Recommendation: Buy
CMP = Rs 222 (as of Thursday)
Price target: Rs 300
Key points:
· Ahmednagar Forgings Ltd (AFL), a subsidiary of Amtek Auto, manufactures small- and medium-sized forged components such as connecting rods, gear blanks, shafts, transmission components, flanges and hubs. AFL is a tier-1 supplier to large domestic original equipment manufacturers (OEMs) like Tata Motors, Ashok Leyland, Eicher Motors, Force Motors, Bajaj Auto and Maruti Suzuki.
· In Q4FY2007 AFL’s sales grew by 52.7% to Rs 150.7 crore, which was below our expectations. The profit after tax (PAT) grew by 61.9% to Rs 16.6 crore in the same quarter. The profit growth was lower mainly due to the slowdown in the domestic market and the impact of the strengthening rupee on its exports.
· For the fiscal ended June 2007, the company has reported a 59.9% growth in its net sales to Rs 600.3 crore and a 75.3% growth in its net profit to Rs 68.2 crore against expected Rs 67.5 crore of PAT.
· Though the company has a strong order book, I would like to take a cautious view on the domestic sales in FY2008 in light of the slowdown in the OEM segment. The outlook on the exports remains bullish with the commencement of the additional lines and increase in the utilisation levels. However, the margins may be hit due to rupee appreciation as around 40% of its exports are in US dollar terms.
· Considering the slowdown in the domestic market and the delay in commencement of the export lines, I am downgrading the FY2008 EPS estimate by 30% from Rs 36.5 to Rs 25.3 and am estimate EPS for FY2009 at Rs 32.2.
· At the current market price of Rs222, the stock trades at attractive valuations of 6.9x its FY2009E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.4x. I maintain Buy recommendation on the stock with a price target of Rs 300.
