Electric Transition Will Shrink Forging Demand Despite Modest Capacity Upside

Key Takeaways

• The accelerating shift to electric vehicles and rapid material innovation threaten to erode Ramkrishna Forgings' market share and long-term earnings stability.
  
• Elevated debt, higher compliance costs, and heavy export exposure pressure profitability, limit modernization, and increase risks to shareholder returns.
  
• Expansion in capacity, new product segments, geographic diversification, and strong order inflows underpin robust long-term revenue growth, profitability, and earnings sustainability.

Catalysts

Engages in the manufacture and sale of forged components for automobiles, railway wagons and coaches, and engineering parts in India and internationally.

• The accelerating shift towards electric vehicles is expected to significantly reduce demand for traditional forged auto components, potentially shrinking Ramkrishna Forgings' addressable market and putting long-term pressure on revenues from its core business lines.
  
• Increasing global regulation around sustainability and carbon emissions will likely burden the company with higher compliance costs and capex requirements, causing net margins and overall profitability to deteriorate over the coming years.
  
• With global OEMs actively diversifying and localizing their supply chains to mitigate geopolitical risk, Ramkrishna Forgings' heavy exposure to exports (particularly to North America and Europe) faces a prolonged risk of order deferrals, reduced contract sizes, or outright loss of business, undermining both revenue visibility and earnings stability.
  
• Rapid advances in lightweight materials such as aluminum and composites, paired with the slow pace at which Ramkrishna Forgings has developed technologically advanced or high value-added forged products, threaten to erode market share and compress EBITDA margins as commoditization worsens.
  
• Elevated debt levels, ongoing large-scale capex, and limited pricing power in a global environment of steel and forging overcapacity may combine to increase interest costs, depress free cash flows, and constrain the company from investing in necessary modernization-ultimately reducing net profits and shareholder returns.

Ramkrishna Forgings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Ramkrishna Forgings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Ramkrishna Forgings's revenue will grow by 2.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.1% today to 11.1% in 3 years time.
• The bearish analysts expect earnings to reach ₹4.9 billion (and earnings per share of ₹27.37) by about August 2028, up from ₹2.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 29.8x on those 2028 earnings, down from 36.5x today. This future PE is greater than the current PE for the IN Metals and Mining industry at 22.8x.
• Analysts expect the number of shares outstanding to grow by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.12%, as per the Simply Wall St company report.

Ramkrishna Forgings Future Earnings Per Share Growth

Risks

• Significant new capacity additions in both forgings and castings, along with high utilization rates (casting nearing 90% and about to double), are set to meaningfully boost top-line revenue and drive operating leverage, which can support higher earnings and EBITDA margins over the long term.
  
• Ramp-up of value-added and diversified product segments such as aluminum forging for EVs and fully assembled undercarriages for railways, supported by large confirmed orders and approval for highly scalable addressable markets like Indian Railways, provide strong multi-year growth opportunities and margin stability.
  
• Despite recent margin pressures, management has guided for a return to historical EBITDA margins of 21-22% on a standalone basis within the next 4-5 quarters, driven by stabilization of raw material prices, rebalancing of export/domestic mix, and an ongoing cost-optimization program, which is expected to improve operating profitability.
  
• Geographic diversification with expanding exports to Europe (expected to match North America soon), the ramp-up of Mexico operations, and new US and European OEM client wins for both PV and CV segments, reduce concentration risk and create resilient, diversified revenue streams, supporting earnings sustainability.
  
• Strong order inflow, including ₹660 crores of new orders in Q1 (with long program lives and direct bookings from American and European OEMs), as well as a healthy pipeline in railways and passenger vehicles, underpins robust future revenue visibility, reinforcing long-term earnings growth potential.

Valuation

• The assumed bearish price target for Ramkrishna Forgings is ₹540.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Ramkrishna Forgings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1111.0, and the most bearish reporting a price target of just ₹540.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹44.3 billion, earnings will come to ₹4.9 billion, and it would be trading on a PE ratio of 29.8x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹585.0, the bearish analyst price target of ₹540.0 is 8.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.