Multibagger Stock: UBS sees another 46% upside in RK Forgings after 1,869% rally in 5 yrs, initiates coverage with ‘buy’

Multibagger Stock: Global brokerage firm UBS recently initiated coverage on Ramkrishna Forgings (RKFL), a prominent Indian supplier of rolled, forged, and machined products, with a 'buy' rating and a target price of ₹1,500. This target suggests a potential upside of 46% from the stock's previous closing price of ₹1,028 apiece.

UBS is optimistic about RKFL’s growth prospects, citing the potential for significant market share gains. The company currently holds a low single-digit share in the global market, which implies a substantial growth runway ahead. UBS believes that RKFL’s transition from a pure forging company to a comprehensive assembly solution provider, coupled with product diversification and a move up the value chain, will drive its market share expansion.

Furthermore, UBS points to upcoming capacity expansions, new client acquisitions, key order wins, and recent acquisitions as factors enhancing earnings visibility for RKFL. UBS also notes that the consensus may not fully account for RKFL’s capabilities and growth drivers, which could indicate potential undervaluation by the market.

The brokerage highlights RKFL’s impressive trajectory since FY14 when it held less than 2% market share among the top seven companies. Over the past decade, it said the company has expanded its revenue by nearly 10 times—outpacing peers who grew by an average of 2 to 5 times.

While many major players faced acquisitions, bankruptcy, or declining market share, RKFL now holds close to a 12% revenue market share among the top six listed companies.

UBS attributes Ramkrishna Forgings' (RKFL) success to a strategic approach focused on three key areas:

Diversification: RKFL has significantly diversified its portfolio, with non-auto market share rising from 16% to 23%, and exports increasing from 29% to 42% between FY19 and FY24. Additionally, the contribution from its top five clients fell from 71% to 50%, allowing the company to navigate economic cycles more effectively than its peers.

Capacity Expansion: By scaling up capacity even during downturns, RKFL positioned itself to recover faster and attract major international clients with high-tonnage presses. With plans to expand capacity by approximately 50% over the next two years, the company is poised for continued growth.

Transition to a Comprehensive Provider: RKFL is evolving into a one-stop shop, offering forging, machining, and assembly services. By increasing its share of product per vehicle and focusing on higher-tonnage, machined products, RKFL has deepened its client relationships and is well-positioned to gain market share.

UBS projects RKFL to outperform peers

UBS expects Ramkrishna Forgings to outpace its competitors as it transitions from a forged product manufacturer to a comprehensive assembly provider offering one-stop solutions. It highlights several growth areas, including aluminum forging, entry into the electric vehicle (EV) segment, and fabrication and assembly services for earthmoving and agricultural equipment, Vande Bharat Express train orders, and the two-wheeler market.

UBS anticipates that these ventures will begin contributing in the near term while also offering substantial growth potential over the medium-to-long term.

The company’s strong track record of outperforming peers underscores its effective execution. RKFL's diversification strategy has already proven successful, with non-auto revenue share rising from 16% in FY19 to 23% in FY24 and the share of higher-margin machined products increasing from 59% to 75% during the same period.

Additionally, RKFL's recent major oil and gas client win, supported by the acquisition of the JMT plant, demonstrates its expanding capabilities and market reach, it noted. 

Stock up over 1,850% in 5 years 

The stock has maintained a strong upward trend since 2019, navigating market fluctuations with minimal pullbacks. Remarkably, it has closed in the green for the last four calendar years, and the positive momentum continues into the current year.

Over the past three years, the stock has delivered a substantial return of 354.85% and an impressive 1,869% over the past five years. During this period, the stock price has surged from ₹53 to its current trading price of ₹1,028.

Ramkrishna Forging is the second-largest forging company in India in terms of FY23 revenue, with over 40 years of experience in the forging industry. It manufactures and supplies engineered, critical automotive and non-automotive components in forged, rolled, and machined condition. 

It caters to original equipment manufacturers and Tier-1 customers in the automotive sector, with a primary focus on commercial vehicles, and the product portfolio includes front axle and steering, rear axle, suspension and chassis, transmission, and engine components.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.