state of the western cv industry & its impact on major indian forging...

State of the Western CV Industry & its Impact on Major Indian Forging Players

Much ink has been spilt on the impact of the impending ‘slowdown’ in the N. American (NA) CV industry, and its

adverse implications on large Indian forging companies carrying significant exposure to these end markets,

especially Bharat Forge Ltd, Ramkrishna Forgings Ltd and MM Forgings Ltd. The latter two, in particular, have

recently commissioned/will shortly commission significant, capacities equipped to cater specifically to the CV

industry. BHFC, in addition to a meaningful exposure to the Western CVs industry, also depends heavily on the non-

auto export segment, which, too, has seen headwinds in recent quarters. Fears of a slowdown in these markets have

led to these stocks witnessing a significant run-down in the recent past.

To get an on-the-ground view on the state of these markets (CV & Non-auto exports), we sifted through and read

between the lines of guidance issued by major NA /European CV OEMs, Tier1 auto-comp players, and capital goods

majors. We further supplemented our analysis by analysing trucking demand propellers including build/backlog

rates, freight indices & other macro-economic indices. Key takeaways follow.

Sluggishness in NA CV build rates expected to persist for the current quarter: The NA class 8 CV industry is in the midst

of an inventory correction characterised by sequentially tapering build rates seen over 3QCY15 and 4QCY15. This has been

precipitated by a confluence of factors including high industry inventory as proportion of retail sales (avg. of 2.86 times in

4QCY15 v/s an avg. of 2.43 times in 9mCY15) and high cancellations as proportion of production backlog (avg. of 2.8 times in

4QCY15 v/s an avg. of 1.9 times in 9mCY15) . We believe that sluggish build rates could persist in 1QCY16 as indicated by

unfilled production slots for 1QFY16 at 40% as at Nov15 (compared to 30% for 1QFY15 in Nov14). This could mean that

revenue from the NA CV markets for BHFC and RMKF for 4QFY16 would continue to be depressed for 4QFY16.

Nevertheless, fundamental drivers of freight and hence trucking demand continue to be robust as evidenced by an

improving truck loading index (CY16E: 135; CY15: 130), active truck utilisation rates (CY16E: 96.8; CY15: 95.5) and

truckload rates (CY16E:3.7; CY15: 3.1). Also, with the backlog to build ratio at 6.9 months in Dec15, the highest since Feb15,

we believe that truck manufacturers would have to increase build rates sooner than later, especially in light of the low build

rates in the last few quarters and the consequent inventory correction.

The impact of the NA CV market blip in CY16 on Indian Forging companies could be less-than-proportionate and

could potentially also be a blessing in disguise: Though NA Class 8 truck demand is expected to decline in absolute

terms, we believe that there might not necessarily be a linear decline in revenue for BHFC and RMKF who have indicated

improving share with major Tier 1 suppliers/new orders. Also, most OEMs have stressed upon efforts to protect margins even

in the event of slowdown, with Daimler, Paccar, Navistar, Volvo and Cummins already announcing job cuts. We believe that

this could mean that India with superior technological edge and low cost manufacturing base could be a very likely port of call.

The EU HCV industry is expected to post flat to modest growth in CY16 driven by positive economic indicators and

improving freight fundamentals. On non-auto exports front, guidance issued by cap-goods majors indicates

continued sluggishness/de-growth in major sectors, which could continue to pose a challenge to BHFC

Stock Calls: Bharat Forge (Add; TP: Rs. 850):Expect benefits of diversification efforts, aided by stable-strong growth in auto

(new export PV orders, steady domestic CV volumes) and non-auto domestic (primarily Rlwys), to fructify, though with a

gestation period. RMKF – (Buy; TP: Rs. 440): Expect export headwinds to normalise over near term and steady domestic

volumes to aid propulsion into a strong growth trajectory. MMFG (Unrated): Commissioning of its 8000T press would enable it

to further branch out (products & segments) its already diversified revenue profile, poising it for an entry into the big league

BSE Auto vs. Sensex

Performance (%)

1m 3m 12m

Sensex -5.5% -10.4% -20.4%

BSE Auto -3.7% -12.9% -17.2%

Market data

BSE SENSEX 23089

Nifty 7019

BSE Autos 16264

Forgings Industry Update

Date 25th Feb’2016

Expect a moderate blip in CY16 NA Class 8 volumes post an exceptional CY15; time to run for the hills? ABSOLUTELY NOT!

