Sanghvi Forging: New heavy forging orders may get delayed

CRISIL Research has come out with its report on Sanghvi Forging and Engineering (Sanghvi). According to the research firm, considering the sluggish demand scenario, the company is likely to face challenges in bagging orders.

Sanghvi's Q3FY13 earnings were below CRISIL Research's expectations because the anticipated orders for the recently commissioned heavy forging facility did not materialise. We had assumed a small contribution from the facility in H2FY13 but now have excluded it from our FY13 forecast. In Q3FY13, revenues declined yo- y while margins improved over the same period as the company executed a few high margin orders. Sanghvi capitalised its 15,000 tonnes/annum open die heavy forging capacity, which increased depreciation and interest expenses. This impacted profitability in Q3FY13. The company is in the process of stabilising the heavy forging plant. However, considering the sluggish demand scenario, we believe the company is likely to face challenges in bagging orders; hence utilisation rates for the new capacity is expected to remain low in FY14 and FY15. We have revised the earnings estimates for FY13 and FY14. We maintain the fundamental grade of 2/5, indicating that its fundamentals are ‘moderate' relative to other listed securities in India.

Delay in receiving orders from new capacity; capitalisation hits earnings
Revenues declined 16% y-o-y (up 29% q-o-q due to lower base in Q2FY13) to Rs 117 mn because Sanghvi is finding it difficult to get approvals and bag orders from clients for its new heavy forging capacity. It caters to industries such as power - hydro, thermal and nuclear, shipbuilding and oil refineries. EBITDA margin improved 446 bps y-o-y (fell 270 bps q-o-q) to 20.8% due to the execution of more high-margin orders. During the quarter, the company capitalised its 15,000 tonnes/annum open die heavy forging capacity due to which depreciation and interest expenses increased. PBT declined 81% both y-o-y and q-o-q to Rs 3 mn. The company reversed the tax provision (as it expects to pay MAT for FY13), which supported earnings. PAT declined by 36% y-o-y and 40% q-o-q to Rs 7 mn. The company reported EPS of Rs 0.5 in Q3FY13 compared to Rs 0.80 in Q3FY12 and Rs 0.9 in Q2FY13.

Commissioned the 15,000 tonnes/annum open die forging capacity
Sanghvi has commissioned the 15,000 tonnes per annum open die forging capacity in Q3FY13 but is yet to supply a heavy forged piece (40-50 tonnes) to any client. So far, it has supplied a 4-5 tonne forged piece from the new capacity to a client. During trial runs, the company successfully manufactured up to a 15-tonne single piece forged product. Hence, forging capability above that weight remains to be tested. We believe the company is likely to receive orders albeit at a slower pace and hence expect utilisation rate to remain at around 25% for FY14.

Fair value maintained
We continue to use the price-to-earnings method to value Sanghvi. We have lowered our earnings estimates for FY13 and FY14 and rolled forward our valuation to FY15. Therefore, our fair value remains unchanged at Rs 61 per share. Based on the CMP of Rs 28, the valuation grade is 5/5.

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