Force Motors Ltd (FML), a leading manufacturer of passenger and commercial vehicles, has witnessed a sharp appreciation in its stock price over the past month on the back of expectations of improved financials, new product launches and plans for a new facility in Chennai for assembly of BMW engines. The stock has appreciated over 90% since our viewpoint report dated August 14, 2014, highlighting the aforementioned re-rating triggers & points.
Though the growth outlook remains positive on the back of the incremental revenues from its Chennai plant for BMW, technical tie-ups and the proposed introduction of new LCV platform, but we believe that the stock has run ahead of its fundamentals. It trades at 18.1x FY2016 EPS estimates and EV/EBITDA of close to 8.9x (FY2016 estimated EBITDA), which is at a premium to quality companies like Maruti Suzuki and seems to be unjustified. Consequently, we advise investors to book profits.
Risk to our call: A higher than expected ramp-up in the BMW business and better than expected margins (though we had assumed margins that are higher than the historical trend) could result in an upside to our estimates.
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