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Summary of Contents
STOCK IDEA
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. |