MUKESH SARAF [email protected] +91 44 4344 0041

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

Thomson First Call, Reuters Knowledge and Factset

-25%

-20%

-15%

-10%

-5%

0%

5%

Feb-15 May-15 Aug-15 Nov-15 Feb-16

BSE Auto Sensex

B


Fortunes of major Indian forging players are intertwined with that of the Western CV industry

Companies have bet big on the demand from the CV industry, (especially in the West) by investing in

higher tonnage press lines

Source: Company, Spark Capital Research

Export revenue as % of total revenue: Major Indian forging players exhibit a significant dependence

on export markets


Extent of dependence on the North

American and EU CV industry

BHFC: 46% of consolidated revenue in

FY15 was from the export CV segment.

MMFG: Derives an equal proportion of

revenue each from NA, EU and India. 60%

of overall revenue is derived from the CV

segment, with only a miniscule portion

from the Class 8/HCV segment.

RMKF: ~50% of revenue is derived from

the export Class 8 CV markets.

RMKF commissioned its 6300T and

12500T press-lines in 2HFY16 equipped

to manufacture complex forging parts

including front axle beams and

crankshafts for the CV sector. Per

management, a major part of the capacity

commissioned was meant to cater to the

NA CV markets.

MMFG, too, is expected to commission its

8000T press line in FY17 which would

equip it with capabilities similar to RMKF

to cater to the CV markets, primarily

domestic and also exports.

BHFC, with a significant proportion of its

capacities in higher tonnage press-lines,

depends heavily on the CV market as an

important market segment

60

66

47

-

10

20

30

40

50

60

70

80

FY11 FY12 FY13 FY14 FY15

BHFC MM Forgings RMKF

9%

14%

32%

0%

5%

10%

15%

20%

25%

30%

35%

BHFC MM Forgings RMKF

5 year CAGR of capex through FY15


On CY15 volumes and guidance for CY16

The NAFTA truck market is likely to drop by 10% vs. the very high previous year's

level. In 2016, volumes will still be above 2014 and 2013.

While the European truck market is expected to slightly grow, the market in Brazil

shows no signs of improvement and is likely to decrease again in the magnitude of

10%

On increasing penetration of captive transmission components

So far in our (Daimler’s) Class 8, we had a penetration rate of roughly 40% of the

company’s heavy-duty captive transmission. As more capacity is made available on

the back of investments being made in capacity on the transmission, there will be

higher penetration rates, in the vicinity of 60% in CY16.

—Wolfgang Bernhard

Head of Daimler's Trucks & Buses division

On CY15 volumes

The excellent results (in CY15) reflect the strongest North American heavy-truck

market since 2006, and the highest European heavy-truck market since 2008.

On Ordering levels and delivery expectations

Customers are ordering and ordering levels are comparable to what they ordered

in 2015. The difference is just their expectations.

Last year, the expectations for delivery were, they needed them as soon as they

could get them. And now, they’re thinking a little bit spreading those deliveries out

a little further across the year. So, we’re seeing positive things overall

On fears of elevated cancellation levels and outlook for CY16

Cancellation activity in our operations are very normal. There’s nothing unusual

that is happening in that arena. And in terms of where we’re at in the cycle, I think

that’s to be determined. The economic fundamentals are positive, and we think

the demand is going to be a good market for 2016

—Ronald E. Armstrong CEO and Ken Hastings Director of Investor Relations

On CY15 volumes and guidance for CY16

Heavy (CV) is up the most in terms of percentages in CY15. And we think in 2016 heavy (CV) will be down slightly, but not a huge number. It

will be down from a very, very strong base in 2015. Medium (CV) is going to continue to grow. And buses will continue to grow.

—Bill Kozek

President of Truck and Parts


Snapshot of recent NA and EU OEM and Tier 1 management commentary


On CY15 volumes

We have had a recovery in Europe during 2015, increased freight volumes, improved

earnings for our customers and, thereby, also taking the opportunity to renew the fleet.

And we have a continuous replacement need given the good years at the end of 2005,

2006, 2007, 2008 and so on

Guidance for CY16

First of all, we had the market correction when it comes to the long-haulage segment

after a pretty long period of very good volumes. Secondly, the dealer destocking to get

balance in the structure that we see industry-wide. And our estimate is that this will last

during at least quarter one and quarter two to get the right balance for different segments

and regions. And thirdly, we had an exaggerated difference between year-on-year

quarter four also. So, our current estimate is that the market would drop from 302,000 to

approximately 260,000 with, if anything, a little bit of downward pressure

Production cuts expected

We have already decided and we are underway to take down the production levels and

we are doing that more than the market forecast in order also to correct the balance

between dealer stocks and production output. So, we are on the level of approximately

30% adjustment downwards.

