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Bharat Forge

Bharat Forge

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Published by Abel Jojo
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Categories:Types, Business/Law
Published by: Abel Jojo on Aug 19, 2010
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03/05/2012

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   E  q  u   i   t  y   |   I  n   d   i  a   |   A  u   t  o  s   &   C  o  m  p  o  n  e  n   t  s
Important disclosures can be found in the Disclosures Appendix.
Bharat Forge
Profit traction improves substantially
June quarter results surprised with impressive sales growth and marginexpansion by the standalone and consolidated entities. With US CV cyclerecovery and non-auto expansion, Bharat Forge looks well placed to us to ridethe uptrend given restructured costs in its European operations. Buy, Rs401 TP.
Key forecasts
FY09A
 
FY10A
 
FY11F
 
FY12F
 
FY13F
 
Revenue (Rsm) 47,751
 
33,276
 
44,142
 
52,705
 
64,980
 
EBITDA (Rsm) 5,574
 
3,385
 
7,795
 
9,540
%
10,917
 
Reported net profit (Rsm) 582.7
 
-634.2
 
2,787
%
3,642
%
4,281
 
Normalised net profit (Rsm)¹ 1,921
 
153.1
 
2,787
 
3,642
 
4,281
 
Normalised EPS (Rs) 8.03
 
0.64
 
11.7
 
15.2
%
17.9
 
Dividend per share (Rs) 1
 
1.05
 
2
 
3
 
3
 
Dividend yield (%) 0.29
 
0.3
 
0.58
 
0.87
 
0.87
 
Normalised PE (x) 43.1
 
540.8
 
29.7
 
22.7
 
19.3
 
EV/EBITDA (x) 17.5
 
28.7
 
11.4
 
9.04
 
8.47
 
Price/book value (x) 5.04
 
5.66
 
3.42
 
3
 
2.59
 
ROIC (%) 6.36
 
1.73
 
9.8
 
11.9
 
13.7
 
Use of
%&
indicates that the line item has changed by at least 5%.1. Post-goodwill amortisation and pre-exceptional itemsAccounting standard: Local GAAPSource: Company data, RBS forecastsyear to Mar, fully diluted
 
Quarterly profit traction improves sharply
The Bharat Forge consolidated entity recorded impressive 15.6% qoq growth in normalisedPAT to Rs606m in the June quarter, despite seasonal weakness. The 24% qoq jump inEBITDA from the international subsidiary post cost restructuring helped, supported by a 13%rise in EBITDA from the standalone entity.
Raising our net profit forecasts due to global CV, premium car makers’ buoyancy
Global truck and premium car makers such as Daimler, MAN and BMW recorded impressiveprofit performance in the June quarter and guided for strong new order intake, which shouldbenefit Bharat Forge in improved export tonnage from the highly profitable Indian plant. Webuild this improved export tonnage into our forecasts, along with recent equity fund-raisingbenefits, and upgrade our consolidated PAT by 6% for FY11F and 15% for FY12F. We feelthere is upside risk to our forecasts based on a planned ramp-up of the non-auto forgingbusiness from the December 2010 quarter.
Raising EPS and target price; Buy
The strong outlook provided by key clients in developed markets, especially in commercialvehicles (CVs) and premium cars, augurs well for Bharat Forge, which should be able toramp up capacity utilisation from 55% currently and extend the operating leverage benefitsoon. By successfully overcoming a substantial repayment of foreign currency convertiblebonds (FCCBs) and subsequent fund raising to trim its net debt:equity to 0.8, the companylooks well positioned to handle the uptrend. In non-auto forging, management guides for asharp improvement in capacity utilisation from 30% now to 50% by year-end based oncustomer orders in hand, which should be highly accretive to margins. We reiterate Buy witha revised three-stage DCF-based TP of Rs401 (from Rs385) as we roll forward our forecaststo FY13. At our TP, the stock would trade at 26.4x FY12F consolidated EPS, in line with itspast trend for the forward PE band, considering our EPS CAGR of 24.6% for FY11-13F.
17 August 2010Researched by
RBS Equities (India) LimitedInstitutional Team
Mafatlal Chambers – C Wing, GroundFloor, N.M. Joshi Marg, Lower Parel (E),Mumbai 400 013, India. Tel : +91 0226754 8411 Fax : +91 022 6754 8420
www.rbs.in/broking
Price performance
(1M)(3M) (12M)
Price (Rs) 329.5266.5 226.3Absolute (%) 5.129.9 53.0Rel market (%) 4.522.3 30.6Rel sector (%) 2.928.2 62.8
 
