Ramkrishna Forgings

Ramkrishna Forgings Limited (RKFL) is a forging company based in Kolkata that was founded in 1981 primarily as a forging player for Indian Railways. It has diversified its offering over the years to include automotive, railways, farm equipment, bearings, oil and gas, power and construction, earth moving and mining, both in India and in international markets. It has six manufacturing plants in India, all of which are located near Jamshedpur and Kolkata. As of FY22E, it had an installed capacity of 187,100 tonnes and a 75 per cent utilisation rate. Its primary focus is on chassis and rear axle components with little or no exposure to engine components.

The company’s vision is to be the most dependable and preferred supplier of forged and rolled components for the railway, automobile, mining, earthmoving, oil exploration, farm equipment, wind energy, bearing and general engineering industries by providing world-class products at competitive prices through a knowledge-based organisation. The company also provides critical safety items such as screw couplings, bolster suspension, side frame keys and draw gear assemblies for railway coaches and wagons. It is a preferred supplier to OEMs in India such as Tata Motors, Ashok Leyland, VE Commercial and Daimler as well as Volvo, Mack Trucks, Iveco and Ford in international markets. It is a global supplier to Tier 1 axle manufacturers such as Dana, Sisamex, Meritor and American Axles.

Sector Overview

The Indian forging industry is the second-largest in the world, next only to China, but has been facing heat owing to declining automobile sales. Forging is traditionally considered as the backbone of the manufacturing industry. It provides major inputs to sectors which support the country’s economic growth such as automobile, industrial machinery, power, construction and mining equipment, railways and general engineering. The Indian forging industry is well-known throughout the world for its technical capabilities

With an installed capacity of approximately 40 lakh MT, the Indian forging industry can forge a wide range of raw materials to meet the needs of the user sector. The domestic forging industry employs over 3 lakh people directly and an equal number indirectly, accounting for 85 per cent of the MSME sector. The Indian forging industry has evolved from a labourintensive to a capital-intensive manufacturing sector over the years. Furthermore, the introduction of electric vehicles will have a direct impact on the forging industry, reducing the demand for a vehicle’s moveable parts. 

While the shift to electric two-wheeler variants may be occurring at a healthy rate, similar trends in passenger and commercial vehicles will take some time to manifest. In the last two to three years, the Indian automobile and automotive ancillary industries have faced numerous headwinds. The automotive industry has seen it all, from managing emission and safety-rated regulatory changes to the pandemic, two semiconductor supply shortages and the most recent steep commodity inflation. During the pandemic period, the China Plus One theme gained traction with several OEMs around the world constituting and acting on diversifying component sourcing away from China.

It began with the United States posing tariffs and trade barriers to China with Indian OEMs and the automotive ancillary sector benefiting from this progress. Due to India’s low manufacturing costs, the scale of vehicle production and the maturity of its automotive ancillary industry, companies like Ramkrishna Forgings are deriving an advantage as they have the capacity to meet the demand. Infrastructure and real estate are expected to provide tailwind to this industry along with e-commerce, transportation and logistics, which are critical to the economy. As a result, there is a lot of optimism about the growth and OEMs are very bullish about growth in this sector.

Financials

For the quarter ended September 30, 2022, Ramkrishna Forgings reported consolidated revenue of ₹824.44 crore, up 42 per cent from last year’s same quarter’s revenue of ₹578.82 crore and up 17.89 per cent from last quarter’s revenue of ₹699.33 crore. The EBITDA for the quarter stood at ₹175.38 crore and witnessed a growth of 34 per cent from Q2FY22. The company reported a net profit after tax of ₹67.23 crore in the latest quarter which rose by 53 per cent from the corresponding quarter last year. It increased capacity utilisation by 300 basis points to 82 per cent in Q2FY23 from 79 per cent in Q2FY22, a sequential improvement of 40 basis points. 

Despite high commodity prices, improved product mix and cost management have contributed to such revenue growth and stable margins. The company is confident that by raising capacity prices it will be able to deliver comparable results in the second half of the year, resulting in increased operating leverage and margin expenses. In the first six months of FY23, it received five orders worth ₹408.5 crore and it is confident about receiving additional orders in the second half of the year due to a strong pipeline and positive business visibility. The company is working hard to diversify its product portfolio and expand its geographical footprint by introducing value-added products across the board.

During the quarter, it received approval for fundraising of ₹94 crore through preferential allotment of convertible warrants, a majority of which will be used to reduce debt. It intends to have an adequate capital allocation policy in order to reduce debt. The company’s gross debt position as of September 30, 2022, was ₹1,319 crore, down from ₹1,577 crore as of March 31, 2022. The goal is to be debt-free by FY25. The Board of Directors has declared a second interim dividend of ₹0.50 per equity share with a face value of ₹2.

Outlook

Timely investments in cutting-edge technology, capacity augmentation and equipment modernisation has enabled Ramkrishna Forgings to earn the status of ‘preferred supplier’ with leading globally respected OEMs operating in India. Taking the overall scenario into account, light commercial vehicle (LCV) volume is expected to rise 9 per cent to 14 per cent due to increased demand for last-mile connectivity from sectors such as FMCG and e-commerce but this will be offset in part by supply constraints due to the ongoing semiconductor shortage. The Indian small commercial vehicle market was valued at USD 1,909.91 million in FY21. The market is expected to grow at a CAGR of 15.14 per cent between FY23 and FY27, reaching a market value of USD 4,256.93 million by FY27. 

The demand for medium and heavy commercial vehicles has been subdued in recent years as a result of the global slowdown and the effects of the pandemic. The revival of medium and heavy commercial vehicle sales in FY22 is expected to continue in FY23, driven by the government’s massive capex for the National Infrastructure Pipeline, improved economic demand and the implementation of the vehicle scrapping policy.Diversification into other high-margin products for the electric vehicle and oil and gas sectors would help RKFL expand its margins. Exports have also increased and the company is expanding into key markets in North America and Europe. 

When completed, the acquisition of ACIL, which manufactures machined components for tractors and passenger vehicles, would provide a strong foothold in the passenger vehicle segment. The company has entered into an agreement with ePropelled (USA), a Massachusetts-based technology firm that provides cuttingedge electric propulsion systems. According to the terms of the agreement, the two companies will collaborate on the development of e-axle products based on ePropelled’s patented Dynamic Torque Switching™ (eDTS) technology, which increases power efficiency by at least 15 per cent, allowing manufacturers to reduce the size and cost of their battery packs.

This one-of-a-kind combination yields a highly scalable design that can be used in a wide range of vehicles from light EVs like scooters and three-wheelers to cars, light trucks and large trucks. As per CRISIL, the industry should sustain the doubledigit volume growth next fiscal also on continuing economic recovery and infrastructure spending. Commercial vehicle sales volume should increase next fiscal by 18 per cent to 23 per cent. The sales volume of medium and heavy commercial vehicles is expected to grow 37 per cent to 42 per cent next fiscal because of strong demand from the infrastructure segments such as construction, roads, mining, steel and cement. Hence, we recommend BUY.