Why is MM Forgings falling/rising?

Recent Price Movement and Market Context

MM Forgings has demonstrated a strong short-term rally, outperforming its sector by 3.74% on the day. The stock opened with a gap up of 2.2% and reached an intraday high of ₹370.05, marking a significant 12.94% surge from its previous close. Over the past week and month, the stock has delivered returns of +5.22% and +10.68% respectively, substantially outpacing the Sensex’s modest gains of +0.65% and +1.43% during the same periods. This recent momentum is further supported by a two-day consecutive gain, accumulating a 3.3% return.

However, these short-term gains contrast sharply with the stock’s longer-term performance. Year-to-date, MM Forgings has declined by 28.11%, while the Sensex has risen by 8.96%. Over one and three years, the stock has fallen by 32.05% and 21.37% respectively, underperforming the broader market indices and the BSE500 consistently. Despite a five-year gain of 70.18%, this still lags behind the Sensex’s 90.82% growth over the same period.

Financial Performance and Valuation Insights

MM Forgings’ operating profit has exhibited healthy long-term growth, expanding at an annual rate of 41.98%. The company’s return on capital employed (ROCE) stands at 9.3%, which, while modest, contributes to an attractive valuation metric with an enterprise value to capital employed ratio of 1.4. This valuation suggests the stock is trading at a discount relative to its peers’ historical averages, potentially enticing value-focused investors.

Nevertheless, the company’s recent quarterly results paint a more challenging picture. MM Forgings has reported negative results for six consecutive quarters, with profit before tax excluding other income falling by 33.2% to ₹21.11 crores compared to the previous four-quarter average. Net profit after tax has declined even more sharply, down 40.3% to ₹16.57 crores. The half-year ROCE remains at a low 9.33%, indicating subdued capital efficiency.

Investor participation appears to be waning, as delivery volumes on 01 Dec dropped by 51.75% against the five-day average, despite the stock’s price appreciation. This suggests that while the price is rising, the underlying investor conviction may not be robust, with more volume traded near the lower end of the day’s price range.

Market Position and Shareholding

The majority ownership of MM Forgings rests with promoters, which often provides stability but also concentrates control. The stock’s liquidity is sufficient for moderate trade sizes, with a traded value around ₹0.02 crores based on 2% of the five-day average, ensuring reasonable ease of entry and exit for investors.

Balancing Short-Term Gains Against Long-Term Challenges

The recent rise in MM Forgings’ share price reflects a short-term rebound that outpaces both its sector and broader market indices. This could be attributed to bargain hunting given the stock’s attractive valuation metrics and healthy operating profit growth over the long term. However, the persistent decline in quarterly profits and consistent underperformance relative to benchmarks over the past three years highlight significant headwinds.

Investors should weigh the stock’s current momentum against its fundamental challenges, including falling profitability and subdued capital returns. The stock’s position below its 200-day moving average suggests that while it has gained ground recently, it remains in a longer-term downtrend. The falling delivery volumes also caution that the recent price gains may not be supported by strong investor conviction.

In summary, MM Forgings’ price rise on 02-Dec is driven by short-term market dynamics and valuation appeal, but the company’s ongoing financial struggles and historical underperformance temper enthusiasm. Investors seeking exposure to this stock should carefully consider these factors in the context of their investment horizon and risk tolerance.

Get 2 full years of MojoOne Premium for only Rs. 12,999. Subscribe for 1 year and we'll add another year FREE. Offer valid for a limited time. Start Saving Now →