Security Analysis of Bharat Forge Limited

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Security Analysis of Bharat Forge Limited
D

DECLARATION

I (Ranjan Shankar Shetty .B.K) hereby declare that the work presented in this Project entitled “Security Analysis of Bharat Forge Limited” submitted to Dr. Sridevi, Ph.D. (Area Head- Finance) at IFIM Business School, Bangalore Submitted for Security Analysis and Portfolio Management (SAPM) Paper in Term –V, is an authentic record of my original work.

Place: Bangalore Date: 04th October 2010 Ranjan Shankar Shetty .B.K

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Security Analysis of Bharat Forge Limited

Disclaimer

I hereby certify that the views expressed in this document reflect my personal views. I also certify that no part of my respective comments was, is, or will be, directly or indirectly, related to the views expressed in this document. I do not own any amount of stock in the company recommended/covered in this report.

Ranjan Shankar Shetty .B.K

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Security Analysis of Bharat Forge Limited

EXECUTIVE SUMMARY
The Indian Forging and Casting industry is one of the important industries for the Success of Automobile industry and off lately in the power sector also, which have undergone metamorphosis with the advent of new business and manufacturing practices in the light of liberalization and globalization. The sector seems to be optimistic of posting strong sales in the couple of years in the view of a reasonable surge in demand. The Indian Auto component market is gearing towards international standards to meet the needs of the global automobile giants and become a global hub. A detailed analysis of Forging & Casting has been covered in respect of past growth and performance. Under this project to better understand the Industry we have used Fundamental and Technical tools to make it more authentic n meaningful. An E.I.C approach has been followed under Fundamental Analysis which covered effect of Recession, the impact of inflation, Interest Rate & GDP on Forging & Casting. The Industry Analysis has been done with the help of five forces model, BCG Matrix, SWOT analysis, industry life cycle and the industry specific index. For Company Analysis as a part of Fundamental tool we have undergone with the Peer comparative analysis of Bharat Forge Limited our leading company India’s largest Forging & Casting company. The fundamental aspect consists financial and Non-Financial analysis. In the Technical aspect we have considered Share price analysis, moving average, trend line, Resistance & support and M.A.C.D. of Bharat Forge Limited (BFL).

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Security Analysis of Bharat Forge Limited

Recommendation

HOLD
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Bharat Forge Limited

CMP-NSE (01/10/2007) Target Price (By 31 December 2010) 52 Week high/low Face Value Market Cap (mn) 6m Avg vol ('000nos) No of o/s Shares (mn) NSE Code Beta Date of Incorporation 12 months return 6 months return
st

371.15 405 375.20/231.55 2 86378.33 544 223 BHARATFORG 0.67 1961 10% 21%

Similar Stocks
Companies
Bharat Forge Electro castings Jayaswal Neco Mahindra forge

Price (Rs)
362.5 45.65 39.5 105.75

Chg (rs)
3.5 -0.15 -0.25 1.1

Vol('000)
138936 392261 290213 45135

1

Prices as on 1 of October 2010

st

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Security Analysis of Bharat Forge Limited

Contents

ANALYSIS OF FORGING INDUSTRY ................................................................................................................ 8 Fundamental Analysis ................................................................................................................................... 8 Indian Economy......................................................................................................................................... 8 Interest rate .............................................................................................................................................. 9 Inflation ................................................................................................................................................... 10 Indian Forging Industry ............................................................................................................................... 11 Current Market Overview ........................................................................................................................... 11 Future Outlook ............................................................................................................................................ 12 Industry characteristics ............................................................................................................................... 12 Indian Forging Industry – SWOT Analysis ................................................................................................... 13 Industrial Life Cycle ..................................................................................................................................... 14 Five Forces Model - Industry ....................................................................................................................... 15 BCG MATRIX ................................................................................................................................................ 16 Security Analysis ......................................................................................................................................... 18 Company Analysis ....................................................................................................................................... 18 Profile of Bharat Forge Ltd .......................................................................................................................... 19 Key Recent Developments ...................................................................................................................... 19 MANAGEMENT........................................................................................................................................ 20 SUBSIDIARY COMPANIES ........................................................................................................................ 20 JOINT VENTURES ..................................................................................................................................... 20 Business Outlook..................................................................................................................................... 22 Product Profile ........................................................................................................................................ 22 Strong Customer Profile.......................................................................................................................... 22 Bharat Forge Ltd - SWOT Analysis............................................................................................................... 23 Five Forces Model - Bharat Forge ltd .......................................................................................................... 24 Ratios .......................................................................................................................................................... 25 Review of Business .................................................................................................................................. 26

