuing training Lack of growth programs

Others

37% 44% 30%

39% 37%

38%

12% 5% 13%

12% 14% 20%

0%

20%

40%

60%

80%

100%

2012 2014 2015

No significant concern Imports are becoming more competitive

Imports are becoming less competitive American forging exports are increasing


Opportune capacity additions to benefit from potential increase in

demand

Source: Company, Spark Capital Research

Bharat Forge clearly leads in respect of non-auto revenue

diversification


Noteworthy export focus characterized by significant export revenue

as % of total revenue


60 66

47

-

10

20

30

40

50

60

70

80

FY11 FY12 FY13 FY14 FY15

Bharat Forge MM Forgings Shivam RKFL

A comparison of Bharat Forge, RKFL, MM Forging and Shivam Autotech; amongst the largest forging companies in India

54%

22%

19%

-10%

0%

10%

20%

30%

40%

50%

60%

70%



Shivam is majorly into cold forging; it has the lowest FA turnover

ratio amongst peers


9%

14% 14%

32%

0%

5%

10%

15%

20%

25%

30%

35%


5 year CAGR of gross block through FY16

1.14

1.06

1.02

1.41

0.60

0.80

1.00

1.20

1.40

1.60

1.80




1990: Technology Upgradation

Investment in state-of-the-

art forging technology.

Commissioning of16000 MT press

line

1990

1991:

Major break-through in Japan,

USA and UK for critical supply of

power-train & chassis components

2001:

Commissioning of second 16000

MT press line. First M&A -

Acquired order book of Dana.

2002:

Investment in Research &

Development, Testing & Validation

and state-of-the-art Heavy Duty Truck

Crankshaft Machining facilities

2003:

Established Global Manufacturing

Footprint across Europe, North

America and China.

2008:

Bharat Forge commissioned

India's largest commercial

open forging press

2009:

Inauguration of forging and

high horse power, industrial

- locomotive, marine and oil

& gas crankshaft machining

facility at Baramati

2010:

Inauguration of the Ring Rolling

facility at Baramati. Establishment

of the Kalyani Center for

Technology and Innovation

2012:

Company's capital goods division won its

first commercial order for two 660 MW

supercritical turbine generators David

Brown Bharat Forge opens its first

industrial gearbox service and assembly

centre in Hosur, India

2013:

Supply of crankshaft for Indian

locomotives, becoming the 1st

indigenous supplier of crankshaft

Timeline

1990 1995 2000 2005 2010 2015

Global presence


Bharat Forge stands head and shoulders above other Indian forging

companies in revenue and capacities


29,473

36,860

31,512 33,993

45,481

4,111 5,013 4,039 4,295 7,408

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000



Forging capacity: 80k T (additional

70k on-stream in FY16)

Forging capacity: 0.4 mn T The BF Group

Forging

capacity

Crankshaft

machining

capacity

(mn nos)

Front Axle Beam

Machining Capacity

(mn nos)

Bharat Forge Ltd 0.40 1.20 0.75

CDP Bharat Forge Gmbh 0.08 - -

Bharat Forge Aluminiumtechnik 0.02 - -

Bharat Forge Kilsta AB 0.08 - -

Total 0.58 1.20 0.75

Bharat Forge: Forging an aspirational path for the forging companies, locally and globally


Excellent diversification with presence across segments


A global behemoth with unrivalled reach and technical

prowess

However, aggression on the capex front in the past has cost BF

dearly in terms of asset turns in times of weak demand


Bharat Forge: Forging an aspirational path for the forging companies, locally and globally

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

FY09 FY10 FY11 FY12 FY13 FY14 FY15

Fixed asset turnover

Peak of downturn

Strong domestic

demand

With its global presence, Bharat Forge is a supplier of automotive

components directly/indirectly to every automotive major.

It is the only forging company in India to have crankshaft machining

capabilities

Its diversified presence across segments, largely insulates it from

downturns in a particular industry

Industry presence 2001 2004 2012 2015 2017

Truck

Passenger Car

Construction

Mining

Agriculture

Oil & Gas

Aerospace *

* Product expansion

Bharat Forge has changed its approach to a more asset light model



Core - net working capital

Year FY11 FY12 FY13 FY14 FY15

Bharat Forge 53 32 57 51 38

MM Forgings 131 96 79 82 60

Shivam 58 46 37 45 66

RKFL 117 89 170 160 164

Debtor days


MM Forgings 58 24 36 26 22

Shivam 57 29 24 28 40

RKFL 51 52 78 108 141

Creditor days


MM Forgings 18 18 31 14 21

Shivam 48 37 41 41 40

RKFL 37 58 52 96 72

Inventory days


MM Forgings 90 90 74 69 59

Shivam 49 54 54 59 66

RKFL 102 95 145 148 95

Bharat Forge, has the highest gross / EBITDA margin, primarily driven by superior product mix (front axle beams and higher machining mix)

We expect RKFL’s and MM Forgings’ EBITDA margins to improve on the back of increase in the proportion of complex/heavier forged products like front

axle beams, knuckles and crankshafts following the expected commissioning of new press capacities which would aid realisations and production

efficiencies.

EBITDA margins of Shivam, which were depressed in FY14 and FY15 on account of product development costs, are expected to improve on the back of

coming on-stream of the greenfield capacities at Bangalore and Rohtak.

RKFL’s higher net working capital days is driven by its increasing receivable days, (highest amongst its peers) on the back of the growing proportion of

exports in its revenue. Management informed that export customers are typically offered a higher credit period. However, this trend is not apparent in

Bharat Forge and MM Forgings, where despite having a higher proportion of exports, the receivable days are lower than that of Bharat Forge.

RKFL has the highest inventory days amongst peers, exposing it to potential value at risk on account of high inventory holding

Peer comparison: Domestic

Gross margin%


Bharat Forge 54.9 55.7 56.9 59.6 61.7

MM Forgings 63.9 58.0 57.3 57.1 58.8

Shivam 55.5 54.2 55.9 56.3 55.6

RKFL 44.3 44.6 48.4 47.0 50.1

EBITDA%

Bharat Forge 24.4 24.9 22.7 25.4 29.2

MM Forgings 19.6 17.3 16.0 19.2 22.0

Shivam 23.3 23.6 23.5 20.1 18.6

RKFL 17.2 16.2 15.0 13.2 17.1

Exports as % of revenue

Bharat Forge 43% 48% 51% 55% 60%

MM Forgings 65% 65% 68% 69% 66%

Shivam 0% 0% 0% 0% 1%

RKFL 12% 9% 13% 24% 47%

Non-auto sector revenue as % of revenue

Bharat Forge 67% 66% 64% 62% 54%

MM Forgings 32% 27% 23% 24% 22%

Shivam 0% 0% 0% 0% 0%

RKFL 19% 21% 23% 26% 19%


RoACE


Bharat Forge 11% 13% 10% 11% 15%

MM Forgings 13% 9% 9% 10% 14%

Shivam 11% 12% 17% 17% 13%

RKFL 9% 10% 5% 3% 9%

RoE


Bharat Forge 18% 17% 14% 16% 23%

MM Forgings 22% 18% 15% 16% 23%

Shivam 14% 16% 21% 19% 16%

RKFL 12% 12% 5% 3% 20%

All companies, except Shivam have lower average interest costs on

account of higher proportion of borrowings in foreign currency,

(primarily for working capital purposes).

Shivam, on account of a lower export mix, does not have working

capital facilities denominated in foreign currency.

