Ramkrishna Forgings Ltd

Ramkrishna Forgings is the second largest forging company in India by installed capacity. It converts alloy steel into load bearing parts: axles, chassis and drivetrain components for commercial vehicles, along with railway, mining, earthmoving and general industrial parts. Its customers are vehicle and equipment manufacturers, not end users. It operates 20 plants, most in Jamshedpur and one in Mexico, and has added casting and aluminium forging alongside its steel forging lines.

The revenue base has broadened over the past five years. In Q1 FY27, domestic auto was 49 percent of standalone revenue, railways 6 percent, mining and farm equipment 6 percent, and industrial products 7 percent. Exports were 32 percent. The business remains cyclical and capital intensive, but the wider set of end markets reduces its dependence on commercial vehicles.

At full utilisation the asset base turns about 2.5 times, which implies revenue potential near 9,000 crore on the current net block. Steel, the main raw material, is passed through to customers with a one quarter lag. Energy, freight and currency are not passed through in the same way.

Between FY24 and FY26 the company invested heavily. Net block rose from 2,334 crore to 3,776 crore, and debt, depreciation and finance costs rose with it. FY26 profit after tax was 72 crore on revenue of 4,238 crore.

Q1 FY27 shows the operating leverage from that investment. Profit before tax and exceptional items was 66 crore in the quarter, against 113 crore for the whole of FY26. Revenue was 1,217 crore, up 20 percent year on year. EBITDA was 218 crore, up 47 percent. Profit after tax was 47 crore, against 12 crore a year earlier. EBITDA margin was 18 percent, up from 14.6 percent a year earlier.

The driver is utilisation, which was 68 percent across total capacity in the quarter. Ring rolling is already above 120 percent. The spare capacity is in the press and forging lines that were recently commissioned and are already being depreciated, so incremental volume on those lines converts largely to profit. Management expects cold forging above 70 percent by Q3 and casting to continue ramping.

Exports. Management guides exports to about 35 percent of revenue in FY27, with growth above 20 percent and the highest export revenue in the company's history. North America is 58 percent of the export book and Europe 41 percent. The North American Class 8 truck cycle has recovered: industry order data through mid 2026 shows orders up sharply year on year, backlogs at a multi year high, and pre buying ahead of the 2027 US emission rules.

Casting. The casting plant was capitalised in March, so this is new revenue. Q1 volume was 8,593 tonnes, up 85 percent, and still ramping. Realisation fell this quarter because lower value parts were used to fill the line, and should recover as the mix improves.

Rail wheels. Trial production has started. The first 300 samples go to Indian Railways in August, with bulk supply targeted for September or October. The confirmed order is 80,000 wheels, plus 25,000 from the JV partner, giving about 1,10,000 wheels of visibility through FY28. The JV manufactures only wheels; the rest of the railway business sits in the main company and should not be double counted.

Mexico and passenger vehicles. Mexico contributed about 6 crore this quarter and becomes material from Q3. The Q1 order win of 278 crore is entirely domestic, split 82 percent passenger vehicle and 18 percent two wheeler, on four year programmes. The passenger vehicle order is for a domestic EV brand; management's PV book is roughly half combustion and half electric.

Aerospace and non ferrous products such as titanium and Inconel are eight to ten quarters away with no order book, and carry no value in current estimates.

Energy and freight. Gross margin in Q1 FY27 was 54 percent, the highest the company has reported, but EBITDA margin was 18 percent. The difference is energy and shipping cost, which cannot be passed through as steel is. The business previously earned 20 to 22 percent EBITDA on a lower gross margin than it earns now, so there is margin upside, but it depends on energy prices falling, which is outside management's control. Management has identified this as the largest risk to profitability.

Target slippage. The 8,000 crore revenue target has moved from FY28 to FY29, as management has acknowledged.

Earnings quality. FY26 operating cash flow was 840 crore, the highest the company has recorded, and receivables fell to 795 crore, so working capital improved. Given the size of inventory and receivable balances, the conversion of reported profit into cash needs to hold over the next few quarters.

FY25 profit of 415 crore was supported by a large tax credit and included 83 crore from a discontinued business. On a comparable basis, profit fell from 332 crore in FY25 to 72 crore in FY26. FY26 was the low point in earnings, and Q1 FY27 is the recovery from it.

At 681 the market capitalisation is 12,409 crore and net debt is about 1,900 crore, giving an enterprise value near 14,300 crore.

On FY26 profit of 72 crore this is 172 times earnings, distorted by the trough. On the annualised Q1 profit run rate of about 188 crore it is about 66 times. On enterprise value against annualised Q1 EBITDA of about 874 crore it is about 16 times. The price reflects expected FY29 results rather than current earnings.

On management's targets, revenue of 8,000 crore by FY29 at a 20 percent EBITDA margin implies about 1,600 crore of EBITDA and, after higher depreciation, lower finance cost and tax, about 725 crore of profit. That is about 17 times FY29 earnings on a deleveraged balance sheet. If the margin instead stays at the FY26 level of 15 to 16 percent, profit is about 465 crore and the multiple is about 27 times.

The price therefore assumes the revenue ramp to 8,000 crore, margin recovery to 20 percent, and continued deleveraging are all delivered. The margin recovery depends mainly on energy costs falling, which management does not control.

Verdict: the earnings inflection is real, but the current price already reflects successful execution of the FY29 plan, leaving little margin of safety at 681. The evidence worth waiting for is further EBITDA margin expansion driven by energy relief rather than steel prices and mix.

Positive: EBITDA margin moving to 19 to 20 percent while gross margin holds; utilisation crossing 75 percent with realisation stable; the rail wheel plant clearing testing and reaching bulk supply on schedule.

Negative: EBITDA margin stalling near 18 percent despite a high gross margin; a further delay to the 8,000 crore target; working capital reversing and profit not converting to cash; an earlier than expected downturn in the North American truck cycle.

TenetFour Research. Educational analysis only. Not investment advice or a recommendation to buy, sell, or hold any security. Author may hold a position. Readers are responsible for their own decisions.