S t o c k I d e a Date: 26-Apr-13 CMP: `101.50 TARGET: `138 Upside: 36% B U Y SENSEX 19287 NIFTY 5871 Eq. Cap. (` Crs) 36.75 Face Value (`) 10.0 M. Cap (` Crs) 373 BSE Code 513335 NSE Code Financial Year AHMEDFO July-June 52-w H/L 299/97 Avg. Daily Vol. 57,432 TTM EPS (`) 33.73 P/E (x) 3.0x BVPS (`) 217.37 P/BVPS (x) 0.47x Dividend Yield 0.98% Stock vs. Sensex Latin Manharlal Securities Pvt Ltd. 124 Viraj, S,V.Road, Khar (W), Mumbai 400 052 www.latinmanharlal.com AHMEDNAGAR FORGINGS LTD. (AFL) Incorporated in 1977, Ahmednagar Forgings Ltd (AFL) is the largest forging manufacturer in the small and medium component segment. AFL is promoted by Amtek Auto (AAL), a premier automotive component manufacturing company that holds ~55% stake in the company. The company manufactures over 1,500 varieties of steel forgings with the categories of components manufactured comprising camshafts, connecting rods, crankshafts, crown wheel, hub and shafts etc. Backed by Strong Promoter Group AFL is promoted by the $1.3-billion Amtek Auto Group, one of the largest integrated auto component manufacturers in India with a strong global presence. The group has been associated with the auto ancillary industry and trade for over two decades. Amtek Auto Group is comprised of Amtek Auto, Amtek India and Ahmednagar Forgings. India: Attractive central hub for OEM global exports The Indian forging industry has kept alongside with the domestic manufacturing sector's demand, yet exporting significant quantities despite surging input costs of fuels, power and labour charges during the past months of the financial year. The industry is a supplier of critical components for automotive OEM s in India as well as in countries such as USA, Europe, China, Japan and other countries. Indian forging industry to see 20% annual growth: AIFI The $3 billion Indian forging industry is poised to grow by over 20% annually and see investments of $3 billion by 2015 for capacity expansion, according to the Association of Indian Forging Industry (AIFI). The industry body, which gets ~70% of its business from the automotive sector, says it is undeterred by the current slowdown and turmoil in other markets. Established relationship & diversified clientele The Company is a Tier-1 vendor and is a OEM supplier to Maruti Suzuki, John Deere, TVS Suzuki, JCB, JBML, Case New Holland, GE, Hero Moto, Hindustan Motors, Mahindra & Mahindra, Tata Motors, Sanden Corp, Force Motors, Eicher Tractors, Honda Scooters, Yamaha motors, Bajaj Auto, Cummins, Coventry, Letchworth, Hennef etc. The top clients for the company are Fairfield Atlas (USA), King Automotive Systems Ltd (USA) and Zelter GmbH (Germany). Other Key Positives Healthy Operating and Profitability margins The Company has been maintaining its operating and net margin despite the slowdown in the automobile sector. Compelling Peer Group Valuation Impressive Shareholding Promoter entity Amtek Auto has increased its stake in AFL by acquiring 1.80 mn shares representing 4.9% of total equity of AFL. Track record of over 3 decades in the manufacturing of machined and casting components for the automobile sector At the CMP of `101.50, the stock is trading at 2.9x its FY14E EPS of `34.51. We recommend BUY on the stock with a 12-18 months target price of `138, providing an upside of 36% from the current levels. Please Refer DISCLAIMER on the Last Page
Company Profile 2nd largest manufacturer of forged automotive components, cold forged parts and high tensile fasteners in India. Incorporated in 1977, Ahmednagar Forgings Ltd (AFL) is the largest forging manufacturer in the small and medium component segment. AFL is promoted by Amtek Auto Ltd (AAL), a premier automotive component manufacturing company that holds ~55% stake in the company. The company primarily engaged in manufacturing of high-precision Closed dies steel forgings and auto components. The company manufactures over 1,500 varieties of steel forgings with the categories of components manufactured comprising camshafts, connecting rods, crankshafts, crown wheel, hub and shafts etc. AFL is the 2 nd largest manufacturer of forged automotive components, cold forged parts and high tensile fasteners in India. Its product portfolio consists of a range of components for 2/3 wheelers, cars, tractors, LCV, HCV and stationary engines. It also manufactures components for nonauto industry such as the railways, defense and specialty vehicles. In Oct 2002, Amtek Auto acquired AFL in order to establish a manufacturing business in Western India, as there were a number of automotive companies which were being supplied by AFL in that region. Manufactures over 1500 varieties of Forgings The company specializes in products like connecting rods and caps, crankshafts and camshafts, steering levers, gear shifter forks, sector gears and shafts, front impact beams drive shafts, spindlers, hubs and flanges, transmission components, steering parts, pistons, propeller fork shafts, stub-axles, front axle beams, front and rear axle shafts. The manufacturing facilities of the company are located in Ahmednagar, Chakan, Kuurli in Maharashtra and Solan in Himachal Pradesh. With an expansion of 60,000 TPA at a cost of ~Rs.300 Crs in FY10, AFL s forging capacity rose to of 2,25,000 TPA making it one of the largest players in the forging industry. The company s plant at Ahmednagar has successfully qualified for TS Certification from BVQI its the fastener division at Ahmednagar has also been accredited with the ISO certification. Ahmednagar Forgings Ltd. 2 26-Apr-2013