.—Martin Lundstedt

President and CEO

Guidance for CY16

We expect light vehicle to remain strong in North America. We’re expecting

Class 8 production in North America to be down from the last year, but still a

good year at 240,000 to 260,000 units in 2016, while medium truck builds

should remain stable with last year as should off-highway equipment demand

On losing market share

From a quality, delivery, overall execution, customer satisfaction, we're very

comfortable with where we're at with all of our Commercial Vehicle customers,

but things don't change overnight.

.—James K. Kamsickas

President and Chief Executive Officer

Guidance for CY16 and drivers

“In December, we told you we expected Class 8 volumes to be in the range of 275,000 units to 290,000 units for fiscal 2016. Based on current market

conditions and discussions with our customers, we've reduced our outlook to approximately 265,000 units…this fiscal year production translates to a

calendar year of 250,000 units. We expect Western Europe to remain stable with moderate growth of 3% to 5% this year.

As we've said, the average age of the truck fleet is about 7.5 years, which should help drive new truck production.

Freight tonnage movement in the region also continues to gradually improve as well.—Jay Craig CEO and President:

Snapshot of recent NA and EU OEM and Tier 1 management commentary



CY16 Guidance issued by major OEMs and Tier 1 suppliers

OEMs/Tier 1 suppliers

North America EU

2015 2016 2015 2016

NA

Class 6-8 :

10% decline

(15% decline in Class 8 in USA)

NAClass 6-8:

“Some” growth

Class 8 (US and Canada)

278,000

Class 8 (US and Canada)

230,000-260,000

Heavy Trucks

269,000

Heavy Trucks

260,000-290,000

Heavy Trucks:

302,000

Heavy Trucks:

260,000

Heavy Trucks:

270,000

Heavy Trucks:

280,000

Class 8:

322,000

Class 8 :

240,000-260,000

MH Truck:

438,000

MH Truck

440,000-445,000

Class 8:

328,000

Class 8:

265,000

MHDV (West Europe)

398,000

MHDV (West Europe)

410,000-420,000

NA

T&B production

Decline of 10-15%, with further

decline in Class 8

NAT&B production

Outlook flat to +5%

NA

On Highway trucks:

Expect persistently high CV

retail inventory and hence lower

Class 8 production

NA NA



Outlook for 2016

Construction industries (5)-(10)%

Energy & Transportation (10)-(15)%

Resource industries (15)-(20)%

Outlook for 2016

Power +

Renewables +/++

O&G (10)-(15)%

Energy Mgmt +

Aviation +

Healthcare +

Transportation -

A&L +

Industrial segments 2-4%

- Services +

- Digital ++

Outlook for 2016

Construction equipment -2% to -7%

-24%

-14%

NA

-23%

-30%

-25%

-20%

-15%

-10%

-5%

0%

2015 2016E

E&P Spending Capital Spending Budgets

Outlook for 2016

Aerial Work Platforms -15%

Cranes -15%

Material Handling & Port

SolutionsFlat

Materials Processing 5%

Construction -15%

Outlook for 2016

Supply of metalworking tools,

mining tools, construction tools,

etc

(2)-(7)%

-2% -18% -19% -19% -5%

5.0% 7% 7%

-40%

-20%

0%

20%

2013 2014 2015 2016 2017 2018 2019 2020

Mining Capex

CY16 Guidance issued by major Capital goods manufacturers



North American Class 8 trucks market share

Source: Bloomberg, Spark Capital

Indian Forging players cater to most major Western OEMs and Tier1 auto comp suppliers

20% 20% 20% 20% 20% 21% 22% 20% 21% 22%

13% 14% 15% 14% 14% 14% 15% 15% 15% 15%

15% 15% 15% 16% 16% 16% 16% 17% 16% 16%

15% 14% 14% 14% 14% 13% 14% 15% 15% 15%

13% 13% 13% 13% 13% 13% 13% 13% 13% 14%11% 11% 11% 11% 10% 9% 8% 7% 7% 7%11% 11% 10% 10% 11% 10% 10% 10% 11% 9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Daimler DAF Man Volvo Truck Scania Iveco Renault Others

Data is available only till CY13

European Heavy Truck (16T+) market share


Indicative customer base of Indian

Forging cos.