All companies except, RKFL, have comparable RoACE%. RKFL

has a lower RoACE% primarily on account of higher working capital

requirements. Also, the company has incurred significant capital

expenditure in the last two years to set up new capacity that will

come on stream in 2HFY16

Shivam has a lower FA turnover ratio on account of lower value

added nature of products manufactured; while MM Forgings also

has a lower FA turnover ratio as product mix currently does not

include heavy / complex forgings

Effective interest costs


Bharat Forge 8% 9% 8% 8% 6%

MM Forgings 5% 4% 5% 5% 5%

Shivam 11% 15% 17% 17% 16%

RKFL 8% 10% 9% 6% 5%

Capital structure


Bharat Forge 0.74 0.79 0.81 0.74 0.51

MM Forgings 0.94 0.95 0.85 0.77 0.80

Shivam 1.82 1.36 0.93 0.73 1.09

RKFL 1.12 0.83 1.02 1.56 1.75

Fixed asset turnover


Bharat Forge 1.03 1.20 0.92 0.91 1.14

MM Forgings 0.95 1.04 0.94 0.98 1.06

Shivam 0.77 0.99 0.95 0.99 1.02

RKFL 1.54 1.67 1.18 1.20 1.41

Peer comparison: Domestic



RoE

Year CY11/FY12 CY12/FY13 CY13/FY14 CY14/FY15

Sypris Technologies (USA)* 13% 5% -17% -2%

Baoding Heavy Industries (China) 13% 6% 2% 2%

Avic Heavy Machinery (China) 4% 5% 4% 4%

Daechang Forging Co., Ltd. (Korea) 30% 24% 16% 15%

Hanil Forging Industrial Co Ltd (Korea) 2% -2% -4% 0%

Chian Hsing Forging Industrial (China) 14% 12% 13% 16%

Mean value of (BF, RKFL, Shivam and MM) 17% 14% 16% 22%

Fixed Asset turnover


Sypris Technologies (USA)* 1.72 1.78 1.61 1.86

Baoding Heavy Industries (China) 1.59 0.80 0.39 0.53

Avic Heavy Machinery (China) 1.73 1.34 1.25 0.97

Daechang Forging Co., Ltd. (Korea) 3.88 3.32 2.66 2.29

Hanil Forging Industrial Co Ltd (Korea) 1.03 1.00 0.94 0.96

Chian Hsing Forging Industrial (China) 0.79 0.75 0.81 0.81

Mean value of (BF, RKFL, Shivam and MM) 1.12 0.95 0.99 1.10

* RoACE, ROE and FA turnover for Sypris Technologies has been computed on the

consolidated numbers of Sypris Solutions Inc. and Sypris Technologies Inc.

Peer comparison: Overseas

Gross Margin %


Sypris Technologies (USA) 10% 11% 11% 13%




Hanil Forging Industrial Co Ltd (Korea) 12% 9% 10% 10%



EBIT Margin %


Sypris Technologies (USA) 8% 7% 7% 8%







RoACE


Sypris Technologies (USA)* 6% 10% -11% -1%







Dana Corp. has replaced Sypris Tech. with RKFL for the supply of

components primarily on account of cost considerations. As can be seen

from the gross margin and EBIT margins, Sypris and other global players

have a more expensive cost structure than the India companies.

Indian companies fare better also in terms of the return ratios, aided by

better margins and asset turnovers

We expect the current trend of significant export traction to continue on

the back of sheer cost advantages that Indian companies would have

over there overseas counterparts

Source: Company, Spark Capital Research Source: Industry, Spark Capital Research

Ramkrishna Forgings Limited Rating

BUY

Target

Rs. 760

CMP

Rs. 630

Stock Performance (%)

1m 3m 12m

RKFL -10.6 18.6 158.1

Sensex -5.8 -3.3 -3.3

BSE Auto -9.7 -4.8 -3.6

Financial Summary

Year Revenues (Rs. mn) EBITDA (Rs. mn) EBITDA Margin Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x)

FY15 7,408 1,267 17% 747 27.2 23.2 19.4

FY16E 11,528 2,260 20% 799 29.1 21.7 11.2

FY17E 15,599 3,135 20% 1,228 44.7 14.1 8.2

Date 21st Sep 2015

Market Data

SENSEX 26219

Nifty 7982

Bloomberg RMKF IN

Shares o/s 27mn

Market Cap Rs. 17bn

52-wk High-Low Rs. 781-212

3m Avg. Daily Vol Rs. 93mn

Index member BSESMCAP

Latest shareholding (%)

Promoters 48.1

Institutions 23.4

Public 28.5

Initiating Coverage Ramkrishna Forgings Limited (RKFL) is among Indian’s largest manufacturers of forged components and sub-

assemblies, catering primarily to the automotive sector. Despite the industry slow down in the last 2-3 years, RKFL

aggressively set up press-line forging capacities at an outlay of ~Rs.6.8bn, (highest 5 year CAGR of gross block

amongst peers through FY16). Pursuant to the capacities added, and orders bagged from global OEMs and Tier 1 auto

comp suppliers, it is poised to make a significant transition from manufacturing forging complex and large/heavy

products. Export revenue is expected to grow at 47% CAGR from FY15-FY18 vs. 22% for domestic. We initiate coverage

on RKFL with a Buy and a price target of Rs. 760, based on 17x FY17 EPS of Rs. 44.7. PAT CAGR from FY14 to FY18

stands at 31%, translating into a PEG of ~0.55

Orders tied up for ~75% of total capacities: The enhanced capacities have come on-stream at an opportune time in line with

steady growth being witnessed in Europe and the US (key end user markets for RKFL’s customers), in conjunction with the

cyclical uptick being witnessed in domestic MHCV demand. Management indicated that orders have been tied up for ~75% of the

capacities (incl. press line capacities), including long term, five year export contract ($100mn annual) with Dana Corp., a global

auto-comp player. Apart from the order from Dana, RKFL has also won a ~$14mn annual order from large European OEM, which

is expected to scale up to ~$30mn in a couple of years. We do not see an execution risk for RKFL and expect the company to

win more orders (other locations of Dana and new OEMs across Europe)

Transition into mfg. of complex forged products to result in improvement in profitability and return ratios: Given the

nature of the industry, the movement towards manufacturing larger and complex products such as axle beams and crankshafts is

expected to improve EBITDA margin by ~200bps, in addition to improving return ratios. With the new products, there is more

possibility of value addition by way of increased machining content. We currently do not factor in a significant increase in

machining mix, however in the event of it, there could be a further upside to our margin estimates

Improving domestic CV outlook: Execution of aforesaid export orders is expected to improve RKFL’s ability to bag similar

domestic orders, which could potentially lead to greater diversification of the revenue profile. Moreover, RKFL is expected to start

supplies of axles to Tata Motors given the focus of the OEM for a second source apart from Bharat Forge.

Risks: D/E at 1.8x as of FY15 is expected to continue to be >1.5 times till FY17. However, average cost of debt is ~6% on the

back of majority of debt being denominated in foreign currency. Also, the cash accruals of the company are expected to be more

than sufficient to meet maturing debt repayment obligations. Working capital intensity is expected to increase driven by high

exports. However, given that the working capital would be funded by PCFC, we do not foresee any impact on debt servicing

ability. Customer concentration is also expected to be high in the initial years of the contract.

Opportune aggression to pay rich dividends


RAMAKRISHNAN SESHAN [email protected] +91 44 4344 0020


BUY

Target

Rs. 760

CMP

Rs. 630

Corporate Factsheet

Promoter Background

Ramkrishna Forgings was set up in 1981 by Mr. Mahabir Prasad Jalan and is engaged in the business of manufacturing open and closed die forgings of carbon and alloy steel, micro alloy steel and stainless steel forgings. The company has a production

capacity of 150,000 per annum (including press line forging capacities of 80000 MT expected to come on-stream by FY16).

The company has a machining capacity of around 50% of its production capacity.

Business

The company primarily caters to OEMs and Tier -1 auto-component suppliers in the CV segment. Product portfolio includes

machine forged engine, steering components, gearbox components and axle components. With the coming on – stream of the

press line forging capacities, the company would have the capability to manufacture complex forgings including front axle

beams and crankshafts.

Management

Mr. Mahabir Prasad Jalan– Chairman

B.Tech – Mechanical Engineering from BITS Pilani. Has more than 20 years experience in this industry. Has served as

Managing Partner of Tribeni Steel Forgings besides other companies like Orient Paper Mills Limited, Spinning Accessories

Ltd. Jaipur, Shalimar Wires Limited and Calicut Engg.. Works Limited.

Mr. Naresh Jalan–Managing Director

MBA - Marketing from Symbiosis, Pane. Has more than about 15 years of experience in this industry

Presence The company has five manufacturing facilities, 3 in Jamshedpur (Jharkhand), 1 in Saraikhela-Saraiwan (Jharkhand) and 1 in

Kolkata.

Corporate Structure The promoters’ stake in Ramkrishna Forgings is 48.09% as of Jun 2015. The company has a wholly owned subsidiary - Globe

Forex & Travels Limited, which is engaged in the travelling, MICE & leisure business.

Revenue Model The company derived 33% of its revenue in FY15 from the domestic automotive segment Exports, primarily Automotive,

contributed 47% to the total revenue. Other major segments include Railways and Mining at 6% and 3% respectively.

