EQUITY RESEARCH: MM FORGINGS LTD

The third-largest forging company in India, MM Forgings Ltd. (MFL), controls a sizeable portion of both the domestic and international markets for forging products for the CV segment. By the end of the company's 23rd fiscal year, capacity is anticipated to increase to 130,000 tonnes. It is increasing its emphasis on EV products and broadening its selection of machined goods, which is producing higher profits.

MM Forgings Ltd.

ABOUT:

• Since its beginnings in the forging industry in 1974, MM has built a solid reputation in the automotive and industrial forgings industries. The majority of the significant clientele of the business have been with it for more than 20 years.
• The company's daily operations are managed by Mr. Vidyashankar Krishnan, a third-generation business owner and postgraduate in engineering from I.I.T. Madras with more than 25 years of experience in the forging sector.
• MFL produces steel forgings in various grades of Carbon, Alloy, micro-alloy, and Stainless steel in the weight range of 0.20 Kg to 100 Kg in raw, semi-machined, and completely machined stages.
• As of September 22, the company's manufacturing capacity was 120,000 MTPA (Metric tonne per annum). The ability to machine supports the forging capacity as well.
• MFL serves both domestic and foreign markets by producing forged parts for automobiles (mostly commercial vehicles), valves for the oil industry, and off-highway equipment. While the machining facility is located close to Lucknow, Uttar Pradesh, MFL's manufacturing facilities are in Tamil Nadu.
• MFL owns solar panels with a 3 million unit capacity as well as windmills with a total capacity of 35 million units. On October 21st, MFL bought the crankshaft manufacturer CAFOMA Auto parts Private Limited for Rs 28cr in cash and Rs 5cr of debt.

SHAREHOLDING PATTERN:

BUSINESS HIGHLIGHTS

Recovery in CV volumes growth

Following a 26% recovery in FY22 from a Covid-19 pandemic-impacted FY21, commercial vehicle (CV) sales volume in India is expected to climb by 15-19% over the next few years. The entire volume of commercial vehicles would surpass 10 lakh units by the fiscal year 2023-2024, owing to a recovery from multiyear lows in the medium and heavy commercial vehicle (MHCV) market and ongoing growth in the light commercial vehicle (LCV) categories. Growth in the passenger CV sector would also be beneficial, as the outbreak had a greater impact on this sector due to travel restrictions and the suspension of school and work commutes.

Scrappage policy:

To replace outdated automobiles on Indian roadways with new and modern ones, the government-funded vehicle scrappage program was introduced in August of that year. A new policy mandates the mandatory scrapping of commercial cars older than 15 years and passenger vehicles older than 20 years that fail fitness and emission testing. The policy takes into account other aspects, such as braking performance, engine quality, and others, rather than just treating a car as garbage because of its age. The goal is to phase out outdated vehicles, lower urban pollution levels, and boost automobile sales, which are still slowing down in India following COVID. Additionally, it is said that the ban on vehicle scrappage is a component of a bigger stimulus package that OEMs primarily demanded to boost demand.

The anticipated benefits of the policy are as follows:

• Indian vehicle sales are expected to increase by 30% over the next few years, from their current level of Rs 4.5 lakh crore (US$ 61.46 billion) to Rs 10 lakh crore (US$ 136.59 billion).

• The present turnover's 1.45 lakh crore ($19.81 billion) export component is probably going to increase to 3 lakh crore ($40.98 billion).

• Reduce India's enormous import expenditure for crude by Rs 10 lakh crore (US$ 136.59 billion).

• Entice new investments worth Rs. 10,000 crores ($1.37 billion) and generate up to 35,000 employment

In order to strengthen their individual automotive industries and reduce vehicular pollution, a number of nations, including the US, Germany, Canada, and China, have implemented vehicle scrappage programs. In the upcoming years, this is anticipated to increase demand for more recent CVs.

Foray into EV parts to diversify revenue

• In September of this year, MFL purchased an 88% share in Abhinava Rizel Pvt. Ltd. As part of its transformation strategy, MFL plans to invest a total of Rs 200 crore in the business. Since 2017, Abhinava Rizel has been working on EV motor and powertrain technology, and as of now, he or she has eight patents in force and ten more in the pipeline.
• The motors made by Abhinava Rizel are based on a hybrid topology radial flux design that combines the greatest features of PMSM (Permanent Magnet Synchronous Motors) and SynRM (Synchronous Reluctance Motors). Due to the combination of these two capabilities and sophisticated thermal management techniques, realized thermal efficiency is around 25% greater than those of traditional traction motors. This makes it possible to utilize a lot fewer magnets, copper, aluminum, steel, etc. without sacrificing performance. With the implementation of his several patent-protected inventions, Abhinava Rizel's designs outperform traditional traction motors in terms of overall drive cycle efficiency by about 15%. This means that an average EV user can drive 15% farther between charges, or that EV OEMs can utilize a battery pack that is 15% smaller for a given range, making EVs more accessible to a wider market.