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Security Analysis of Bharat Forge Limited

Peer Comparison......................................................................................................................................... 27 Technical Analysis ....................................................................................................................................... 29 Resistance & Support Level..................................................................................................................... 32 Simple Moving Average .......................................................................................................................... 33 Trend line ................................................................................................................................................ 35 MACD ...................................................................................................................................................... 36 Conclusion ................................................................................................................................................... 37 References .................................................................................................................................................. 38

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Security Analysis of Bharat Forge Limited

ANALYSIS OF FORGING INDUSTRY
Over a period of more than two decades the Indian Forging industry has been driving its own growth through phases. With comparatively higher rate of economic growth rate index against that of great global powers, India has become a hub of domestic and exports business. The forging sector has been contributing its share to the shining economic performance of India in the recent years. To understand this industry for the purpose of investment we need to analyze it by following two approaches: 1). Fundamental Analysis (E.I.C Approach) a. Economy b. Industry c. Company 2).Technical Analysis

Fundamental Analysis
Economic analysis is the analysis of forces operating the overall economy a country. Economic analysis is a process whereby strengths and weaknesses of an economy are analyzed. Economic analysis is important in order to understand exact condition of an economy.

Indian Economy
The economy of India is the twelfth largest economy in the world by market exchange rates and the fourth largest by PPP2 basis. Industry accounts for 27.6% of the GDP and employ 17% of the total workforce. However, about one-third of the industrial labour force is engaged in simple household manufacturing only. In absolute terms, India is 16th in the world in terms of nominal factory output.

Source: IMF Apr’09, Economic Survey 2008-09 & RBI Bulletin

2

purchasing power parity

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Security Analysis of Bharat Forge Limited

Today, auto-component sector in India is one of the key sectors of the economy in terms of the employment. Directly and indirectly it employs more than 10 million people and if we add the number of people employed in the automobile and auto ancillary industry then the number goes even higher. The Indian economy expanded 7.40 percent over the last year, as measured by the yearover-year change in Gross Domestic Product (GDP YoY). Unlike the commonly used quarterly GDP growth rate, the annual GDP growth rate takes into account a full year of economic activity, thus avoiding the need to make any type of seasonal adjustment. The India Gross Domestic Product is worth 1296 billion dollars or 2.09% of the world economy, according to the World Bank. The Gross Domestic Product (GDP) in India expanded at an annual rate of 8.60 percent in the last quarter; Services are the major source of economic growth, accounting for more than half of India's output with less than one third of its labor force. The economy has posted an average growth rate of more than 7% in the decade since 1997.

Year 2010 2009 2008

Mar 8.60 5.80 8.50

Jun 6.00 7.80

Sep 8.60 7.50

Dec 6.50 6.10 8.60 6.73 7.48

Average

Interest rate
India benchmark interest rate stands at 4.50 percent. In India, interest rate decisions are taken by the Reserve Bank of India's Central Board of Directors. The official interest rate is the benchmark repurchase rate.

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Security Analysis of Bharat Forge Limited

Year 2010 2009 2008

Jan 3.25 4.05 6.00

Feb 3.25 4.00 6.00

Mar 3.34 3.55 6.00

Apr 3.61 3.39 6.00

May 3.75 3.25 6.00

Jun 3.75 3.25 6.00

Jul 4.08 3.25 6.00

Aug 3.25 6.00

Sep 3.25 6.00

Oct 3.25 6.00

Nov 3.25 6.00

Dec 3.25 5.24

Inflation
The Inflation rate in India was 9.67 on 31st July 2010; the reason for the high rate of inflation in India is due to increase in international crude prices which effect the consumer prices directly. Due to which the controller RBI (Reserve bank of India) have taken up measures to tighten the monitory policy, and Fiscal policy. A moderate amount of inflation is important for the proper growth of an economy like India because it attracts more private investment