36% 37% 34% 33% 32% 31% 33% 31% 33% 36% 36% 39%

25% 24% 26% 28% 27% 25% 26% 29% 30% 30% 29% 28%

20% 19% 20% 21% 25% 28% 25% 22% 18% 15% 15% 12%

19% 20% 20% 17% 16% 15% 16% 18% 18% 19% 20% 20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Daimler Paccar Navistar Volvo Others


North American truck loading index: Expected to continue to on a positive trajectory

Source: FTR, Spark Capital

North American Class 8 Retail sales – CY2016 volumes to dip post an exceptionally strong CY2015


N. American CY16 Class 8 demand, though expected to be down yoy, to be supported by strong underlying freight indicators

309

348

207184

119143

217248 238

271

306~276

0

50

100

150

200

250

300

350

400

CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16

130.2 130.0 129.2

119.4

105.4107.8

113.0115.3

120.1

125.4

130.4

134.6

100.0

110.0

120.0

130.0

140.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

CY06 was a pre-buy year prior to

revised EPA standards coming into

effect in CY07, favorably impacting

demand.

CY15 witnessed the highest Class 8

retail sales since CY06

The expected yoy decline in CY16

Class 8 volumes should be seen in

the light of an exceptionally strong

CY15; CY16 is expected to be strong

on a standalone basis.

The Truck loading index, a measure of

total tons transported to the average

tons per truck, is expected to

continue on a positive trajectory in

CY16 indicating expectations of a

sustained growth in freight volumes

and trucking demand


N. American CY16 Class 8 demand expected to be supported by strong underlying freight indicators

North America: Active Truck Utilisation% is expected to improve in line with the increase in freight

volumes


91.3

87.888.8

89.9

87.6

93.0

96.3

94.7

96.1

98.0

95.5

96.8

85.0

87.0

89.0

91.0

93.0

95.0

97.0

99.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

North American Truckload rates (Revenue per loaded mile) expected to move in tandem with the truck

loading index and truck utilisation levels


11.4

6.2 5.53.9

-10.9

4.45.8

3.0

0.4

3.9 3.1 3.7

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Expectations of the truckload rates

improving over CY15, augurs well for

the fleet operator profitability and

hence, again, reaffirms a healthy

outlook for truck demand

The truck market is expected to

continue to be tight in CY16 with the

truck utilisation rate expected to

continue to be well above 95 levels,

indicating an healthy outlook for truck

demand.


Inventory correction led build rate sluggishness expected to sustain for another quarter (1QCY16) atleast

Clear signs of inventory correction in NA apparent from the sequential slowing down of production


Pursuant to an ongoing inventory

correction in NA, the production

volumes have been sequentially

scaled down in 3QCY15 and 4QCY15.

We expect the trend to continue in

1QCY16; extrapolating January 2016

production volumes, indicate

production volumes for 1QCY16 to be

much lower than the preceding

quarters

55

68 7177

69

82 8175

NA

6672

79 76 7887

82

72

60*

0102030405060708090

100

1Q

CY

14

2Q

CY

14

3Q

CY

14

4Q

CY

14

1Q

CY

15

2Q

CY

15

3Q

CY

15

4Q

CY

15

1Q

CY

16

Retail Sales (000s) Production (000s)

* 1QFY16 estimated production has been arrived at by extrapolating production volumes of January 2016

Ratio of the NA Class 8 industry inventory to retail sales


4.2

1.7

3.1

2.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-08 May-09 Sep-10 Jan-12 May-13 Sep-14 Dec-15

Avg. industrial inventory to retail

sales for the last three Q was as

under

4QCY15: 2.9 times

3QCY15: 2.5 times

2QCY15: 2.4 times

We believe that the production cuts in

the recent quarters could be result of

an elevated industrial inventory to

retail sales ratio, which would get

evened out as the production cut

continues for quarters progress


Increasing backlog to build ratio could lead OEMs step up production sooner than later

NA Class 8 Backlog to Build ratio: At elevated levels


NA: Cancellations as % of backlog; Continues to be a challenge


7.7

6.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

-

20

40

60

80

100

120

140

160

180

200

Jan

-14

Fe

b-1

4

Ma

r-14

Ap

r-14

Ma

y-1

4

Jun

-14

Jul-1

4

Au

g-1

4

Se

p-1

4

Oct-

14

Nov-1

4

Dec-1

4

Jan

-15

Fe

b-1

5

Ma

r-15

Ap

r-15

Ma

y-1

5

Jun

-15

Jul-1

5

Au

g-1

5

Se

p-1

5

Oct-

15

Nov-1

5

Dec-1

5

Backlog units (000s) Build units (000s) Backlog/Build

The backlog-to-build ratio, which

measures the time between orders

and delivery, rose to 6.9 months in

Dec’15, the highest since Feb’15.

Given the low build rates in the last

few quarters and the consequent

inventory correction, we believe that

truck manufacturers would have to

increase build rates sooner than later.