Key Success Factors Long standing relationship with most OEMs, new businesses with global Tier 1 auto-comp suppliers and OEMs pursuant to

the commissioning of press line forging facilities

Credit Rating ICRA A- /Stable/A2+, CRISIL BBB+/Positive

Corporate Bankers State Bank of India, IDBI Bank Limited, EXIM Bank, International Finance Corporation and Landesbank Baden, Wurttemberg

Auditors M/s Singhi, Kolkata

Corporate Office “Ramkrishna Chambers”, 72, Shakespeare Sarani, Kolkata


BUY

Target

Rs. 760

CMP

Rs. 630

Forging

capabilities Ring-Rolling Press-lines

(Brownfield expansion)

Hammers

and upsetters

Used for production of ring shaped

components like crown wheels, bearings

rings etc.

Installed capacity 24000 MT; Capacity

utilisation of ~ 95%

No plans of increasing installed capacity

Brownfield project , currently partly

operational.

Used for production of heavy duty and

complex forged products like front axle

beams, crank shafts and knuckles.

Includes presses of 3150MT, 4500MT

(Operational since Jul14), 6300MT and

12500MT (will be operational in Sep15 and

Dec15 respectively).

Used for production of forged engine,

transmission and axle group components,

Forgings done through hammers and

upsetters.

Installed capacity of 45,000MT, capacity

utilization of ~85%

RKFL is graduating into the manufacture of complex forged products by setting up forging press lines

As % of total production capacity, press-

lines to increase from 15% in FY15 to 53%

in FY18, favorably impacting operational

efficiencies



BUY

Target

Rs. 760

CMP

Rs. 630

Revenue

(35% revenue CAGR FY15 – FY18)

Domestic Exports

Existing orders New orders

Products supplied include forged

engine, transmission and axle

group components, including

spur gears, synchro rings,

shafts, wheel hubs, pinions,

clamps and spindles

Key customers include Tata

Motors, Ashok Leyland, Indian

Railways and BEML

Major orders include contract as

the alternate supplier of

crankshafts and front axle

beams (after Bharat Forge) for

Tata Motors, post Tata Motors

decision to reduce reliance on

its internal foundry capacities.

Major OEM

Existing orders New orders

Products supplied

include forged

engine, transmission

and axle group

components

Key customers

include Meritor and

Sisamex

Dana Corp

$14mn p.a.

contract from a

major OEM.

Supplies are

expected to

commence in

FY16.

Could scale upto

$30mn p.a. by

FY18

$100mn p.a. order for

knuckles, front axle beams

and crank shafts.

Order bagged after Dana

terminated its $200mn p.a.,

sole supplier contract with

Sypris Tech.

Supplies commenced in

FY15, and is expected to

fully scale up by FY18.

Possibility scaling up of

revenue of upto $200 mn

p.a. if further orders are

bagged

Revenue growth over the medium term to be driven by exports

47% revenue CAGR

(FY15 – FY18) 22% revenue CAGR

(FY15 – FY18)

RKFL has developed technology to

manufacture knuckles for Dana

Corp., through internal R&D

Source: Industry, Spark Capital Research


BUY

Target

Rs. 760

CMP

Rs. 630

…resulting in a positive Impact on EBITDA, through better

efficiencies and realisations

Source: Company, Spark Capital

Overall capacity utilization as at Mar15 stood at ~ 82% (incl. press

line capacities of 17500T)……


…..medium term capacities to be bolstered by coming on stream of

press lines with capacities of 80000 MT (cumulative)


Investments in press lines to have positive impact on revenue and profitability

Press lines are expected to form 55% of installed capacities by FY17,

up from 15% in FY15…..


-3%

2%

7%

12%

17%

22%

0

2000

4000

6000

8000

10000

12000

14000

FY13 FY14 FY15 FY16E FY17E

Revenue EBITDA%

0%

20%

40%

60%

80%

100%

-

10,000

20,000

30,000

40,000


Ring Rolling (MT) Traditional Forging (MT)

Press-line forging (MT) Ring Rolling utilisation%

Forging utilisation% Press-line forging (MT) utilisation%

63,700 69,700 69,700

11,667 17,500 17,500 8,750 17,500 15,000

45000

-

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

1,60,000

FY15 FY16 FY17

Existing Capacity 3500T and 4150T pressline

6300Tpressline 12500T pressline

15%

37%

53%

-10,000

10,000

30,000

50,000

70,000

90,000

1,10,000

1,30,000

1,50,000

FY15 FY16 FY17

Ring-rolling and traditional forging Press line forging


BUY

Target

Rs. 760

CMP

Rs. 630

Domestic auto and exports (primarily auto) contribute significantly to

overall revenue


Sustained pick up in domestic MHCV demand


Key end user geographies expected to perform well over the medium term

Steady demand in end user export markets of US


Demand uptick in Europe appears bullish as well


-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

0

10

20

30

Sep-1

0

Dec-1

0

Mar-

11

Jun-1

1

Sep-1

1

Dec-1

1

Mar-

12

Jun-1

2

Sep-1

2

Dec-1

2

Mar-

13

Jun-1

3

Sep-1

3

Dec-1

3

Mar-

14

Jun-1

4

Sep-1

4

Dec-1

4

Mar-

15

Jun-1

5

Th

ou

san

ds

EU HCV Volumes YoY Growth

-60%

-40%

-20%

0%

20%

40%

60%

80%

Apr-

13

Jun-1

3

Aug-1

3

Oct-

13

Dec-1

3

Fe

b-1

4

Apr-

14

Jun-1

4

Aug-1

4

Oct-

14

Dec-1

4

Fe

b-1

5

Apr-

15

Jun-1

5

Aug-1

5

MHCV Growth yoy %

70% 70% 65% 49%

33%

11% 9% 12%

25% 48%

6% 5% 8%

9%

6% 3% 6% 6%

5% 3%

10% 10% 9% 12% 10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Domestic Auto Exports Railways Mining Others

0 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

Net Orders

US HCV truck industry demand determined

by a monthly survey of truck OEMs;

usually lags sales by one to two quarters


BUY

Target

Rs. 760

CMP

Rs. 630

Exports to increasingly contribute greater proportion of revenue


Revenue expected to grow at 35% CAGR through FY18…..


…driven by export orders bagged (3 CAGR through FY18 - 47%)


Revenue growth to be driven by the export sales of high end forgings; share of exports to increase

88% 91% 87% 76%

53% 42% 36%

12% 9% 13% 24%

47% 58% 64%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016P 2017P

Domestic sales Export sales

Domestic revenue to grow steadily driven by demand uptick

(3 CAGR through FY18 - 22%)


-40%

-20%

0%

20%

40%

60%

80%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Revenue (Rs. Mn) Revenue yoy%

-50%

0%

50%

100%

150%

200%

250%

300%

0

2,000

4,000

6,000

8,000

10,000

12,000


Export revenue (Rs. Mn) Revenue yoy%

-30%

-20%

-10%

0%

10%

20%

30%

40%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


Domestic revenue (Rs. Mn) Revenue yoy%


BUY

Target

Rs. 760

CMP

Rs. 630

Expected revenue scale up over the medium term


With growing exports, working capital intensity is expected to increase, due to higher debtor days

RKFL has bagged a $100mn p.a., 5 year long contract from Dana Holding

Corp,(NYSE: DAN) a US-based worldwide supplier

of powertrain components, with a customer base that includes every major

vehicle manufacturer in the global automotive segment

This follows termination of Dana’s contract with its existing supplier Sypris

Technologies Inc., a wholly owned subsidiary of Sypris Solutions Inc

(NASDAQ SYPR), principally since Jan 15.

Under the erstwhile contract with Dana, Sypris was the sole supplier of

drive train assemblies for use by leading truck manufacturers including

Ford and Volvo, and derived revenue of ~$200mn p.a.

