MM Forgings' Profit Plunges 30% in Q1 FY26: Is a Turnaround on the Horizon?

MM Forgings Limited (MMFL), a prominent player in the automotive forging sector, recently unveiled its Q1 FY26 results, painting a picture of a company navigating significant macroeconomic and industry-specific headwinds. The quarter, spanning April to June 2025, reflects the broader cautious sentiment prevalent in both global and Indian automotive markets, as highlighted by the company’s management.

Did MM Forgings manage to forge ahead, or did the tough market conditions temper its performance? Let’s delve into the numbers and management commentary to understand the true impact and, more importantly, what it means for the company’s future trajectory.

Navigating the Macro Headwinds: A Challenging Backdrop

The Indian economy, while generally robust with GDP growth projections around 6.5-7% for FY26, has seen its equity markets experiencing a July correction after a strong Q1 rally. Sectors like IT and FMCG have underperformed, while cyclical sectors benefiting from domestic growth (banks, capital goods, infra) have outperformed. The automotive sector, particularly export-linked segments, has faced “softer demand” and “moderated export momentum” due to global uncertainty, geopolitical dynamics, and potential tariff escalations.

MM Forgings’ Q1 FY26 performance is very much a reflection of these realities. The Chairman, Shri. Vidyashankar Krishnan, candidly described a “fragile global economic outlook” and a “subdued Indian automotive industry.” This context is crucial to understanding the reported figures.

Sales Performance: A Dip in Demand

The headline numbers reveal a noticeable moderation in MMFL’s top-line performance.

• Standalone Revenue from Operations: ₹348.81 crore in Q1 FY26, down from ₹368.52 crore in Q1 FY25 (a 5.3% year-on-year (YoY) decline).
• Consolidated Revenue from Operations: ₹361.65 crore, compared to ₹382.19 crore in Q1 FY25 (a 5.4% YoY decline).

The decline in revenue was driven by a combination of factors. While production volume increased marginally quarter-on-quarter (from 17,300 tons in Q4 FY25 to 18,000 tons in Q1 FY26), sales volume notably decreased from almost 20,000 tons in Q4 FY25 to 17,780 tons in Q1 FY26. This indicates a weakening demand environment, leading to a build-up in inventory.

Furthermore, sales per ton declined to ₹192,000 from ₹203,000-₹204,000 in the previous quarter. Management attributed this largely to a product mix change, indicating a shift towards lower-value or lower-margin products within their sales. This is a critical point, as it directly impacts profitability.

Segmental and Geographical Mix (Q1 FY26): MMFL’s sales continue to be heavily weighted towards the Commercial Vehicle (CV) segment, which accounted for approximately 80% of sales. Agri and Off-Highway, along with Passenger Vehicles, made up the remaining share. Geographically, exports contributed a significant 40.2% of total sales, with North America being a key market (13% of total exports).

The company’s reliance on the CV segment makes it susceptible to its cyclical nature. The management indicated that post-capacity ramp-up, they expect CV’s share to slightly decline to around 75%, with Passenger Car increasing to about 18%. This subtle shift suggests an effort towards diversification, though the core remains CV.

Operational Efficiency: Running Below Full Throttle

With sales volumes declining and production slightly up, capacity utilization stood at around 60% for both forging and machining. This low utilization is a concern, as it means fixed costs are being spread over a smaller revenue base, impacting margins. The company’s large forging capacity (120,000 tons) and machining capacity (5.5 lakh parts/month against current 3.5-3.75 lakh) suggest significant headroom if demand picks up.

The decline in sales per ton due to product mix is a clear operational challenge, directly impacting the average realization per unit.

Earnings & Profitability: The Margin Squeeze Intensifies

This is where the impact of lower sales, unfavorable product mix, and rising costs truly shows.

The decline in Profit After Tax (PAT) is particularly sharp, plunging over 30% YoY for both standalone and consolidated results. This significant contraction points to a severe margin squeeze.

Key drivers for the PAT decline were:

1. Lower Sales Volume: Directly impacting the top line.
2. Product Mix Change: Shift to lower-margin products, as indicated by the drop in sales per ton.
3. Increased Depreciation: Up by ₹3 crore YoY, reflecting investments in new capacities, which are yet to fully contribute to revenue.
4. Higher Finance Costs: Up by ₹4 crore YoY, indicating increased borrowings.
5. Rising Power Costs: Due to a 5% annual hike by the Tamil Nadu Government and the impact of lower sales volume making fixed power costs appear higher on a reduced base.

The EBITDA margin (excluding other income) for Q1 FY26 stood at 18%, a noticeable drop from 19.4% in the previous quarter (Q4 FY25). This is not a healthy sign.

