Sanghvi Forging: Execution of high-margin orders pushed PAT

Sanghvi Forging and Engineering Ltd’s (Sanghvi’s) Q2FY13 revenues were below while PAT was above CRISIL Research’s expectations. Postponement of one of its client’s requirement led to lower-than-expected revenues while the execution of high-margin orders boosted profitability. The management expects to receive some orders in the last quarter of FY13 but they have informed that the scenario is weak. We have lowered our FY13 revenue estimate to factor in the slow execution of orders and have raised FY13 margin estimate to factor in the higher-than-expected profitability. Sanghvi has started the stabilisation of the heavy forging plant which is expected to take two-three months. Its capability to acquire approvals and subsequently bag orders is a key monitorable. We maintain the fundamental grade of 2/5, indicating that its fundamentals are ‘moderate’ relative to other listed securities in India.

Delay in order execution impacted sales but high-margin orders supported profitability
Revenues declined 27% y-o-y and 9% q-o-q to Rs 90 mn. The management has informed that one client has delayed the requirement due to which the order execution has been deferred. However, higher contribution of high-margin orders helped the company improve profitability. EBITDA margin improved 760 bps y-o-y and 448 bps q-o-q to 23.5%. In line with decline in sales, PAT declined 9% y-o-y to Rs 11 mn; however, the decline was arrested by the margin expansion. The company has reported EPS of Rs 0.90 in Q2FY13 compared to Rs 0.80 in Q2FY12 and Rs 0.78 in Q1FY13.

Capacity expansion of 15,000 tonnes per annum open die forging is on track
Sanghvi has started the stabilisation of 15,000 tonnes per annum open die forging capacity. We expect the company to complete the stabilisation of the plant by Q3FY13 and to execute a few of the prototype orders. This expansion provides the company an entry into the heavy forging segment of open die forging where there are large opportunities for domestic manufacturers. However, its ability to win the clients’ approval and regularly bag orders, and effectively manage the relatively larger operations are key monitorables.

Valuations: Fair value maintained
We continue to use the price-to-earnings method to value Sanghvi and maintain the fair value of Rs 61 per share. Based on the current market price of Rs 38, the valuation grade is 5/5.

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