2.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

- 20 40 60 80

100 120 140 160 180 200

Backlog (000s Units) Cancellations as % Backlog

Nevertheless, the backlog-to-build

ratio, has to be viewed in conjunction

with the cancellation rates, which

continue to remain high, casting

aspersions on the quality of the

backlog.


NA: Greater proportion of unfilled production slots for 1QCY16 indicates continuation of sluggish build rates; would improve in 2QCY16


Higher % of unbooked production slots confirms build weakness in 1QCY16; to get evened out in 2QCY16

51%41% 40%

49%59% 60%

0%

20%

40%

60%

80%

100%

Sep-15 Oct-15 Nov-15

1QCY16

58%

37% 30%

42%

63% 70%


1QCY15

69%60%

51%

31%40%

49%


2QCY16

85%

65%53%

15%

35%47%


2QCY15

81% 81% 75%

19% 19% 25%


3QCY16

87% 85%68%

13% 15%32%


3QCY15

Unfilled slots Filled slots

North America :Net orders Class 8: Witnessing weakness as orders get deferred


-100%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

05

101520253035404550

Jan

/16

Au

g/1

5

Ma

r/15

Oct/14

Ma

y/1

4

Dec/1

3

Jul/13

Fe

b/1

3

Se

p/1

2

Ap

r/12

Nov/1

1

Jun

/11

Jan

/11

Au

g/1

0

Ma

r/10

Oct/09

Ma

y/0

9

Class 8 Net Orders (000s) YoY%

We believe that sluggish build rates

could persist in 1QCY16 as indicated

by higher % of unfilled production

slots for 1QFY16 as at Nov15 at 40%,

(compared to 30% for 1QFY15 in

Nov14). However, the situation is

expected to improve significantly in

2QCY16, where the filled production

slots are trending at similar levels in

Nov15 as in Nov 14 for 2QCY15.


EU Heavy Truck (>16T) registrations


EU is the only western CV market that is expected to post stable volumes in CY16

Commentary of Truck manufacturers suggests that the EU CV market would post a flat to modest growth on the back of economic indicators

trending positively and freight fundamentals improving.

Overall CV market

• In 2015, the EU market showed a consistent uplift (+12.4%) and rose for the third year in a row, exceeding two million commercial vehicles registered

(2,079,322).

• During the year, Spain (+36.4%) showed the most significant increase, followed by the UK (+16.7%), Italy (+13.2%), Germany (+4.3%) and France

(+3.1%) – all performing better than 2014.

Heavy commercial vehicles (HCV) over 16 tonnes

• In 2015, the new heavy truck market in the EU was up by 19.4%, reaching 260,135 units.

• Spain (+38.7%), the UK (+32.1%), Italy (+25.3%), France (+12.7%) and Germany (+5.3%) saw demand for heavy trucks increase, supporting the

overall upturn in the region. Noteworthy are the positive contributions from the Netherlands (+34.4%) and Poland (+31.7%).

158 173

237 214 218 219

260 260

-

50

100

150

200

250

300

CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16E


More heightened-than-ever focus on margin improvement in the West could be a big positive for Indian Forging companies

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

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

costsNet importer

of forgings;

also lacks

technical

expertise

Prohibitive labour and

pollution control

compliance costs

Energy and labor costs, along with foreign competition continue to

be concerns for NA forging companies

Source: Forgings Magazine (USA), Spark Capital Research

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

Expansionary capex of NA forging companies 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

Most NA OEMs have stressed upon their endeavour to protect

margins even in the event of the impending slowdown in

volumes

A slew of job cuts have been announced by OEMs and Tier 1

suppliers including Daimler (2100jobs at North Carolina),

Navistar (1400 jobs or ~10% of work force), Cummins (~2000

workers), Paccar and Volvo (undisclosed) .

We believe that this could lead to an increasing preference to

turn to low-cost countries, particularly India with its superior

technological edge and low cost manufacturing.


Guidance issued by Indian Forging players and our stock calls

BHFC is increasing market shares with Volvo, Daimler. The company has

received new orders from Paccar and DAF in the US to which it did not

supply earlier; hence its market share in the US will likely go up.

BHFC expects the NA truck market to stabilise at 270,000 units, lower than

CY15 on the back of elevated inventory levels and weakness in commodity

markets.

EU heavy truck demand is expected to be flat to slightly positive in CY16.

Source: BHFC presentation 3QFY16 and excerpts from Analyst call in

Dec15

RMKF has budgeted for industry volumes of 262,000 units of Class 8 trucks

in CY16 against 330,000 last year.

Company has added couple of NA customers and Dana no more remains the

single largest customer.

Source: Company earnings call 3QFY16

Company a minuscule exposure to the Class 8 markets, though it

derives ~60% of its overall revenue from the CV segment..

