Ahmednagar Forgings
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs380
Current market price: Rs250
Forging ahead
Key points
- The business of Ahmednagar Forgings Ltd (AFL) is growing at a spectacular pace on the back of a buoyant domestic climate and bulging export orders. At present, the company has an order book of Rs850 crore, executable over the next twelve months. Of these, orders worth Rs650 crore are from the domestic market and the balance are export orders.
- To cater to this demand, AFL is more than trebling its forging capacity from 46,000 tonne per annum (tpa) in FY2006 to 165,000tpa by FY2008. The machining capacity is also being expanded from 10,000tpa to 25,000tpa.
- After the acquisition of Amforge's Chakan unit by Mahindra Automotive Steels, some of its original equipment manufacturer (OEM) customers have shifted to AFL. This is expected to generate additional revenues of Rs100 crore.
- AFL's export revenues should get a boost with the acquisition of the two forging lines from Anvil International. At peak levels these lines should generate revenues of Rs300 crore. AFL would also be meeting the outsourcing needs of GWK, UK, the Amtek group's global business.
- With increased contribution of the machined products and higher revenues from the non-automotive segment, we expect the margins to expand by 120 basis points over the next two years.
- At the current market price of Rs250, the stock discounts its FY2008E earnings by 6.5x. Considering the company's future growth potential and the stupendous increase in its size, we believe that such a discount to its peers is unjustified and recommend a Buy on the stock with a price target of Rs380.
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