Revenue under the contract could increase further if RKFL is contracted to

cater to the whole of the requirements (valued at $200mn p.a.) which was

being supplied by Sypris Tech. -

20

40

60

80

100

120

140

160


Debtor days Inventory days Creditor days

Debt to equity ratio to peak in 2016 due to capex and WC debt;

improve thereafter…


Working capital intensity to remain high with greater proportion of

exports


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

-1,000

1,000

3,000

5,000

7,000

9,000

11,000

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Debt DE ratio

-

20

40

60

80

100

120

140

160



Source: Industry, Spark Capital Research


BUY

Target

Rs. 760

CMP

Rs. 630

Return metrics to improve sharply as profitability improves


EBITDA% would continue on an upward trajectory with improvement

in asset turnover ratio…


Continued benefits from low interest cost leading to strong interest

coverage


Financial parameters and debt servicing ability on stable ground…

Cash accruals to be sufficient to meet repayment obligations


0

200

400

600

800

1000

1200

1400

1600

1800

2000

2016 2017

Net cash accruals Term debt repayments

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

4%

5%

6%

7%

8%

9%

10%


Average interest rate% Interest coverage

-3%

2%

7%

12%

17%

22%

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8


Fixed asset turnover ratio EBITDA%

0%

5%

10%

15%

20%

25%

30%

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

ROCE RONW


BUY

Target

Rs. 760

CMP

Rs. 630

Bharat Forge – 12 month forward P/E Band


Ramkrishna Forging – 12 month forward P/E Band


5x

8x

11x

14x

17x

20x

0

100

200

300

400

500

600

700

800

Dec-1

0

Mar-

11

Jun-1

1

Sep-1

1

Dec-1

1

Mar-

12

Jun-1

2

Sep-1

2

Dec-1

2

Mar-

13

Jun-1

3

Sep-1

3

Dec-1

3

Mar-

14

Jun-1

4

Sep-1

4

Dec-1

4

Mar-

15

Jun-1

5

Sep-1

5

CM

P (

Rs.)

10x

15x

20x

25x

30x

35x

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Dec-1

0

Mar-

11

Jun-1

1

Sep-1

1

Dec-1

1

Mar-

12

Jun-1

2

Sep-1

2

Dec-1

2

Mar-

13

Jun-1

3

Sep-1

3

Dec-1

3

Mar-

14

Jun-1

4

Sep-1

4

Dec-1

4

Mar-

15

Jun-1

5

Sep-1

5

CM

P (

Rs.)

Peer comparison CMP MCAP P/E EV/EBITDA PAT CAGR EBITDA

CAGR

Rs. Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E FY15-FY17 FY15-FY17

Ramkrishna Forgings 630 16,495 195.2 x 23.2 x 21.7 x 14.1 x 37.6 x 18.7 x 10.8 x 7.9 x 28.2% * 57.3%

Bharat Forge 923 2,14,911 50.3 x 29.4 x 25.7 x 18.5 x 22.5 x 16.2 x 13.8 x 10.5 x 26.1% 20.8%

MM Forgings 550 6,639 22.6 x 13.1 x 12.6 x 10.7 x 10.3 x 6.9 x 6.7 x 5.8 x 11.0% 10.0%

Shivam Autotech 144 7,200 25.3 x 25.6 x 21.0 x 13.7 x 10.4 x 11.0 x 9.9 x 6.9 x 36.0% 28.0%

Valuations

Source: Company, Spark Capital, * PBT CAGR for Ramkrishna Forgings is expected to be 48.5%


BUY

Target

Rs. 760

CMP

Rs. 630

Abridged Financial Statements Key metrics

Rs. mn FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E

Profit & Loss Growth ratios

Revenues 4,295 7,408 11,528 15,599 18,418 Revenues 6.3% 72.5% 55.6% 35.3% 18.1%

Manufacturing & Other Expenses 3,727 6,140 9,269 12,464 14,624 EBITDA -6.2% 123.0% 78.3% 38.8% 21.0%

EBITDA 568 1,267 2,260 3,135 3,794 PAT -23.4% 784.3% 6.9% 53.6% 37.6%

Depreciation 249 312 611 830 870 Margins

EBIT 319 955 1,648 2,306 2,925 EBITDA 13.2% 17.1% 19.6% 20.1% 20.6%

Net Interest Exp / (inc) 215 303 563 627 605 EBIT 7.4% 12.9% 14.3% 14.8% 15.9%

Profit Before Tax 128 784 1,125 1,729 2,379 PAT 2.0% 10.1% 6.9% 7.9% 9.2%

Tax 43 37 326 501 690 Leverage & WC ratios

Adjusted Net Profit 85 747 799 1,228 1,689 Debt to equity (x) 1.6 1.8 1.8 1.5 1.1

Balance Sheet (Rs. mn) Current ratio (x) 2.7 2.3 2.8 2.9 2.9

Shareholders Equity 3,232 4,111 4,884 6,029 7,636 Debtor days 108 141 140 140 140

Loan funds 5,041 7,203 8,880 9,031 8,264 Inventory days 148 95 90 90 90

Sources of funds 8,582 11,658 14,109 15,404 16,245 Creditor Days 142 125 94 92 92

Net block 2,337 5,239 7,884 7,555 7,185 Performance & turnover ratios

Investments 67 67 67 67 67 RoACE 3.0% 9.0% 9.1% 11.1% 13.1%

Capital WIP 3,470 3,157 200 200 200 RoAE 2.9% 20.4% 17.8% 22.5% 24.7%

Current assets, loans & advances 4,251 5,598 8,809 11,205 13,019 Total asset turnover (x) 0.5 0.5 0.7 0.8 0.8

Current liabilities & provisions 1,543 2,402 2,852 3,622 4,226 Fixed asset turnover (x) 1.2 1.4 1.4 1.5 1.7

Net Current Assets 2,708 3,195 5,958 7,583 8,793 Valuation metrics

Application of funds 8,582 11,658 14,109 15,404 16,245 Current price (Rs.)

Cash Flows (Rs. mn) Shares outstanding (mn) 26.1 27.5 27.5 27.5 27.5

Cash flows from operations 280 489 128 900 1,962 Market capitalisation (Rs. mn) 16,495 17,361 17,361 17,361 17,361

Capex (2,904) (2,994) (300) (500) (500) Enterprise value (Rs. mn) 21,393 24,559 25,320 25,630 24,856

Free Cash Flow (2,624) (2,505) (172) 400 1,462 EV/EBIDTA (x) 37.6 19.4 11.2 8.2 6.6

Cash flows from investments (2,921) (2,731) (300) (500) (500) Adj. Per-share earnings (Rs.) 3.2 27.2 29.1 44.7 61.5

Cash flows from financing 2,754 2,104 1,089 (559) (1,454) Price-earnings multiple (x) 195.2 23.2 21.7 14.1 10.3

Cash & Cash equivalents 143 5 921 762 770 Dividend yield (%) 0.2% 0.3% 0.3% 0.4% 0.4%

632

Financial Summary

Bharat Forge Rating

BUY

Target

Rs. 1,100

CMP

Rs. 926


1m 3m 12m

BHFC -26.2 -16.5 6.9

Sensex -5.8 -3.3 -3.3

BSE Auto -9.7 -4.8 -3.6

Financial Summary (Consol)

Year Revenues (Rs. mn) EBITDA (Rs. mn) EBITDA Margin (%) Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x)

FY15 76,248 14,408 18.9% 7,339 31.4 29.5 16.3

FY16E 82,141 16,526 20.1% 8,412 35.9 25.8 13.9

FY17E 1,02,340 21,028 20.5% 11,672 49.9 18.6 10.5

Date Sep 21, 2015

Market Data

SENSEX 26219

Nifty 7982

Bloomberg BHFC IN

Shares o/s 233mn

Market Cap Rs. 215bn

52-wk High-Low Rs. 1,363-713

3m Avg. Daily Vol Rs. 1,079mn


Promoters 46.8

Institutions 32.0

Public 21.2

Company Update Bharat Forge (BHFC) has significant exposure to CV with ~50% of revenues across India, North America and

Europe. In FY15 and YTDFY16, BHFC has significantly benefited from improving US CV production. While the

August’15 new orders for class-8 trucks in the US have been weak, we believe August is a seasonally low month

and assuming production numbers stabilize at these levels, CV volumes in the US would still be at a nine year

high. Furthermore, domestic CV production is continued to grow sequentially and European CV outlook remains

stable. BHFC has mitigated the cyclicality in CV business with a steep scale up in non-auto business (~20% in

FY04 to ~46% in FY15). While the oil & gas / commodity linked end-market is expected to be significantly weak in

the near term, we see this to be off-set in the medium term by way of new end-markets (Aerospace, Railways) in

exports and domestic markets. Our estimates have reduced to factor in near-term non-auto weakness and US CV

stabilization, we maintain a Buy with a target price of Rs. 1,100 based on 12.5x FY17 EV/EBITDA

Auto exports: Production of US class-8 trucks have been up ~18% YTD in 2015 after a 20% growth in 2014. Recent new

order data has come in weak, with a ~20% decline in new-orders over the last four months. August specifically is a

seasonally weak month, and industry estimates suggest seasonally adjusted numbers are ~15% higher than the non-

adjusted numbers. Industry estimates also suggest the increase in truckload shipping rates have improved fleet operator

profitability resulting in fleet addition. There are also expectations of peak order season starting post October. We however

factor in the current weakness in orders to reflect in muted production in 4QCY15. However, it would still result in CY15

being a significantly strong year. Apart from CVs, new passenger car programs would be the key drivers for exports. We

now estimate auto exports to grow at 16% CAGR (FY15-FY17) from 25% earlier

Non-Auto: Exports to oil & gas sector would account for ~10% of the total non auto mix of ~46% and has been a key driver

for sequential weakness from 4QFY15. We expect overall non auto exports to post a decline in FY16 as we do not see a

near term improvement in oil & gas and other end-markets such as mining. Construction markets in the US have been

holding up, while in Europe have remained weak. However in FY17, we expect a recovery driven by new segments such as

aerospace (4 new orders targeting for at least USD100m by 2020), and railways where the company has expanded its

product portfolio this year and the major benefits would reflect in FY17.

