MM Forgings Ltd. Upgraded to Hold as Technicals Improve Amid Mixed Financials

Quality Assessment: Persistent Financial Struggles Amid Long-Term Growth

MM Forgings has faced significant headwinds in recent quarters, with the company reporting negative results for six consecutive quarters. The latest quarterly figures for Q2 FY25-26 reveal a sharp decline in profitability metrics: Profit Before Tax (excluding other income) fell by 33.2% to ₹21.11 crores compared to the previous four-quarter average, while Profit After Tax dropped by 40.3% to ₹16.57 crores. Return on Capital Employed (ROCE) for the half-year period stands at a modest 9.33%, marking the lowest level in recent years.

Despite these setbacks, MM Forgings has demonstrated healthy long-term operational growth, with operating profit expanding at an annualised rate of 41.98%. This suggests underlying business strength and potential for recovery, even as short-term financial performance remains under pressure. The company’s majority ownership by promoters provides stability, but consistent underperformance relative to benchmarks such as the BSE500 index over the past three years remains a concern.

Valuation: Attractive Metrics Amid Discounted Pricing

From a valuation perspective, MM Forgings presents an appealing case. The stock trades at ₹434.95, up 10.20% on the day, with a 52-week high of ₹474.85 and a low of ₹276.05. Its Enterprise Value to Capital Employed ratio stands at a favourable 1.6, indicating that the market values the company at a discount relative to the capital it employs. This valuation is notably lower than the average historical valuations of its peers in the Castings/Forgings industry, signalling potential upside for investors willing to look beyond recent earnings volatility.

However, the stock’s one-year return of -3.52% contrasts with the Sensex’s 7.85% gain over the same period, reflecting the market’s cautious stance. Over longer horizons, MM Forgings has delivered mixed results: a five-year return of 104.59% outpaces the Sensex’s 76.39%, but the three-year return of 4.81% lags significantly behind the benchmark’s 41.57%. This uneven performance underscores the importance of valuation in the current rating upgrade.

Financial Trend: Mixed Signals with Negative Recent Earnings but Long-Term Growth

The financial trend for MM Forgings remains challenging. The company’s profits have declined by 27.8% over the past year, and quarterly earnings continue to deteriorate. This has contributed to the stock’s underperformance against the BSE500 and Sensex indices in recent years. Nevertheless, the long-term operating profit growth rate of 41.98% annually indicates that the company’s core business remains robust, suggesting that the recent downturn may be cyclical rather than structural.

Investors should note that while the short-term financial metrics are weak, the company’s ability to generate operating profit growth and maintain a ROCE of 9.3% provides a foundation for potential recovery. The downgrade in financial trend scores has been partially offset by these positive long-term indicators, supporting the Hold rating rather than a Sell.

Technical Analysis: Shift to Mildly Bullish Momentum Spurs Upgrade

The most significant catalyst for the rating upgrade is the improvement in technical indicators. The technical trend has shifted from sideways to mildly bullish, signalling a potential change in market sentiment. Key technical metrics include:

• MACD: Weekly readings are bullish, with monthly indicators mildly bullish, suggesting upward momentum in the near term.


• RSI: Weekly RSI remains bearish, indicating some short-term caution, while monthly RSI shows no clear signal.


• Bollinger Bands: Both weekly and monthly bands are bullish, reflecting increased price volatility with an upward bias.


• Moving Averages: Daily averages are mildly bearish, but weekly and monthly trends show mild bullishness, indicating a potential trend reversal.


• KST (Know Sure Thing): Weekly readings are bullish, though monthly KST remains bearish, highlighting mixed momentum across timeframes.


• Dow Theory: Both weekly and monthly indicators are mildly bullish, reinforcing the possibility of a sustained upward trend.


• On-Balance Volume (OBV): Weekly OBV shows no clear trend, but monthly OBV is bullish, suggesting accumulation by investors over the longer term.

This combination of technical signals has been pivotal in upgrading MM Forgings’ rating from Sell to Hold. The stock’s recent price surge to ₹434.95 from a previous close of ₹394.70, representing a 10.20% gain in a single day, further supports this positive technical outlook.

Stock Performance Relative to Sensex

Examining MM Forgings’ returns relative to the Sensex provides additional context. Over the past week and month, the stock has outperformed the benchmark significantly, with returns of 22.16% and 23.69% respectively, compared to Sensex returns of 0.88% and -0.32%. Year-to-date, the stock has gained 20.02%, well ahead of the Sensex’s 0.26% rise. However, over longer periods, the stock has lagged, with a one-year return of -3.52% versus the Sensex’s 7.85%, and a three-year return of 4.81% against the Sensex’s 41.57%.

These figures illustrate a stock that is currently experiencing a technical rebound but remains challenged by longer-term financial and market dynamics.

Conclusion: A Cautious Hold Backed by Technical Recovery and Valuation Appeal

MM Forgings Ltd.’s upgrade from Sell to Hold reflects a balanced view of its current situation. The company’s financial performance remains under pressure, with declining profits and consistent quarterly losses. However, the long-term operating profit growth and attractive valuation metrics provide a foundation for potential recovery. Most notably, the shift in technical indicators from sideways to mildly bullish has been the key driver behind the rating change, signalling improved market sentiment and possible price appreciation in the near term.

Investors should weigh the risks posed by recent financial underperformance against the opportunities presented by valuation discounts and technical momentum. The Hold rating suggests that while MM Forgings is not yet a strong buy, it is no longer a sell, and may warrant closer monitoring for signs of sustained recovery.

Given the company’s mixed performance relative to the Sensex and its peers, a selective approach is advisable, with attention to upcoming quarterly results and broader sector trends in Auto Components & Equipments.

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