Recommendation: Buy (again!!!)
CMP = Rs 240
Price target: Rs 300
Key points:
- Ahmednagar Forgings Ltd (AFL) is making a preferential allotment of 17 lakh shares and 38 lakh warrants to its promoters at a price of Rs 240 to raise Rs 132 crore. The management expects to use the raised fund to buy assets such as forging lines. Some of the assets have already been identified and an announcement in this respect is expected in the next two-three months.
- This preferential allotment will lead to an equity dilution of 16%. The group has a history of frequent and large equity dilutions for acquisitions and expansions. However, the current dilution is aimed at enabling AFL acquire capacities at cheaper valuations and reach its planned capacity of two-three lakh tonne with no major future dilutions.
- The company continues to have a strong order book. The expanded capacity of 165,000 tonne has become operational from December 2007 onwards.
- We have not incorporated the revenue and profit additions expected due to this dilution in our estimates. The acquisition would be positively accretive to the earnings. Consequently, we maintain our positive outlook on the company considering its strong order book position, capacity expansion plans and margin improvement due to a better product mix.
- At the current market price of Rs 240, the stock trades at attractive valuations of 8.7x its FY2009E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.5x.
- I maintain strong Buy recommendation on the stock with a price target of Rs 300.
