Friday, May 25, 2012


RKFL results were almost in-line with our estimates. It reported net sales of INR 1428 mn, up by 14.5% YoY  and 10.9% QoQ & profit of INR 80 mn, up by 5.9% YoY and 43.1% QoQ. EBITDA margins at 16.01% contracted  by 83 bps YoY, led by higher fuel expenses. We introduce FY14 estimates & roll-forward our valuations by  12 months and retain our BUY recommendation.

Results in-line with our estimates
In Q4FY12, RKFL has reported net sales of INR 1428 mn, up by 14.5%  YoY & 10.9% QoQ. PAT at INR 80 mn was up by 5.9% YoY & 43.1% QoQ. Overall capacity utilization improved to 90.6% in FY12 vis-àvis 77.3% in FY11. Its steel forging unit is operating at full capacity utlisation levels. Utilization in case of ring rolling (which is a high  margin product) has improved to ~79% vis-à-vis ~69% in FY11. It has also taken a small price increase in Q4FY12 to offset increase in input costs.

Contraction in EBITDA Margins
EBITDA margins at 16.01%, contracted by 83 bps YoY & were up  by 40 bps QoQ. Foreign exchange losses of INR 15 mn on exports  receivables reported in Q3FY12 has also been reversed in this quarter. Raw material to sales stood at 53.5%, up by 282 bps YoY & down by 367 bps QoQ. Power &  fuel expenses increased to 9.2% of net sales increasing by 197 bps YoY & 37 bps QoQ.

Capacity expansion plans
RKFL is looking to further enhance its product portfolio with  plans to manufacture front axle beams & crankshafts used in CVs. Total investment in the project would be INR 5000 mn, which would be financed through debt-equity ratio of 65:35. RKFL expects financial closure of the same to come by the end of June 2012 & expects the capacity to become operational by FY15.

RKFL has tied up with two new players in Turkey & Mexico for exports in Q4FY12. This will lead to better utilization of its ring rolling capacity leading to improved realizations. We expect exports to contribute ~10% in FY13E & ~12.5% in FY14E vis-à-vis 9% in FY12.

Outlook & Valuation
We expect growth in H2FY13 to be better than the 1st half. Given the expected slowdown in the CV segment, we expect the top-line growth to slow to ~10% in FY13E & 12.5% in FY14E. With current capacity almost getting exhausted, tepid outlook of the CV sector in the near term & 2 years time for new capacities to become operational, we retain our BUY recommendation with a revised target of INR 189 in 18 months, implying a discount of 5.5x FY14E EV/EBITDA & 10x FY14E earnings.

To read report in detail: RKFL