Source: Management interactions

Bharat Forge

• We believe that revenue headwinds of subdued off-take from oil & gas segment and the larger non-auto exports segment will subside only over medium term, once

benefits of concerted diversification efforts (both new segments and customers) and stable to strong growth in Auto (new PV orders, steady CV volumes) and non-

auto domestic (primarily Railways) start flowing in.

• We believe that increasing market share with Western OEMs and Tier 1 suppliers would aid the revenue growth of the company even in the face of a slowdown in the

Class 8 and HCV markets in the West.

RMKF

• We believe that though Class 8 inventory correction led export revenue headwinds (~45-50% of revenue) would sustain over the near term, RMKF would benefit

immensely from the expected addition of a major Tier 1 supplier to its clientele.

• We believe that the same should largely counteract any impact on revenue on the back of the expected blip in Class 8 volumes in NA.

MM Forgings

• Within CVs (~60% of overall revenue), MMFG derives a minuscule portion of its revenue from the Class 8 segment . The coming on-stream of the 8000T press line in

FY17 would enable it to cater to the HCV segment, both domestically and exports, in a more meaningful manner, affording further diversification to its well diversified

revenue profile. The company derives revenue proportionately from the US, EU and Indian markets.


Ramkrishna Forgings Ltd: Rating : Buy; TP : Rs. 440

• Near term pain expected on the exports front: Export revenue (~50% of revenue) could face near term headwinds,

due to the ongoing inventory correction in line with an expected 8-10% industry wide de-growth in Class 8 production

in NA in CY16. However, the same is start picking up towards the latter part of 1HFY17.

• Domestic revenue would continue to hold fort: We expect continued strength on the domestic front on the back of

fresh orders from OEMs and a more higher value added product profile enabled by the coming on-stream of the

higher tonnage press-lines (12500 T in Dec’15 and 6300T in Sep’15)

• Expect exports to record a 22% CAGR from FY16-FY18; though there could be a positive surprise if RMKF improves

its geographic and customer diversification. Domestic segment is expected to record a CAGR of 22% for FY16-FY18,

with the addition of new product lines, increased SOB and addition of new customers.

• We expect the company to report EBITDA margins of ~19.6% in FY16 and 20% in FY17, which would further improve

to 21% in FY18 buoyed by economies of scale and increasing benefits from a meaningful transition into manufacture

of complex forged products, at least domestically

BHFC

CMP Rs.760

M.Cap. Rs. 177bn

52-wk High-Low Rs. 1,363-720

3m Avg. Daily Vol Rs. 715mn

Returns (%) 1m 3m 12m

BHFC -5% -14% -40%

Sensex -6% -10% -20%

BSE Auto -4% -13% -17%

Bharat Forge: Rating : Add; TP : Rs. 850

• Diversification to drive revenue growth: Benefits of concerted diversification efforts (new segments/customers),

stable to strong growth in Auto (new PV orders, steady CV volumes) and non-auto domestic (primarily Railways)

would start bearing fruit over the medium term, though with a gestation period.

• Domestic CV and export PV segments would be BHFC’s strongest suits: Auto vertical is expected to record a

revenue CAGR of 16% for FY15-18. Domestic CV segment is expected to see a steep recovery in FY16, while

addition of new customers/products, and increase in market share would aid export revenue even in the face of

conservative industry growth prospects. Non-auto segment (~35% of sales) to remain benign and expected to record

~4% CAGR for FY15-18 driven primarily by domestic sales to Railways and the ‘Make in India’ initiative. Exports are

expected to record ~3% CAGR on the back of lack of visibility of turnaround in the O&G segment and gestation

involved in diversification efforts.

• Domestic : Expect margin to stabilise at ~30% (in FY18) as the revenue growth would require capacity addition and

new product introductions which would not scale up to peak efficiency within 1-2 years of operations. The company

has targeted standalone revenue of Rs. 70bn by FY18, however, we believe it could fall short of target due to

slowdown in non-auto exports.