EBITDA margins expected to remain elevated: EBITDA margin in 1QFY16 improved significantly to 30.7% on the back

of product mix, FX realisations and weaker commodity costs. Given high value addition and machining, we expect EBITDA

margin to remain strong as input costs continue to remain benign and INR/USD remains favorable. Foresee, an

improvement in net debt positions as no major capex is planned and new businesses are based on existing capacities.



Medium term outlook remains robust

Bharat Forge Rating

BUY

Target

Rs. 1,100

CMP

Rs. 926

Financial Summary

Abridged Financial Statements (Consolidated) Key metrics

Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E


Revenues 67,161 76,248 82,141 1,02,340 Revenues 17.8% 13.5% 7.7% 24.6%

Manufacturing & Other Expenses 56,890 61,840 65,614 81,312 EBITDA 33.5% 40.3% 14.7% 27.2%

EBITDA 10,271 14,408 16,526 21,028 PAT 92.3% 71.0% 14.6% 38.8%

Depreciation 3,579 3,624 3,840 4,300 Margins

EBIT 6,693 10,784 12,687 16,728 EBITDA 15.3% 18.9% 20.1% 20.5%

Net Interest Exp / (inc) 1,692 1,356 1,535 1,230 EBIT 10.0% 14.1% 15.4% 16.3%

Profit Before Tax 7,287 11,223 12,656 17,208 PAT 6.4% 9.6% 10.2% 11.4%

Tax 2,100 3,587 4,245 5,536 Leverage & WC ratios

Less: Minority interest (29) (30) - - Debt to equity (x) 0.7 0.7 0.5 0.4

Adj. Net Profit 4,291 7,339 8,412 11,672 Current ratio (x) 1.4 2.0 2.0 1.9

Balance Sheet (Rs. mn) Debtor days (Sales) 48 42 40 40

Shareholders Equity 26,832 34,442 40,618 49,495 Inventory days (COGS) 154 131 135 130

Loan funds 20,074 25,464 21,969 17,578 Creditor Days (COGS) 157 139 145 150

Minority interest 170 (20) (20) (20) Working capital days 45 33 30 20

SOURCES OF FUNDS 48,721 61,523 64,204 68,691 Performance & turnover ratios

Net block 25,283 25,750 25,910 25,352 RoACE 9.3% 13.3% 13.4% 17.1%

Investments 8,012 4,955 5,955 6,955 RoAE 17.4% 24.0% 22.4% 25.9%

Capital WIP 5,827 8,586 8,586 8,586 Total asset turnover (x) 0.9 1.0 0.9 1.1

Current assets, loans & advances 36,166 42,511 47,076 58,428 Fixed asset turnover (x) 1.2 1.4 1.4 1.6

Current liabilities & provisions 26,624 20,816 23,861 31,167 Working capital turnover (x) 6.1 4.9 3.7 4.1

Net Current Assets 9,542 21,695 23,215 27,261 Valuation metrics

APPLICATION OF FUNDS 48,721 61,523 64,204 68,691 Current price (Rs.)

Cash Flows (Rs. mn) Shares outstanding (mn) 233 233 233 233

Cash flows from operations 7,170 10,293 12,283 15,112 Market capitalisation (Rs. mn) 2,15,619 2,15,619 2,15,619 2,15,619

Capex (6,758) (7,172) (4,000) (3,742) Enterprise value (Rs. mn) 2,31,465 2,34,264 2,29,080 2,20,945

Cash flows from investments (1,882) (4,616) (5,000) (4,742) EV/EBIDTA (x) 22.5 16.3 13.9 10.5

Cash flows from financing (7,472) (3,599) (5,594) (6,626) Adj. Per-share earnings (Rs.) 18.3 31.4 35.9 49.9

Free cashflow 411 3,121 8,283 11,370 Price-earnings multiple (x) 50.5 29.5 25.8 18.6

Closing Cash 4,227 6,820 8,508 12,253 Dividend yield (%) 0.5% 0.8% 0.9% 1.1%

926

MM Forgings CMP

Rs. 550


1m 3m 12m

MMFG -18.0 -8.9 16.7

Sensex -5.8 -3.3 -3.3

BSE Auto -9.7 -4.8 -3.6

Financial Summary

Year Revenues (Rs. mn) EBITDA (Rs. mn) EBITDA Margin (%) Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x)

FY15 5,025 1,108 22.0% 505 41.9 13.1 6.9

FY16E 5,373 1,155 21.5% 529 43.8 12.6 6.7

FY17E 6,208 1,335 21.5% 623 51.6 10.7 5.8

Date Sep 21, 2015

Market Data

SENSEX 26219

Nifty 7982

Bloomberg MMFG IN

Shares o/s 12mn

Market Cap Rs. 7bn




Promoters 56.4

Institutions 13.2

Public 30.4

Not Rated / Company Update MM Forgings (MMFL) is among the key players in Indian forging industry with ~66% of revenues coming from exports.

The company generates ~75% of revenues from CVs and PVs and has a equal split between India, North America and

Europe. Exports have been the key growth driver with a CAGR of 17% in the last 7 years vs. domestic CAGR of 10%. In

each of the years where MMFL has expanded production capacity (by adding a higher tonne press), the average

realization per ton (MT) has seen a significant jump (slide 6). In 4QFY16, MMFL plans to introduce an 8,000 MT press, we

expect this to further provide a jump in realization and revenue

Capacity expansion with higher MT press: MMFL increased its capacity from 15,000 MT in FY00 to 45,000 MT in FY15 and is

further expected to improve to 65,000 MT by end of FY16. Currently MMFL’s forging press ranges from 1,600 MT to 4,000 MT

and in 4QFY16 it will add an 8,000 MT press. Product range currently varies between 0.2kg to 60kg, new press could enable

MMFL to improve upper end of the range to ~90kg. Given the ~30% jump in capacity (new press), expect a substantial increase

in average weight of components. MMFL could potentially supply steering knuckles, crank shafts, transmission components and

axle beams. As the complexity of production increases, margins and realizations would typically improve. In the last 15 years, we

have seen a step jump in capacity in FY01, FY05 and FY09. In each of these years, there was an improvement in average

realisation per MT resulting in a realisation CAGR of ~7% in the last 10 years.

Domestic and North American CVs to be key drivers: We expect domestic CVs (~20% of revenue) to see a steep recovery

given the low base and the expected improvement in infra and manufacturing. Similarly, domestic PVs (~4% of revenues) are

expected to see an improvement, recording double digit growth, driven by new launches and urban recovery. North American CV

segment (~20% of revenue) has seen ~20% production growth in the last 12m and the average net orders (leading indicator for

next two quarters) in the last 6 months has been higher than current production levels. European CVs remain subdued as HCV

registrations on an average have remained flat in the last six months

Steep improvement witnessed in EBITDA margins: EBITDA margins have seen a steady improvement in line with revenue

and realizations. We do not expect an improvement in the next two years, however expect a 50bps drop in FY16/17 on the back

of Euro depreciation and start-up costs associated with the new press, partially offset by product mix and better USD/INR

realization. Power cost as a % of sales was ~11% in FY14, however, adjusted for income from sale of solar and wind power

generated, to the grid, cost comes down to ~8.5% (22mn units generated vs. requirement of 43mn)

Financials & Valuation: We expect a 11% revenue/PAT CAGR from FY15-FY17, driven primarily by domestic and North

American CV volumes. EBITDA margin is expected to drop to 21.5%. Currently the stock trades at 11x FY17 EPS, we believe

that the risk-reward is favorable given our conservative estimates



Stepping into the big league

MM Forgings CMP

Rs. 550

Corporate Factsheet

Promoter Background

MM Forgings, started initially in 1946 as ‘Madras Motors Limited’ which was a Royal Enfield dealership. Later, in 1974,

promoter, Mr. E.S. Krishnan forayed into the forging business with an initial capacity of 780MT per annum. As the forging

business grew, the dealership was closed in 1990.

