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Buy Ahmednagar Forgings + Ratnamani Metals – Reliance Money

August 31, 2007

Reliance Money has initiated coverage on Ahmednagar Forgings, a Amtek group company and Ratnmani Metals and Tubes with a BUY rating.

Ahmednagar Forgings Ltd: [AFL]
Amtek Auto Limited holds 51% equity stake in AFL thereby making it a subsidiary. AFL manufactures various forged products like connecting rods, gear blanks, shafts, transmission components, flanges, hubs and is a Tier 1 vendor to OEMs in all major segments i.e. two wheeler, passenger cars, tractors and commercial vehicles. It earns around 80% of total revenue from auto business and 20% from non-auto business.

AFL’s net sales went up by 60% YoY to Rs.6,002mn backed by strong domestic and exports growth. For FY07, AFL reported export revenue to the tune of Rs.2bn, up by almost 10x. AFL’s EBITDA soared by 68% YoY to Rs.1,191mn and its EBITDAmargins grew by a whopping 193bps YoY to 21% from 19% in Q4FY06. It’s noteworthy that AFL’s margins went up despite raw material costs as a percentage of net sales went up by 411bps YoY. For FY07 AFL’s EBITDA jumped by 69% YoY to Rs.1,234mn and its EBITDA margins went up by 108bps YoY to 20.6%.

AFL is expected to report strong net sales and net profit growth at a CAGR of 37% and 36% respectively during FY07-09E.AFL stock currently trades at 12x FY07E and 8x FY08E which is attractive. Reliance is positive on the long term prospects of the company and recommend investors a BUY with a target price of Rs. 337.

Ratnamani Metals and Tubes Ltd: [RMTL]
RMTL is a Tier I supplier of project pipes which have applications mainly in petrochemicals, oil refineries, power plants, sugar refineries, water projects, fertilizer industry, and core engineering industries.

RMTL reported Net sales for Q1FY08 grew by 116% YoY to Rs.1,900mn backed by partial execution of healthy order book and higher capital expenditures incurred in oil & gas industry. The impressive jump in sales in Q1FY08 was mainly because of strong growth in exports from Kutch SEZ which reported export revenue to the tune of Rs.793mn. The net sales growth was driven by both the segments, stainless steel pipes and carbon steel pipes reported strong growth of 142% YoY to Rs.1135mn and 93% YoY to Rs836mn. RMTL is currently sitting on an order book of around Rs.4.31bn (65% -stainless steel pipes and 35% – carbon steel pipes) which will be executed within next 6-8 months. RMTL continue to get healthy order book in FY08E and FY09E as well mainly because of big capex plans announced by oil and gas industry players.

RMTL’s EBITDA grew by 123% YoY to Rs423mn and its EBITDA margins improved by 72bps YoY to 22.3%. RMTL would be able to maintain its EBITDA margins in the range of 21-22% in FY08E & FY09E as well. RMTL stock currently trades at 9x FY08E and 7x FY09E which is attractive. RMTL stock has good potential upside from this level and recommend a BUY with target price of Rs 1361 based on DCF approach. At target price the stock would trade at a P/E multiple of 10x on FY09E earnings.

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