0100200300400Aug 07Aug 08Aug 09BFRG.BOSensex
 
Market capitalisation
Rs80.56bn (US$1.72bn)
Average (12M) daily turnover
Rs241.22m (US$5.21m)
Sector: BBG AP Eng & MachRIC: BFRG.BO, BHFC INPriced Rs346.20 at close 16 Aug 2010.Source: Bloomberg
Buy
Target price
Rs401.00 (from Rs385.00)
Price
Rs346.20
Short term (0-60 days)
n/a
Market view
Underweight
 
Bharat Forge | Investment View | 17 August 2010
 
2
 
Capacity ramp-up benefit yet to flow through
On the back of impressive volume upgrades in user industries such as trucks and cars,Bharat Forge looks best positioned to extend operating leverage from its current 55%capacity utilisation. We raise our EPS and TP for its restructured cost and balance sheet.User industry appears to be on an uptrend
Our European auto analyst, Jose Asumendi, expects world truck demand to remain robustthroughout CY10 and grow about 8% during CY11-13F. Our European team has raised its truckdemand forecasts by 10% on average for CVs for CY10-12, with Central/Eastern Europe andNorth and South America the major growth drivers. The team has reduced its Western Europeansales volume forecasts by 6% for CY11, but notes that on a yoy basis, Western Europe isexpected to register 26% and 21% growth for CY11 and CY12, respectively. We also expect worldcar sales to register 6-9% yearly growth during CY10-13. While Western European is forecast toregister a sales volume decline for the next three to four calendar years, the impact is expected tobe more than offset by growth in other regions. Therefore, our European team has raised its carsales forecasts in the range of 5-7% for CY10-12.
Table 1 : Volume estimate revision for cars and trucks across the global regions
CY10Fyoy ch (%)vspreviousestCY11Fyoy Ch (%)vspreviousestCY12Fyoy ch (%)vspreviousestCY13Fyoy ch (%)Trucks heavier than six tons
Africa 13,047 22.7% -6.5%15,86321.6%-3.2%18,61117.3% -1.6% 20,65211.0%Asia-Pacific 1,511,720 29.7% 24.2%1,290,235-14.7%-0.6%1,427,26610.6% 4.0% 1,578,21510.6%Central/East Europe 101,422 33.9% 13.1%167,61065.3%43.8%181,5208.3% 37.9% 225,31124.1%North America 272,254 9.6% -5.5%391,99244.0%13.3%476,89421.7% 25.5% 519,4948.9%South America 153,996 33.2% 23.7%138,871-9.8%7.4%153,20110.3% 16.2% 167,5129.3%Western Europe 193,593 -1.2% -6.2%243,77825.9%-6.0%294,75920.9% 8.2% 332,94013.0%
Total 2,246,032 23.9% 15.8%2,248,3490.1%3.8%2,552,25113.5% 10.6% 2,844,12411.4%
 
Cars and light vehicles
Africa 462,971 22.0% 10.9%517,27911.7%8.3%593,86514.8% 6.2% 668,10412.5%Asia -Pacific 27,477,974 14.9% 12.1%28,846,1805.0%12.4%30,456,8155.6% 12.0% 31,694,5834.1%Central/East Europe 3,462,795 5.0% 4.6%3,803,3249.8%-1.4%4,409,54215.9% -2.8% 5,188,09117.7%North America 14,157,617 12.2% 1.6%16,319,23515.3%0.5%17,884,2639.6% 0.7% 18,751,2234.8%South America 4,701,700 12.5% 3.8%5,318,28713.1%8.0%5,812,4929.3% 10.7% 6,183,5926.4%Western Europe 14,237,861 -4.9% 6.2%14,010,968-1.6%0.2%14,911,1856.4% -2.6% 15,863,7926.4%
Total 64,500,918 8.7% 7.3%68,815,2736.7%5.6%74,068,1627.6% 4.9% 78,349,3855.8%
Source: RBS forecasts
 
