MY NEXT PICK IS ELFORGE
Company background
EL Forge Limited (EFL), incorporated in 1963, manufactures carbon and alloy steel forgings
weighing between 300 grams and 5 kgs i.e. fuel injection forgings, steering rods, tie rods,
engine and gear boxes components for the automotive segment. EFL is also a leading exporter
to several overseas customers based in US, Germany, Srilanka and Malaysia and has made
significant strides in this space with exports accounting for 23% of total revenues.
EFL is an established vendor to large domestic OEMs like Ashok Leyland, MICO, Rane TRW,
Sundaram Clayton, IL Jin (Tier 1 supplier) to Hyundai Motors India, Lucas TVS, Hindustan
Motors, VST Tillers, Sahney Paris and Audco Valves. Currently, EFL is implementing an
expansion cum reallocation of capacity programme which is expected to get completed by
April 2006 which would increase the total tonnage capacity to 23,200 tpa from 18,200 tpa at
present.
EFL has in all four manufacturing units, one each at Chromepet, Gummidipoondi and
Thurapakkam in Chennai and one unit at Hosur in Tamil Nadu. All EFL plants enjoy ISO/TS
169249 and ISO 9000 quality certification. Within the automotive space, EFL manufactures
light and medium weight forgings for the engine component segment, transmission, steering
and suspension parts, brake assembly parts, and chassis/driveline parts segment.
EFL has reported a steady performance during the H1 of FY06. Net sales have improved
10% yoy to Rs.415.43mn, with EBIDTA growing by 13% yoy in the same period at Rs.56.69
mn (Rs.50.17mn) followed by a PAT of Rs.34.36 mn (Rs.20.24mn) - up by 70% yoy.
EBIDTA margins have been maintained at 13.65% in H1 of FY06 as compared to 13.26%
recorded in H1 of FY05. The company's performance during Q2 FY06 was slightly muted in
terms of topline and profitability as a large export customer incorporated certain basic design
changes in the components supplied which affected export business in Q2 FY06. However,
the company is confident that it will make up for this shortfall in export revenues in the H2 of
FY06 comfortably.
While EBIDTA margins are likely to remain under
pressure in FY06E, we believe these are likely to be offset by the sharp volume upsurge
largely on the back of a strong volume increase coming in from domestic customers but more
so from the outsourcing opportunity after the SFL acquisition made in May 2005 which should
see concrete results from the Q4 of FY06 onwards.
EFL is a Chennai based auto
component player with several
OEM customers like Ashok
Leyland, MICO, Rane TRW,
Sundaram Clayton
The EFL stock trades at an attractive P/E and C/PE of 9x and 6x and a market cap to sales
ratio of 0.43x based on FY07E. I believe that EFLs earnings over the next two years would
be entirely volume driven despite competitive pressures in the auto component space. I
initiate a BUY on EL Forge with a target FAIR price of Rs.164 . At our
target price, the stock will be valued 13x FY07E and on cash PE basis 10x for FY07E.
on a cash earnings basis and
9x PE based on FY07E
CMP-99.
TGT-164 {FOR START}.WE WILL SEE HOW IT GOES FROM HERE