Business

The company primarily caters to the heavy commercial vehicle and passenger car segment. Company manufactures steel

forgings in raw, semi-machined and fully machined stages in various grades of Carbon, Alloy, Micro-Alloy and Stainless Steels

in the weight range of 0.20 Kg to 60 Kg.

Management

Mr. Vidyashankar Krishnan – Vice Chairman and Managing Director – He is a post graduate from IIT, Madras and has

over twenty years of experience in the forging industry. He became the managing director of the company in 1999 and was

made the vice chairman in 2012.

Mr. K. Venkataraman – Joint Managing Director – He is a engineering graduate with more than two decades of experience

in the forging industry. He was appointed as the joint managing director in 1999. He serves on various committees in the

Ministry of Finance and Ministry of Commerce.

Presence The company has four manufacturing facilities in Tamil Nadu.

Corporate Structure The promoters’ stake in MM Forgings is 56.4%.

Revenue Model The company derived 63% of its revenue in FY15 from the heavy commercial vehicle segment, 13% from Passenger car

segment and 12% each from off-highway and oil field segments.

Key Success Factors Timely expansion of facilities, long standing relationship with OEMs and control over power costs (through solar and wind)

Corporate Bankers State Bank of Travancore, State Bank of India, DBS, Citibank

Auditors G. Ramesh Kumar & Co, Tamil Nadu

Credit Rating Care A1

Corporate Office Guindy, Chennai

MM Forgings CMP

Rs. 550

Raw, semi-machined and fully machined products with weight

ranging from 0.2 Kg to 60 Kg


Factories located in Tamil Nadu

Manufacturing facilities, solar and wind power plants located in TN


Singampunari

Viralimalai

Chennai

Sriperumbudur

Karanaithangal

Kancheepuram

Panakudi, Tirunelveli District

Meenakshipuram, Theni District

Kulasekharamangalam,

Sankaran Koil taluk

Bommakkotai/ Kalayar Karisalkulam

Village, Aruppukottai

Factory

Wind-farm

Solar-farm

MM Forgings CMP

Rs. 550

Share of exports has seen a 10ppt growth in the last ten years


~65% from CV - India, Europe and US contribute equally (FY15)


Domestic revenue moves in tandem with CV and PV markets


Share of exports has been steadily improving yoy

0%

US CV market remains strong; Europe yet to recover


-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

MHCV yoy % PC yoy % Domestic Revenue yoy %

50%

52%

54%

56%

58%

60%

62%

64%

66%

68%

70%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

Exports % of Revenue

-20%

0%

20%

40%

60%

80%

100%


Euro CV yoy % US CV yoy % Exports growth yoy %

CV 64%

PV 12%

Off-highway

14%

Oil fields/ valve 10%

India 34%

US 33%

Europe 33%

MM Forgings CMP

Rs. 550

MM Forgings Vs. Bharat Forge

Source: SIAM, Spark Capital

When utilization reaches 60%, capacity is expanded


Average realization has increased ~6% per annum in the last 20 years


Realization to increase as new press shop becomes operational

0

5000

10000

15000

20000

25000

30000

35000

0

0.2

0.4

0.6

0.8

1

1.2

Ramkrishna 1.8 Sales Quantity

38%

higher

-20%

-10%

0%

10%

20%

30%

40%

-

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

1,60,000

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12E

FY

13E

FY

14E

FY

15E

Average realization per MT Growth in Realization %

Growth in Capacity %

0

50000

100000

150000

200000

250000

MM Forging Bharat Forge

Realization per MT

Realization increased sharply

whenever capacity has been

expanded (FY01, FY03 and

FY09)

When capacity is expanded

usually bigger forging

machines are installed and

therefore the weight per

product increases, thereby

leading to better realization

Capacity has been expanded

as utilization reaches 60%;

maximum possible utilization is

80%, usage beyond can

reduce the life of the machine

Current capacity is 45,000 MT

and it shall be increased to

65,000 MT in the next two

years

8000 tonne press shop would

be installed with ability to forge

products in the range of 20 to

90 Kgs

Average Realization of Bharat

Forge ~38% higher than MM

Forgings driven by

1) Bigger press shops – 16,000

tonne vs. 4,000 for MM Forgings

2) Higher share of machining –

50% vs. 15%

3) Higher share of revenue from

non-auto segments

4) Participation in developing the

product, more spend on R&D

MM Forgings CMP

Rs. 550

13% 13% 15%

40% 40% 37%

12% 15% 13% 8% 8% 8%

27% 25% 27%

0%

20%

40%

60%

80%

100%

FY12 FY13 FY14 Consumption of stores Power and fuel

Repairs Freight

Other

Income from sale of wind and solar reduces power cost


EBITDA margin has moved more or less in

line with revenue growth

Source: Company, SIAM, Spark Capital

Power and fuel cost contribute the most in

‘other expenditure’


Pass-through of steel prices; control over power costs

10%

12%

14%

16%

18%

20%

22%

24%

26%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

Revenue yoy % EBITDA %

Steel price has been predominantly passed

through to the customer

Source: Company, Bloomberg, Spark Capital

Company has three wind farms and one

solar power plant in Tamil Nadu. About

~50% of the overall power requirement

is met from these sources.

Company has increased capacity of

renewable power in line with the

increase in total requirement; expect it to

go up in the next two years as well.

Company saves about 250bps on net

sales, from generating power through

solar and wind.

45%

50%

55%

60%

65%

-40%

-20%

0%

20%

40%

60%

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

Steel price yoy (%) Gross Margin (RHS)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0

100

200

300

400

500


Income from Wind and Solar (Sale of power to Grid) Total Power cost Power cost % to Net Sales Power cost % to Net Sales (adj. for sale of power)

MM Forgings CMP

Rs. 550

Financial Summary





Manufacturing & Other Expenses 3,325 3,918 4,218 4,873 5,676 EBITDA 36.6% 40.3% 4.3% 15.5% 16.5%

EBITDA 789 1,108 1,155 1,335 1,555 PAT 20.0% 72.3% 4.6% 17.8% 26.6%


EBIT 429 754 790 906 1,112 EBITDA 19.2% 22.0% 21.5% 21.5% 21.5%


Profit Before Tax 384 686 719 847 1,073 PAT 7.1% 10.1% 9.8% 10.0% 10.9%


Net Profit 293 505 529 623 788 Debt to equity (x) 0.8 0.8 0.6 0.5 0.3


Shareholders Equity 1,958 2,379 2,800 3,296 3,923 Debtor days (Sales) 26 22 25 25 0

Loan funds 1,512 1,902 1,802 1,602 1,302 Inventory days (Sales) 69 59 60 65 0

Sources of funds 3,584 4,404 4,725 5,021 5,348 Creditor Days (Sales) 14 21 20 20 0



Capital WIP 67 0 0 0 0 RoAE 15.9% 23.3% 20.4% 20.4% 21.8%


Current liabilities & provisions 192 328 339 384 439 Fixed asset turnover (x) 1.0 1.1 1.0 1.0 1.1

Net Current Assets 1,519 2,038 2,024 1,949 2,519 Valuation metrics



Cash flows from operations 344 1,209 766 823 1,037 Market capitalisation (Rs. mn) 6,639 6,639 6,639 6,639 6,639

Capex -560 -722 -700 -800 -200 Enterprise value (Rs. mn) 8,137 7,651 7,693 7,797 7,120

Free Cash Flow -216 487 66 23 837 EV/EBIDTA (x) 10.3 6.9 6.7 5.8 4.6

Cash flows from investments -398 -722 -700 -800 -200 Adj. Per-share earnings (Rs.) 24.3 41.9 43.8 51.6 65.3

Cash flows from financing 59 335 -208 -327 -461 Price-earnings multiple (x) 22.6 13.1 12.6 10.7 8.4


550

Shivam Autotech Limited CMP

Rs. 144


1m 3m 12m

Shivam 1.2 25.9 123.3

Sensex -5.8 -3.3 -3.3

BSE Auto -9.7 -4.8 -3.6

Financial Summary

Year Revenues (Rs. mn) EBITDA (Rs. mn) EBITDA Margin Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x)

