Buy Mahindra Forgings Steady improvement;:: Anand Rathi

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Mahindra Forgings
Steady improvement; initiate with Buy
Mahindra Forgings is one of the leading forgings companies
globally and is set to gain from the steady recovery in European
auto demand. This would, in turn, drive a sustainable and
profitable performance ahead. We initiate coverage on MFL with
a Buy and a target price of `137.

 Sound domestic demand. Domestic demand is good, especially
in MFL’s key segments, PVs and tractors, thereby benefiting its
India operations. The transfer of dies from Europe in FY11, while
resulting in short-term pain, would help improve production
standards and capture additional demand ahead.
 Improved operations. Increased share of machined components
at its India operations and greater operating leverage would lead to
improved margins.
 Overseas performance to see steady improvement. Given the
scale of its European operations, ~80% of MFL’s revenue arises
from outside India. Demand in the European auto market is
expected to continue boosting steady recovery, which would
benefit it both in terms of higher revenue and operating leverage.
 Valuation and risks. We value MFL at `137 (25x FY12e EPS of
`5.5). Future re-rating is likely on: i) proven ability to sustain
consolidated profitability and ii) likely restructuring of MFL as
part of Mahindra Systech. We initiate coverage with a Buy. Risks:
decline in domestic or overseas auto sales; currency fluctuations