INVESTMENT POSITIVES Backed by Strong Promoter Group AFL is promoted by the $1.3-billion Amtek Auto Group, one of the largest integrated auto component manufacturers in India with a strong global presence. The group has been associated with the auto ancillary industry and trade for over three decades. Amtek Auto Group is comprised of Amtek Auto, Amtek India and Ahmednagar Forgings. It has 43 world class manufacturing facilities located in India (39) and Europe (4). With the infrastructure and technology platform developed over 25 years, the Group is well positioned in the Indian Auto and Non-Auto component markets. India: Attractive central hub for OEM global exports Indian auto component industry is expected to reach over US$ 110 bn by 2021, growing at a CAGR of 11% The Indian forging industry has kept alongside with the domestic manufacturing sector's demand, yet exporting significant quantities despite surging input costs of fuels, power and labour charges during the past months of the financial year. The industry is a supplier of critical components for automotive OEM s in India as well as in countries such as USA, Europe, China, Japan and other countries. India has been acknowledged by many global OEMs as one of the most strategically important emerging auto markets in the world. It is not only an attractive destination for OEMs as an end customer market but also an increasingly critically important manufacturing base. Global majors Ford, GM and Renault-Nissan have all announced that they will set up their manufacturing facilities in India. These manufacturing facilities will be used to service both the domestic and export markets. Hence the optimism that the forging industry will continue to grow and do well in the immediate future. Longer term the Indian auto component industry is expected to reach over US$ 110 bn by 2021, growing at a CAGR of 11%. Indian forging industry to see 20% annual growth: AIFI The $3 billion Indian forging industry is poised to grow by over 20% annually and see investments of $3 billion by 2015 for capacity expansion, according to the Association of Indian Forging Industry (AIFI). The industry body, which gets ~70% of its business from the automotive sector, says it is undeterred by the current slowdown and turmoil in other markets. From an average growth of ~25% a year, the automotive sector this year has come down to ~8%. This is not small even by any comparison to other markets which have had de-growth. According to AIFI, the overall production of forgings increased to 2.3 mn MT during FY11 from 1.8 mn MT in FY10, registering a growth of over 28%. This is predicted to reach 4 mn MT by 2014E. Moreover ~75% of the forging business was domestic and by offering innovative products, the forging industry is seeking to increase the overall exports from ~25%. Ahmednagar Forgings Ltd. 3 26-Apr-2013
Confident of achieving an overall higher growth than the industry norm Automobile industry is the key demand driver for forgings, accounting for 65-70% of the total forging production worldwide AFL is confident of achieving an overall higher growth than the industry norm through its focus on new product introductions, addition of significant new contracts and continued consolidation in the component industry. Management is focused on achieving operating excellence by reinforcing lean manufacturing and quality improvement programs across all production facilities. This will result in further enhancing utilization levels and productivity improvements. The Company has a long track record of successfully partnering with its high profile customer base, which is essential for managing its business going forward. The automobile industry is the key demand driver for forgings, accounting for 65-70% of the total forging production worldwide. The expansion plans laid down by Tata Motors, Ashok Leyland, Maruti Suzuki, Hyundai, GM India and presence of MNCs like Nissan, Toyota, Nissan-Renault, Volkswagen, Honda Motors and Ford Motor will only boost the demand for quality forgings in India. AFL has also identified other areas that will drive the company's growth plans. Some of the key growth drivers are domain expertise, enhancement of service portfolio to clients, tap new geographies, strengthening marketing teams and inorganic initiatives. Established relationship & diversified clientele Top clients for the company are Fairfield Atlas (USA), King Automotive Systems