Indian automobile demand remained strong during seasonally weaker 1QFY11
The strong demand pull across the auto sector, particularly in two-wheelers in 1QFY11, surprisedus. While the two-wheeler segment registered 8% qoq growth, a qoq decline in other segmentswas also less than expected, leading us to increase our volume forecasts for most of thecompanies in our coverage universe. The M&HCV segment registered impressive 81% yoygrowth, followed by three-wheelers (46%) and LCVs (38%). The normal monsoon and festiveseasons ahead bode well for vehicle demand in the industry for the rest of the year. The M&HCVupcycle, which our autos team expects to continue for next two to three years, would also favourBharat Forge’s business, in our view.
 
Bharat Forge | Investment View | 17 August 2010
 
3Table 2 : Indian auto production volume growth profile
Segmental volume growth 1QFY11% qoq% yoy
Passenger vehicles 652,020-5%29%M&HCV 76,637-19%81%LCV 98,412-13%38%3-wheelers 172,801-1%46%2-wheelers 3,118,1478%32%Grand total 4,118,0174%33%
Source: Company data
Chart 1 : Monthly sales volume trend for CVs and cars
100002500040000550007000085000100000115000130000145000160000175000
      A    p    r   -     0     6      J    u    n   -     0     6      A    u    g   -     0     6      O    c     t   -     0     6      D    e    c   -     0     6      F    e      b   -     0     7      A    p    r   -     0     7      J    u    n   -     0     7      A    u    g   -     0     7      O    c     t   -     0     7      D    e    c   -     0     7      F    e      b   -     0     8      A    p    r   -     0     8      J    u    n   -     0     8      A    u    g   -     0     8      O    c     t   -     0     8      D    e    c   -     0     8      F    e      b   -     0     9      A    p    r   -     0     9      J    u    n   -     0     9      A    u    g   -     0     9      O    c     t   -     0     9      D    e    c   -     0     9      F    e      b   -     1     0      A    p    r   -     1     0      J    u    n    e   -     1     0
CVCarsUV and MPVsSource: Company data, RBS forecasts
June quarter results impressive
For the June 2010 quarter, Bharat Forge reported standalone PAT of Rs594m (down 3% qoq) onnet sales of Rs6.3bn (up 76% yoy and 12% qoq) and EBITDA margins of 25.2% (up 19bp qoqand 120bp vs our forecast of 24%). Excluding extraordinary items, Bharat Forge’s normalisedPAT increased 2.8% qoq (up 302% yoy) to Rs637m. Higher material cost pressure (up 195bpqoq) and higher personnel costs (up 108bp qoq) were more than offset by lower manufacturing(down 190bp qoq) and lower other costs (down 15bp qoq), resulting in a marginal qoq EBITDAmargin increase. On an absolute basis, EBITDA of Rs1.59bn was 36% above our forecast due tohigher-than-expected sales and margins. Normalised standalone EPS for the quarter was Rs2.7.On a consolidated basis (excluding the China joint venture), PBT grew 24% qoq to Rs906m (vs aloss of Rs203m in fiscal 1Q10) on net sales of Rs10.1bn (up 66.3% yoy and 9.6% qoq). Fiscal1Q11 consolidated EBITDA was Rs1.8bn, with margins of 18.2% vs just 9.6% in 1Q10 and 17.5%last quarter, indicating a qoq margin improvement at the subsidiaries level. Consolidatednormalised PAT was Rs606m, up 15.6% qoq (vs a loss of Rs214m in fiscal 1Q10), lower thanstandalone normalised PAT due to a higher tax rate at the consolidated level. Reportedconsolidated net profit was Rs621m. Consolidated normalised EPS was Rs2.5.

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