RMKF

CMP Rs.308

M.Cap. Rs. 8bn

52-wk High-Low Rs. 781-303



RMKF -27% -41% -31%

Sensex -6% -10% -20%

BSE Auto -4% -13% -17%

MMFG

CMP Rs.393

M.Cap. Rs. 5bn

52-wk High-Low Rs. 751-336



RMKF -17% -21% -41%

Sensex -6% -10% -20%

BSE Auto -4% -13% -17%

MM Forgings: Unrated

• A strongly diversified revenue mix, both geographical and segmental, affords MMFG an invaluable advantage. With

the commissioning of the 8000T press-line in FY17, MMFG would be able to further branch out (more value added

products & segments) , both domestically and in exports, poising it for an entry into the big league

Stock calls


Financial summary – Bharat Forge Ltd

Abridged Financial Statements (Consolidated) Key metrics

Rs. mn FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

Profit & Loss Growth ratios

Revenues 76,248 75,814 85,899 105,731 Revenues 13.5% -0.6% 13.3% 23.1%

Manufacturing & Other Expenses 61,840 61,503 69,001 84,542 EBITDA 40.3% -0.7% 18.1% 25.4%

EBITDA 14,408 14,311 16,898 21,189 PAT 71.0% -5.8% 29.0% 34.2%

Depreciation 3,624 3,840 4,223 4,351 Margins

EBIT 10,784 10,472 12,675 16,838 EBITDA 18.9% 18.9% 19.7% 20.0%

Net Interest Exp / (inc) 1,356 1,477 1,111 782 EBIT 14.1% 13.8% 14.8% 15.9%

Profit Before Tax 11,223 10,344 13,057 17,511 PAT 9.6% 9.1% 10.4% 11.3%

Tax 3,587 3,429 4,139 5,541 Leverage & WC ratios

Less: Minority interest (30) - - 0 Debt to equity (x) 0.7 0.5 0.4 0.2

Adj. Net Profit 7,339 6,915 8,918 11,970 Current ratio (x) 2.0 1.9 1.9 1.9

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

Shareholders Equity 34,442 39,122 45,246 54,422 Inventory days (COGS) 131 135 130 130

Loan funds 25,464 21,269 15,878 11,178 Creditor Days (COGS) 139 145 150 150

Minority interest (20) (20) (20) -20 Working capital days 33 30 20 20

SOURCES OF FUNDS 61,523 62,008 62,741 67,218 Performance & turnover ratios

Net block 25,750 25,910 23,197 22,907 RoACE 13.3% 11.3% 13.9% 17.7%

Investments 4,955 5,955 6,955 6,955 RoAE 24.0% 18.8% 21.1% 24.0%

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

Current assets, loans & advances 42,511 43,188 49,694 59,611 Fixed asset turnover (x) 1.4 1.3 1.4 1.7

Current liabilities & provisions 20,816 22,169 26,228 31,379 Working capital turnover (x) 4.9 3.5 3.9 4.1

Net Current Assets 21,695 21,019 23,466 28,232 Valuation metrics

APPLICATION OF FUNDS 61,523 62,008 62,741 67,218 Current price (Rs.)

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

Cash flows from operations 10,293 11,520 13,062 14,132 Market capitalisation (Rs. mn) 176,966 176,966 176,966 176,966

Capex (7,172) (4,000) (1,510) (4,061) Enterprise value (Rs. mn) 195,610 191,189 182,872 188,144

Cash flows from investments (4,616) (5,000) (2,510) (4,061) EV/EBIDTA (x) 13.6 13.4 10.8 8.9

Cash flows from financing (3,599) (6,294) (7,626) (7,494) Adj. Per-share earnings (Rs.) 31.4 29.5 38.1 51.1

Free cashflow 3,121 7,520 11,553 10,071 Price-earnings multiple (x) 24.2 25.7 19.9 14.9

Closing Cash 6,820 7,046 9,972 12,549 Dividend yield (%) 1.0% 1.1% 1.3% 1.3%

760


Financial summary – Ramkrishna Forging Ltd

Abridged Financial Statements Key metrics



Revenues 7,408 9,074 11,302 13,529 Revenues 72.5% 22.5% 24.5% 19.7%

Manufacturing & Other Expenses 6,140 7,281 9,044 10,688 EBITDA 123.0% 41.5% 25.9% 25.8%

EBITDA 1,267 1,794 2,258 2,841 PAT 784.3% -25.0% 26.4% 54.7%

Depreciation 312 548 713 733 Margins

EBIT 955 1,245 1,545 2,109 EBITDA 17.1% 19.8% 20.0% 21.0%

Net Interest Exp / (inc) 303 491 564 576 EBIT 12.9% 13.7% 13.7% 15.6%

Profit Before Tax 784 794 1,027 1,594 PAT 10.1% 6.2% 6.3% 8.1%

Tax 37 233 318 498 Leverage & WC ratios

Adjusted Net Profit 747 561 709 1,096 Debt to equity (x) 1.8 1.7 1.6 1.3

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

Shareholders Equity 4,111 4,643 5,266 6,276 Debtor days (Sales) 141 125 140 140

Loan funds 7,203 7,893 8,223 8,237 Inventory days (COGS) 95 90 90 90

Sources of funds 11,658 12,881 13,833 14,857 Creditor Days (COGS) 125 82 92 92

Net block 5,239 8,647 8,234 7,802 Performance & turnover ratios

Investments 67 67 67 67 RoACE 9.0% 7.2% 8.0% 10.1%

Capital WIP 3,157 200 200 200 RoAE 20.4% 12.8% 14.3% 19.0%

Current assets, loans & advances 5,598 6,200 8,346 10,325 Total asset turnover (x) 0.5 0.6 0.6 0.6