Ltd (USA) and Zelter GmbH (Germany) With its established track record of operations, AFL has established longstanding relationship with its clients over the years. The same is also reflected by AFL s client profile dominated by leading OEMs over the past few years. AFL caters to OEMs in diverse segments including passenger vehicles, commercial vehicles, 2-wheeler segment tractors & LCVs, railways and defence in the non-auto segment. The company also caters to the replacement market which constituted about ~15% of the total sales. The Company is a Tier-1 vendor and is a OEM supplier to Maruti Suzuki, John Deere, TVS Suzuki, JCB, JBML, Case New Holland, GE, Hero Moto, Hindustan Motors, Mahindra & Mahindra, Tata Motors, Sanden Corp, Force Motors, Eicher Tractors, Honda Scooters, Yamaha motors, Bajaj Auto, Cummins, Coventry, Letchworth, Hennef etc. The top clients for the company are Fairfield Atlas (USA), King Automotive Systems Ltd (USA) and Zelter GmbH (Germany). To acquire entire business of First Forge Ltd Recently in March 2013, the Board of Directors of AFL at its meeting held on March 25, 2013 has decided to acquire the entire business of First Forge Limited (FFL) through a Business Transfer Agreement for cash consideration. FFL is engaged in the business of manufacturing of forging components for auto and non auto industry. Ahmednagar Forgings Ltd. 4 26-Apr-2013
Healthy Operating and Profitability margins 30.0% 25.0% 20.0% EBITDA Margin PAT Margin 15.0% 10.0% 5.0% 0.0% Electrosteel Cast Mahindra Forgings Bharat Forge Ramkrishna Forge Jayaswal Neco Ahmednagar Forg Ahmednagar Forgings Ltd Margin Trend 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 EBITDA Margin 23.4% 23.6% 22.8% 21.7% 21.4% 22.0% 21.8% 19.8% 20.8% PAT Margin 12.8% 12.0% 10.7% 9.2% 9.7% 10.1% 11.1% 11.2% 11.0% Peer Group Comparison Listed Peers M.CAP (` Crs) EBITDA Margin PAT Margin EPS (TTM) P/E (x) P/BVPS (x) Dividend Yield (%) M.Cap / Sales (x) Electrosteel Cast 556 7.7% 3.1% 1.80 9.5 0.3 2.9% 0.30 Mahindra Forgings 341 14.0% 6.5% 2.83 13.1 0.4 0.0% 0.86 Bharat Forge 1,071 6.8% 4.4% 39.79 5.8 2.2 1.7% 0.25 Ramkrishna Forge 223 16.8% 4.4% 7.43 12.0 0.9 1.6% 0.53 Jayaswal Neco 465 12.1% 1.4% 0.74 12.6 0.3 0.0% 0.18 Ahmednagar Forging 375 27.2% 10.8% 33.73 3.0 0.5 1.0% 0.33 Source: Capitaline, LMSPL Research Impressive Shareholding Bonus History Year Ratio BVPS (Rs.) EPS (Rs.) 2005 2:01 68.68 15.63 1995 1:01 22.60 5.10 Public Shareholding More than 1% No of Shares % of Holding Description as on 31/12/2012 31/12/2012 Asia Invevestment Corporation Mauritius Ltd 2,201,390 5.99 Chhattisagarh Investments Ltd 528,944 1.44 Copthall Mauritius Investment Ltd 1,609,357 4.38 HDFC Trustee Co Ltd - HDFC Prudence Fund 1,774,860 4.83 HDFC Trustee Co. Ltd - HDFC Mid Cap Opp. Fund 1,221,304 3.32 Warhol Ltd 3,456,898 9.41 TOTAL 10,792,753 29.4 The promoter entity Amtek Auto has increased its stake in AFL by acquiring 1.80 mn shares representing 4.9% of total equity of AFL at Rs 104.2/share on the BSE on April 18, 2013. The company has acquired these shares from Copthall Mauritius Investment and Warhol through bulk deals for total consideration of Rs 18.75 Crs. Ahmednagar Forgings Ltd. 5 26-Apr-2013
CONCERNS Intense competition from organised and unorganised players in auto ancillary sector Performance dependant on the fortunes of the auto industry Volatile prices of key raw material- steel, non-ferrous metals, etc VALUATIONS At the CMP of `101.50, the stock is trading at 2.9x of its FY14E EPS of `34.51. We recommend BUY on the stock with a 12-18 months target price of `138.0, providing an upside of 36% from the current levels. Profit & Loss A/c - Rs. In Crs June Ending FY10 FY11 FY12 1HFY12 1HFY13 Jun-10 Jun-13 Jun-12 Dec-11 Dec-12 Net Sales 634.2 908.2 1182.6 575.4 547.3 Total Expenditure 489.0 689.7 920.9 451.4 436.1 Raw Material Consumed 397.0 577.5 798.5 378.7 362.0 Stock Adjustment -3.7-6.1-10.7 10.3 3.6 Employee Expenses 41.0 53.6 60.0 31.8 35.1 Other Expenses 54.8 64.7 73.1 30.6 35.4 EBITDA 145.1 218.4 261.6 124.0 111.2 Margin 22.9% 24.1% 22.1% 21.6% 20.3% Depreciation 43.32 50.0 61.3 27.5 35.4 EBIT 101.8 168.5 200.3 96.5 75.8 Interest 38.86 45.2 64.9 35.0 34.5 Other Income 31.17 29.1 35.9 14.8 45.2 PBT 94.1 152.3 171.4 76.3 86.5 Tax 30.04 44.2 50.5 22.0 25.9 PAT 64.1 108.2 120.9 54.3 60.5 Margin 10.1% 11.9% 10.2% 9.4% 11.1% EPS (Rs.) 17.44 29.43 32.89 14.78 16.47 Source: Company, Capitaline Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai 400 052. Tel. (022) 4082 4082, Fax (022) 2649 7997. research@lmspl.com www.latinmanharlal.com, LMSPL Network: Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana, Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh) This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and its affiliates may act as market maker or have assumed an underwriting position in the secure-ties of companies discussed herein and may sell them to or buy them from customers on a principal basis. Ahmednagar Forgings Ltd. 6 26-Apr-2013