MMFL, in this context, appears to be acting like a cyclical company currently facing headwinds, rather than a consistent fast grower. Its profitability is directly tied to the health of the automotive, particularly commercial vehicle, market. The management’s focus on “spending, cost control, and sales growth” signifies an immediate prioritization of protecting the bottom line in a tough environment. They are actively pursuing a “wide range of cost reduction efforts” across raw materials, power, manpower, and buying strategies, which are crucial to reclaiming lost margins.

Capital Allocation & Debt: Toning Down Ambition (Temporarily)

The company’s capital expenditure (CapEx) and financing plans reveal a pragmatic adjustment to the current cash flow realities.

• Q1 FY26 CapEx: Approximately ₹50-55 crore was spent.
• Revised FY26 CapEx Plan: Significantly scaled back to ₹150-200 crore from an initially projected ₹300 crore. The primary reason? “Lack of cash generation” and a clear intent “not to increase borrowings significantly.” This is a cautious but necessary move.

While this means a slower ramp-up of new capacities, it protects the balance sheet. The new 16,000-ton press and other capital work in progress are now expected to be commissioned in Q4 FY26 and go into production from FY27 onwards. This means revenue contribution from these new assets will be delayed, impacting growth prospects in the immediate term.

Financing-wise, term loans increased by about ₹30 crore in Q1 FY26. However, the management stated that they expect to end FY26 with no significant increase in borrowings, projecting net term loans around ₹550 crore. They called this level “peak debt” unless “significant and extremely lucrative” opportunities arise. This indicates a clear shift towards debt reduction and balance sheet de-leveraging in the coming quarters, which is positive for financial stability but might constrain aggressive growth.

Future Outlook: Awaiting the Turnaround

Despite the challenging quarter, management maintains a forward-looking perspective, albeit a cautious one for the near term.

• Immediate Outlook (Next 6-9 months): Expects performance to be “around the previous year’s level (plus/minus a small number).” This means no significant growth in the short term, implying a “consolidation phase.”
• Medium-Term Outlook (Next 12-18 months): MMFL expresses confidence in returning to a “growth trajectory in sales and profitability.” This rebound is expected to be driven by:
  • Leveraging investments in new machining capacities (axle beam, crankshaft, con rods).
  • Proactively utilizing the existing installed base.
  • Contribution from new products developed over the last few years and associated customer projects.
  • The new powertrain subsidiary, despite delays due to magnet sourcing issues from China, is now expected to commence production from Q4 FY26, targeting the 3-wheeler market initially. This new venture is a key growth driver and is expected to start generating sales and move towards breakeven.
  • The crankshaft business, particularly for the agri sector (CAFOMA), continues to show strong performance and significant scope for growth.

The impact of US tariffs (25%) on exports remains a watchpoint. While customers currently bear the duty, management acknowledges this isn’t sustainable long-term. This could prompt customers to seek local alternatives in America over 12-36 months, posing a potential threat to MMFL’s export volumes and margins. However, MMFL believes it can remain competitive in other geographies.

The domestic market, while a “mixed bag,” is expected to face “intense scrutiny” and increased competition, pushing MMFL to continue its cost efficiency drive.

Key Takeaways for Investors 💡

MM Forgings Limited had a tough Q1 FY26, clearly impacted by the prevailing headwinds in the global and Indian automotive sectors. The decline in revenue was coupled with a significant drop in profitability, driven by lower sales volumes, an unfavorable product mix, and rising costs (depreciation, finance, power).

1. Short-Term Pain for Long-Term Gain? The company is currently in a consolidation phase, prioritizing cost control and balance sheet strength over aggressive expansion. The revised CapEx plan and “peak debt” stance reflect this pragmatic approach.
2. Margin Recovery is Key: The focus on “wide range of cost reduction efforts” is crucial. Investors should monitor EBITDA margins closely in coming quarters for signs of improvement.
3. New Growth Drivers are on the Horizon (but Delayed): The new capacities and the powertrain subsidiary are expected to kick in from Q4 FY26/FY27. This provides a clear timeline for potential revenue acceleration, but patience is required.
4. Cyclical Nature: MMFL’s performance is closely tied to the automotive cycle. While the current cycle is challenging, a rebound in the broader economy and automotive demand could significantly benefit the company.
5. Watch Exports Closely: The US tariff situation presents both a short-term resilience (customers bearing cost) and a long-term risk (potential loss of market share). Diversification into European markets and domestic growth will be critical.

For investors, this quarter reinforces the need for stock-picking criticality, focusing on valuation comfort (especially during a downturn) and earnings visibility (which is muted for the next few quarters but promising in the medium term). MMFL is demonstrating resilience through disciplined financial management, setting the stage for a potential rebound when market conditions stabilize and its new capacities begin to contribute meaningfully. The next 6-9 months will be about maintaining stability, while the real growth story for MMFL is poised to unfold in the 12-18 month horizon.

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