FY15 4,458 831 19% 281 5.6 25.5 11.0

FY16E 5,026 985 20% 342 6.8 21.0 9.9

FY17E 6,769 1,381 20% 525 10.5 13.7 6.9

Date Sep 21st 2015

Market Data

SENSEX 26219

Nifty 7982

Bloomberg SVAT IN

Shares o/s 50mn

Market Cap Rs. 7bn



Index member BSESMCAP


Promoters 74.8

Institutions 2.3

Public 22.9

Not Rated / Company Update Shivam Autotech Ltd (Shivam), part of the Hero (Munjal) group, manufactures and supplies transmission gears, shafts

and power train components to HeroMotoCorp Ltd (HMCL), and alternator and steering components to 4W OEMs and

Tier 1 suppliers including Maruti, Bosch, Denso. Pursuant to greenfield projects catering primarily to customers in the

4W PV segment expected to come on-stream in FY16, share of HMCL’s revenue is expected to reduce to ~ 70% by

FY18, thus imparting much needed diversification to Shivam’s revenue profile. With the enhanced capacities on-

stream, we also expect the peak revenue potential to increase by around 40% over FY15 levels; additional comfort can

be drawn from the fact that the company has secured contracts from Bosch and Denso, assuring off take from the new

facilities. EBITDA margins and return ratios over the medium term to be favorably impacted by the commercialization

of the greenfield projects. The capital structure too is expected to improve over the medium term on the back of

absence of significant capex plans over the medium term and stable working capital cycles.

Strong business risk profile marked by steady off-take from HMCL; further bolstered by expected revenue

diversification: Shivam derives a significant proportion of its revenue from HMCL (95% and 85% of revenue in FY11 and FY15

respectively). With the new capacities coming on-stream and off-take contracts inked with auto-comp players including Bosch

and Denso, HMCL’s share in revenue is expected to reduce to around 70% by FY18. The company’s new plants in Bangalore

(operational Sep’15) and Rohtak (Feb’16) are expected to potentially generate peak revenues of Rs. 2bn with further room for

brown field expansion, while existing non-HMCL customers expected to contribute 26% of FY18 revenue.

Capacities to cater to HMCL’s expansion plans: Shivam caters to around 50-55% of HMCL’s requirements of gears and

shafts. The operations of Shivam are intricately linked to that of HMCL and in the past, Shivam has increased capacities in

tandem with that of HMCL and in the past, Shivam has incurred capex in line with the expansionary capex incurred by HMCL,

resulting in high gearing. However, Shivam does not have plans to set up capacities to match HMCL’s expansion plans over the

medium term as the new plants would free-up capacities at existing Gurgaon facilty

Operating margins and return ratios are expected to be favorably impacted over the medium term: On the back of start-

up and development costs incurred for the greenfield projects, the EBITDA margins reduced from 23.5% in FY13 to 18.6% in

FY15. With the commercialization of the new projects, and the absence of any new capex plans/product launches over the

medium term, the EBITDA margins are expected to recover to around 20%. This along with the ramp up in the operations in the

new project, the ROE is expected to increase to an average of 22% in FY17 and FY18.

Key risks: Bosch announced plans to sell its starter motor and alternator manufacturing division’ Shivam has secured contracts

to supply components for this division from the Bangalore facility.

Diversification to boost quality of growth




Rs. 144

Corporate Factsheet

Promoter Background Shivam Autotech Limited , formerly known as Munjal Auto Components (MAC) commenced operations in September 1999 as

a full fledged, autonomous wing of the HERO Group.

Business The company is engaged in the manufacture of forged transmission gears and shafts, alternator and steering components for

HMCL, and 4W OEMs and Tier 1 auto-comp manufacturers, using the near net finish technology.

Management

Mr. Sunil Kant Munjal – Managing Director

Mr. Munjal also serves as Jt. Managing Director of HMCL. He was formerly President of CII and is currently a member of

Prime Minister’s Council on Trade & Industry that regularly interacts with the Indian Prime Minister on economic issues.

Mr. Neeraj Munjal – Dy. Managing Director

Diploma in Business Management from Bradford & Ilkley Community College, England, besides a Bachelors Degree in

Commerce. Mr. Neeraj Munjal has been involved from conceptualisation to the commissioning of the company’s operations.

He brings with himself experience of 25 years in auto components sector.

Presence

The company has manufacturing facilities at Binola (Haryana) and Haridwar (Uttarakhand). A greenfield facility has been

commissioned at Bangalore in Sep15, while another greenfield facility is expected to come-on-stream in Rohtak (Haryana) in

Feb16.

Corporate Structure The promoters’ stake in Shivam was 74.8% as of June 2015.

Revenue Model

The company derived 85% of its revenue in FY15 from HMCL. Post the commissioning and coming on-stream of the

greenfield plants, the share of HMCL in the total revenue is expected to reduce to ~70% over the medium term in favour of

other players including Bosch, Denso and Maruti

Key Success Factors

Steady, stable business from HMCL, competitive edge due to usage of near net finish technology and expectations of revenue

diversification due to proposed diversification into serving non HMCL customers. New products developed to be supplied from

greenfield projects to be commissioned.

Credit Rating CRISIL A-/Stable/CRISIL A2+

Corporate Bankers IDBI Bank Ltd, Axis Bank Ltd, Karnataka bank Ltd, Punjab National bank, ING Vysya Bank Ltd and Kotak Mahindra Bank Ltd

Auditors S.S. Kothari Mehta & Co

Corporate Office 303, 3rd Floor, Square One,C-2, District Centre, Saket, New Delhi-110 017


Rs. 144 Key products (including new products developed for the new projects)

Two wheeler components

Gears Shafts Transmission Gears Clutch plate / Sprockets

Shafts and worm wheels Armature Shaft

Alternator and electronic power steering components

Pulley Claw Poles

Drive shaft

Starter motor components

Housing clutch Starter Pinions

New product Development



Rs. 144

FY15: Revenue Rs. 4.6bn

HMCL revenue Rs. 3.8bn

(85% of revenue)

Other customers - PV segment

Rs. 0.7bn (15% of revenue)

To cater primarily to Non HMCL customers - PV segment

Peak revenue potential Rs.2bn p.a.

Products supplied include

transmission gears and shafts.

HMCL is catered to from both

the Gurgaon and Haridwar

plants

Products

Existing Customers

Gurgaon: Bosch, Denso,

Maruti, INEL Ltd, Mitsuba, ZF

Lynksysteme, Hilti

Haridwar: Denso, Munjal

Showa, and INEL Ltd

Products

Alternator components including claw poles, pulley and

armature shafts

Starter Motor Components including housing clutch, starter

pinion and drive shaft.

Electronic steering components including I/O shafts, shafts

shaft upper and worm wheel & shaft

Operating at combined utilisation levels of ~85%.

Peak revenue potential of

Rs.1.5bn p.a.

Commercial production

commenced in Sep’15

Peak revenue potential of

Rs.0.5bn p.a.

Commercial production to

commence in Feb’16



HMCL is catered to from both

the Gurgaon and Haridwar

plants



Bangalore Plant Rohtak Plant

Potential Customers

Bosch, Mando, Denso, INEL

Ltd, ZF India, Volkwagen,

SKF India, Meritor, Eaton,

Nexteer Auto, IWIS Engine

System

Potential Customers

Maruti, HMCL, Mitsuba,

Denso, Oerlikon, Dana

India, American Axle

Manufacturer

Greenfield project

Commercialization of green-field projects to significant boost the customer and industry diversification

Share in revenue to reduce to

64% by FY18 from 85% in FY15

To contribute 26% to revenue by

FY18



Rs. 144

Patents granted by The Patent Office, India

Patent granted in Patent granted

FY16 Process for manufacturing claw pole

FY16 Method of making dog hole in gear through hot forging process

FY16 Method of manufacturing inner race by involving hot forging process

FY16 Method of manufacturing cage gear by involving hot forging process

FY16 Process for preparing seat pipe using hollow pipes on hydraulic press

FY16 Process of seat pipe production from solid metal coil through cold extrusion operation

FY12 Method of manufacturing a sprocket with boss and its teeth profile

FY11 Method of manufacturing lug gear involving warm forging process

FY11 Method for manufacturing ratchet gear with its teeth pattern by involving hot forging

FY11 Method of manufacturing ratchet gear and its teeth profile by involving warm forging

FY11 Method of manufacturing gear with teeth involving forging

Near Net Shape Technology

Shivam is among the few Indian auto-component manufacturers, who use Near Net Shape Technology for cold, warm & hot forging,. This technology

helps produce dies as close to the final product as is possible, leading to marginal machining allowances and greater accuracy.