Exports continue to remain healthy

MFL exports to North and South America, as well as Europe. The management believes that Europe's high energy prices will benefit companies like MFL as customers migrate away from Europe and into other countries. Despite the steep increase in borrowing rates, the export market has so far held up. Exports have accounted for 50% of revenue in recent years and are projected to remain in that range in the future.

Capacity expansion plans

To meet the increasing demands of its clients, MMF has steadily increased its capacity. Between FY23 and FY24, it allocated Rs 550 crore for capacity expansion. The proposed capital expenditure would increase capacity from 1.2 lakh tonnes to 1.3-1.35 lakh tonnes by debottling and increasing machining capacity by Rs 200 crore and Rs 100 crore, respectively. MFL has made a 100 crore rupee investment in the electric vehicle market. It intends to enter the electric two-wheeler market as well as supply goods for electric 3- and 4-wheelers. The supply of gearboxes and controllers in the EV market will follow the supply of motors. Orders for these goods have already been placed with the business. MFL estimates that EV company revenue will be under Rs 25 crore in the upcoming fiscal year and might reach Rs 100 crore by FY25. In contrast to the production of 61,000 tonnes and sales of 62,000–63,00 tonnes in FY21, the company has forecast 80,000–90,000 tonnes of output for FY23. The business has also said that it will produce automation and robotic goods for both internal use and external sale. The capital expenditure would be paid for by loans and internal accruals totaling Rs. 250 crores.

RISK & CONCERNS:

Vulnerable to cyclicality in demand from automobile OEMs

The vehicle industry, which generates 93% of total sales and is anticipated to stay dominant, exposes the business to demand cyclicality. The M&HCV sector generates the majority of the revenue within the car market. Therefore, any decline in the demand from the CV sector could have an impact on MFL's indicators for credit and revenue.

Rising sales of EV could impact demand for forgings

EVs needed fewer forged parts. The changeover could, however, take some time. Even in this scenario, the demand for light forgings may be more negatively impacted than the demand for heavy forgings. More MFL is found in heavier forgings.

High customer concentration

Over 80% of net sales at MFL were accounted for by the company's top ten clients, indicating a heavy reliance on a small number of clients. However, the business has developed relationships with its clients and has experience creating components that meet their changing requirements, which greatly reduces the danger of losing clients.

Forex risk may impact financial performance

A sizable amount of MMF's business roughly 50% of income in FY22 comes from exports. Rupee volatility in relation to the USD/EUR could have a negative effect on profitability.

Raw material price fluctuations

The cost of raw materials accounts for close to 45–50% of the company's production costs. Steel billets, a crucial raw material, have historically had fluctuating prices. Since the bulk of MFL's contracts with its clients have price adjustment clauses, the business could gradually pass on the cost rise to its customers.

FINANCIALS

Q2FY23 Result Update

• In spite of the tough climate and slowing CV volume growth, MFL produced strong earnings in Q2FY23. Due to the local market's strong expansion, the topline increased by 32%/4%/quarterly/year over quarter.
• The domestic-to-export ratio for H1FY23 was 55:45. Due to decreased material costs and higher capacity utilization, EBITDA increased 36% year over year to Rs 67cr, resulting in a 70bps increase in EBITDA margin to 18.7%.
• Due to higher tax rates, PAT increased by 25% year over year to Rs 33 crore. The business for motors, gearboxes, controllers, and other equipment has increased for EVs.
• For FY23, the management projects capital expenditures of Rs 275–300 crore, of which two-thirds will be spent on machining capacity and one-third on forging capacity. MFL produced 36,000 tonnes in the first half of FY23 and anticipates reaching 75,000 tonnes in FY23. Its sales in FY23 could reach Rs. 1400 crore. It plans to produce 90000 tonnes in FY24.

VALUATION & ANALYST COMMENT

• The third-largest forging company in India, MM Forgings Ltd. (MFL), controls a sizeable portion of both the domestic and international markets for forging products for the CV segment. By the end of the company's 23rd fiscal year, capacity is anticipated to increase to 130,000 tonnes. It is increasing its emphasis on EV products and broadening its selection of machined goods, which is producing higher profits.
• MFL's margin expansion would be assisted by EV diversifying into more high-margin commodities and consolidating its market dominance in crankshafts. Exports have remained stable despite rising interest rates in North America and Europe.
• In the medium tenure, strong CV segment growth in the US and Europe and domestic medium and heavy CV (M&HCV) recovery would be the main growth drivers. Increased capacity starting in FY24 may also aid in increasing sales and profits. The company would benefit from better realization and profits if more items were machined, and its entry into EV motors might give it a stronger position in the rapidly expanding electric PV market.
• According to MM Forgings, its revenue would reach Rs 2,000cr in the next two years thanks to a positive order outlook brought on by the China+1 strategy's growing momentum and bettering market conditions in India. In FY22, the business generated revenue of Rs. 1,123cr.
• Over the course of FY22- FY24E, we expect MFL's Revenue to expand at a 25% CAGR, driven by rising CV demand, larger international revenue, and a bigger percentage of machined goods. 

SOURCE:

-STOCX

-COMPANY SOURCE DOCS.

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