Current liabilities & provisions 2,402 2,233 3,014 3,537 Fixed asset turnover (x) 1.4 1.0 1.0 1.2


Application of funds 11,658 12,881 13,833 14,857 Current price (Rs.)

Cash Flows (Rs. mn) Shares outstanding (mn) 27.5 28.7 28.7 28.7

Cash flows from operations 489 857 603 1,410 Market capitalisation (Rs. mn) 8,461 8,830 8,830 8,830

Capex (2,994) (1,000) (300) (300) Enterprise value (Rs. mn) 15,658 16,691 17,038 16,589

Free Cash Flow (2,505) (143) 303 1,110 EV/EBIDTA (x) 12.4 9.3 7.5 5.8

Cash flows from investments (2,731) (1,000) (300) (300) Adj. Per-share earnings (Rs.) 27.2 19.6 24.7 38.2

Cash flows from financing 2,104 171 (320) (649) Price-earnings multiple (x) 11.3 15.8 12.5 8.1

Cash & Cash equivalents 5 33 16 478 Dividend yield (%) 0.6% 0.6% 0.8% 0.8%

308


Financial summary – MM Forgings Ltd

Abridged Financial Statements Key metrics



Revenues 5,025 5,036 5,468 6,238 Revenues 22.1% 0.2% 8.6% 14.1%

Manufacturing & Other Expenses 3,918 3,935 4,265 4,865 EBITDA 40.3% -0.7% 9.3% 14.1%

EBITDA 1,108 1,100 1,203 1,372 PAT 72.3% -3.0% 11.9% 21.2%

Depreciation 354 360 391 416 Margins

EBIT 754 741 812 956 EBITDA 22.0% 21.9% 22.0% 22.0%

Net Interest Exp / (inc) 91 88 83 70 EBIT 15.0% 14.7% 14.9% 15.3%

Profit Before Tax 686 681 762 924 PAT 10.1% 9.7% 10.0% 10.7%

Tax 181 191 213 259 Leverage & WC ratios

Net Profit 505 490 549 665 Debt to equity (x) 0.8 0.6 0.5 0.3

Balance Sheet (Rs. mn) Current ratio (x) 4.5 4.6 4.6 4.5

Shareholders Equity 2,379 2,769 3,206 3,736 Debtor days (Sales) 22 25 25 0

Loan funds 1,902 1,702 1,502 1,202 Inventory days (Sales) 139 139 139 0

Sources of funds 4,404 4,595 4,831 5,061 Creditor Days (Sales) 48 48 48 0

Net block 2,365 2,705 2,715 2,498 Performance & turnover ratios

Investments 1 1 1 1 RoACE 13.9% 11.9% 12.4% 13.9%

Capital WIP 0 0 0 0 RoAE 23.3% 19.0% 18.4% 19.2%

Current assets, loans & advances 2,366 2,216 2,466 2,953 Total asset turnover (x) 1.2 1.0 1.1 1.2

Current liabilities & provisions 328 328 350 392 Fixed asset turnover (x) 1.1 0.9 0.9 1.0


Application of funds 4,404 4,595 4,831 5,061 Current price (Rs.)

Cash Flows (Rs. mn) Shares outstanding (mn) 12.1 12.1 12.1 12.1

Cash flows from operations 1,209 806 869 952 Market capitalisation (Rs. mn) 4,744 4,744 4,744 4,744

Capex (722) (700) (400) (200) Enterprise value (Rs. mn) 5,756 5,750 5,393 4,777

Free Cash Flow 487 106 469 752 EV/EBIDTA (x) 5.2 5.2 4.5 3.5

Cash flows from investments (722) (700) (400) (200) Adj. Per-share earnings (Rs.) 41.9 40.6 45.4 55.1

Cash flows from financing 335 (300) (312) (436) Price-earnings multiple (x) 9.4 9.7 8.6 7.1

Cash & Cash equivalents 830 696 853 1,169 Dividend yield (%) 1.8% 1.8% 2.0% 2.4%

393


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Absolute

Rating

Interpretation

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

horizon

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

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

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state of the western cv industry & its impact on major indian forging...

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