Advantages of this technology include:

Higher Productivity & reduced machining, with improved corrosion and wear resistance

Increased strength due to cold work & better grain flow and improved surface finish

Reduction in material wastage and energy cost

Strong technical capabilities characterized by patents filed and specialised production technology

Source: Patent Office Journal, Spark Capital Research


Rs. 144

Greenfield facilities to scale up to full capacities by FY18….


Existing capacities being utilized at

an average of ~ 85%


Greenfield projects have a

peak revenue potential of

Rs.2 bn


100%

70%

0%

20%

40%

60%

80%

100%

0

2,000

4,000

6,000

8,000

10,000

Binola Haridwar

Installed capacity - Gears/day

Utilisation %

1.25

0.75

0

0.5

1

1.5

2

2.5

Bangalore Rohtak

Rs.2bn

…and drive revenue growth over the medium term


0%

5%

10%

15%

20%

25%

30%

35%

40%

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

7000.0

8000.0


Total Income (Rs. Mn) yoy growth

Shivam’s revenue from HMCL has grown in tandem with HMCL’s

revenue


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

0

50,000

1,00,000

1,50,000

2,00,000

2,50,000

3,00,000

FY11 FY15

Hero - net sales (Rs. Mn) LHS Shivam's revenue from Hero (Rs. Mn)

Revenue growth to be driven by commissioning of new greenfield capacities

313

1,000 1,250

13

600

750

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

FY16 FY17 FY18

Bangalore plant revenue (Rs.mn) Rohtak plant revenue (Rs.mn)


Rs. 144

Power and fuel cost contribute the most in ‘other expenditure’


Consumables forms significant portion of inventory


23.3% 23.6% 23.5%

20.1% 18.6%

19.6% 20.4% 20.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


EBIDTA % Other expenditure % Employee costs %

Decline in profitability due to product development costs; however,

commissioning of the project to favorably impact margins


Revenue concentration to ease moderately over the medium term…


95% 84% 78%

65% 63%

5% 16% 22%

35% 37%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Revenue from Hero Motors (Rs. Mn) Revenue from others (Rs. Mn)

Expect greater revenue diversity and improved margins over the medium term

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


Power and fuel Wages to contractors R&M Travelling & conveyance Others

13 12 9 13 16

14 18 18

18 14

21 20 22

24 33

-

10

20

30

40

50

60

70


Inv

en

tory

da

ys

RM WIP FG Consumables Others, incl. Scrap


Rs. 144

Till FY14, Shivam’s capex has closely mirrored HMCL’s capex; capex

in FY15 and FY16 is non-HMCL capex


Expect better FCF with no major capex plans lined up


-

200

400

600

800

1,000

1,200

1,400

1,600

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Capex - HMCL Capex - Shivam

-600

-400

-200

0

200

400

600

800

1,000

1,200

1,400

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

CFO Free cash flows

No firm capex plans lined up over the medium term

Scale up of revenue (Rs.mn)

Year HMCL Non-HMCL

(Existing)

Greenfield capacities

(Primarily non Hero

Total

Blore Rohtak

FY15 3,789 669 - - 4,458

FY16E 3,941 695 313 13 4,961

FY17E 4,375 723 1,000 600 6,698

FY18E 4,812 752 1,250 750 7,564

The greenfield plants of Bangalore and Rohtak have a cumulative peak

revenue potential of Rs.2bn.

The Bangalore plant has commenced operations in Sep15, while the

Rohtak plant is expected to commence operations by Feb16.

Post gradual scale up, these plants are expected to achieve their peak

revenue potential by FY18, contributing around.26% to the total revenue

of the company thus imparting valuable diversification in the revenue

profile, away from HMCL.

Revenue from HMCL is expected to grow in tandem with growth in

HMCL’s volumes, while non-HMCL existing revenue is expected to exhibit

secular growth.

Source: Company, Spark Capital Research Source: Company, Spark Capital Research


Rs. 144

Stable WC levels and absence of capex plans to aid capital structure


Improvement in capacity utilization to favorably impact margins


Increase in debtor days due to change in HMCL payment cycle; WC

to remain generally stable


0%

5%

10%

15%

20%

25%

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40


Asset turnover EBITDA%

Return ratios to be favorably impacted by improved capacity

utilization and absence of capex plans


0%

5%

10%

15%

20%

25%


ROACE ROAE

Working capital to remain stable; return ratios to improve

-10

10

30

50

70

90

110

130

150



1.8

1.4

0.9

0.7

1.1

1.3

1.0

0.7

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00



Rs. 144

Financial Summary





Manufacturing & Other Expenses 3,185 3,627 4,041 5,388 6,084 EBITDA -8.2% 3.7% 18.5% 40.2% 12.9%

EBITDA 801 831 985 1,381 1,559 PAT 0.8% -1.0% 21.6% 53.3% 12.5%


EBIT 492 556 702 991 1,150 EBITDA 20.1% 18.6% 19.6% 20.4% 20.4%


Profit Before Tax 290 359 439 673 798 PAT 7.1% 6.3% 6.8% 7.8% 7.7%


Adjusted Net Profit 284 281 342 525 591 Debt to equity (x) 0.7 1.1 1.3 1.0 0.7


Shareholders Equity 1,611 1,815 2,085 2,484 2,933 Debtor days 28 40 40 40 40

Loan funds 1,171 1,987 2,607 2,375 2,167 Inventory days 59 66 70 70 70

Sources of funds 2,898 3,916 4,806 4,973 5,214 Creditor Days 92 89 90 90 90



Capital WIP 7 59 0 0 0 RoAE 19.0% 16.4% 17.5% 23.0% 21.8%


Current liabilities & provisions 637 679 789 1,067 1,198 Fixed asset turnover (x) 1.0 1.0 0.9 1.1 1.2

Net Current Assets 599 1,347 1,089 1,406 1,755 Valuation metrics



Cash flows from operations 552 68 1,096 937 1,192 Market capitalisation (Rs. mn) 7,175 7,175 7,175 7,175 7,175

Capex (192) (555) (1,430) (241) (300) Enterprise value (Rs. mn) 8,341 9,100 9,772 9,521 9,125

Free Cash Flow 360 (487) (334) 697 892 EV/EBIDTA (x) 10.4 11.0 9.9 6.9 5.9

Cash flows from investments (191) (555) (1,430) (241) (300) Adj. Per-share earnings (Rs.) 5.7 5.6 6.8 10.5 11.8

Cash flows from financing (361) 544 283 (678) (704) Price-earnings multiple (x) 25.2 25.5 21.0 13.7 12.1


144


Disclaimer

Spark Disclaimer

Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and

infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker.

We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We

have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of

time.

Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered

with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure

advisory services.

This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.

This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should

be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of

companies referred to in this document.

Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies

referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This

document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published,

copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in

any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital

and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to

a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This

material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal.

Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this

document. Spark Capital , its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or

deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit

investment banking or other business from, any company referred to in this report.

This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark

Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information.

Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective

directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents

or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or

damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of

or reliance on this report.

Absolute

Rating

Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year

horizon

ADD Stock expected to provide positive returns of >5% – <15% over a 1-year

horizon SELL Stock expected to fall >10% over a 1-year horizon


Disclaimer (Cont’d)

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,

Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Disclosure of interest statement Yes/No

Analyst financial interest in the company No

Group/directors ownership of the subject company covered No

Investment banking relationship with the company covered No

Spark Capital’s ownership/any other financial interest in the company covered No

Associates of Spark Capital’s ownership more than 1% in the company covered No

Any other material conflict of interest at the time of publishing the research report No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:

Managing/co-managing public offering of securities

Investment banking/merchant banking/brokerage services

products or services other than those above

in connection with research report

No

Whether Research Analyst has served as an officer, director or employee of the subject company covered No

Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research

analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

Additional Disclaimer for US Institutional Investors

This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under

the Securities Exchange Act of 1934, as amended) only by Auerbach Grayson, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange

Act of 1934, as amended). Auerbach Grayson accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities

discussed in the research material may do so through Auerbach Grayson. All responsibility for the distribution of this report by Auerbach Grayson, LLC in the US shall be borne

by Auerbach Grayson, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you

if Spark Capital Advisors (India) Private Limited or Auerbach Grayson, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available

to you. You should satisfy yourself before reading it that Auerbach Grayson, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material

concerning investment to you under relevant legislation and regulations;

indian forgings industry - spark capitalmailers.sparkcapital.in/uploads/mukesh/indian forgings...

Documents