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Tuesday, December 15, 2009

Shree Ganesh Forgings Ltd:Buy/sell/hold,growth prospects and recomendation,news and results,target price and analysis

Scripscan:Shree Ganesh Forgings Ltd

Story:SGF is in the business of making steel forgings catering primarily to the requirements of auto/auto ancillary and petro-chemical sector. In the past few years, the capacity utilisation level for the company has been low owing to the inability to secure large-sized orders. The company has attributed this to bottlenecks in production facilities. The nature of the industry also poses a threat to a small player like SGF. Forgings is a highly fragmented industry with few large players in the organised sector and a number of small ones in the unorganised space. The capacity utilisation has also been low, primarily on account of sluggish demand from the user industries.SGF derives a major chunk of its revenues from exports to the US, Canada and Europe.Although there has been growing demand from these markets, the margins may continue to remain thin on account of small size of orders and relatively less value-added nature of products. Moreover, focus on exports carries with it the risk of exchange rate fluctuations.India is emerging as an outsourcing hub for global auto majors and OEMs for sourcing auto components. But the fact that most of these big companies are moving towards vendor rationalisation (reducing the number of suppliers by sourcing from few large ones) to strengthen their supply chain would act against the small players such as SGF. While the organised sector continues to remain a key threat, competition among small players which is likely to intensify and put pressure on margins on account of price declines.Unless the company is able to procure large-sized orders or higher margins per order, the incremental gains may not justify incremental costs. The performance of most companies in the peer group has been erratic over a full business cycle, which is reflected in their capacity utilisation and financial performance.Given the fragmented nature of the industry, thin margins and stiff competition from like-sized peers, SGFL may not provide an attractive investment oppurtunity. In the light of these factors, I suggest a sell on Shree Ganesh Forgings Ltd.

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