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Security Analysis of Bharat Forge Limited

Indian Forging Industry
The Indian Forging Industry has emerged as a major contributor to the manufacturing sector of the Indian economy. The impact and changes in Indian Automobile Industry is directly proportional to the Indian Forging Industry, so Forging Industry is often referred as backbone to the Automobile Industry, while the automotive industry is the main customer for forgings the industry’s continuous efforts in upgrading technologies and diversifying product range have enabled it to expand its base of customers to foreign markets. The Indian forging industry is increasingly addressing opportunities arising out of the growing trend among global automotive OEM’s3 to outsource components from manufacturers in low-cost countries. As a result, Indian forging industry has been making significant contributions to country’s growing exports.

Current Market Overview
The Indian automobile market has seen a major revival since the slowdown of FY2009. Passenger cars and commercial vehicles together registered a growth of 29% in production and volumes are close to touching 3 million (see Table 3below). More encouraging was the growth in CV4 production. With LCV’s5 registering a growth of 41% and M&HCV’s6 growing by 30%, CV production increased by 36%. There is every indication that the CV segment has emerged from its cyclical low and moving towards an upsurge. Increased infrastructure activity is also expected to fuel further demand in the CV segment.

Many large and medium forging companies also took important initiatives in capacity expansion, modernization, cost rationalization etc. Notwithstanding this, the industry had also to contend with its share of problems. It had to bear the brunt of acute shortages and steep and frequent increases in the cost of major inputs like power and fuel, forging quality steel etc. For a major part of the year, the industry has grappled with this issue and managed to keep floating under these adverse circumstances.
3 4

Original Equipment Manufacturer Commercial Vehicle 5 Light Commercial Vehicle 6 Medium and heavy commercial vehicles

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Security Analysis of Bharat Forge Limited

Future Outlook
The size of the Indian forging industry has been estimated at `855 billion in 2008–09, growing at a compound annual growth rate (CAGR7) of about 23 per cent over the previous five years. The industry is expected to grow to `1800 billion by 2016. Among the 640 players present in the Indian market, only 160 constitute the organized sector and contribute more than 77 per cent of the country’s total production of auto components. The unorganized units generally employ open-die process at lower capital cost, while the organized players dominate the closed die segment, which is almost 65% of total Indian Forging Industry.

Industry characteristics
Capital intensive
The industry is becoming capital intensive with increasing globalization and entry of more MNC auto companies in the domestic market. The forging manufacturers need to invest aggressively in upgrading technology to meet their strict product norms.

Fragmented nature
The Indian forgings industry is characterized by fragmented production capacities; the organized sector accounts for a 55% share with 10 large units dominating the industry.

Raw material intensive
Raw material costs approximate 60% of the total cost and the major raw materials are carbon, alloy, stainless steel, aluminum, titanium, brass, copper and high temperature alloys, which contain cobalt, nickel or molybdenum.

Technology

7

CAGR – Compound annual growth rate

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Security Analysis of Bharat Forge Limited

The Indian industry lacks adequate R&D8, which has necessitated the need for foreign collaboration. The techniques comprise the mechanical drop hammer, sophisticated hydraulic and pneumatic processes etc.

Indian Forging Industry – SWOT Analysis
A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. SWOT analysis of the Indian automobile sector gives the following points:

1. 2. 3. 4. 5. 6.

7.

Strengths Globally cost competitive, Access to technology. Strict quality Controls. Major auto manufacturing players have setup facilities in India, Average Income of an Indian is Increasing, Aggressive YOY9 growth of automobile industry, which acts as a catalyst to the Forging industry – Large Domestic Market Strong Engineering Skill for Labor

1. 2. 3. 4.

5. 6. 1. 2.

Opportunities 1. Serves as sourcing hub for global automotive majors. 2. Significant export opportunities may be realized through diversification of export basket, 3. Implementation of VAT10 will help to the cascading impact of prices. 4. Huge business opportunity in automotive as well as non-automotive applications in India as well as international markets

3. 4.

Weakness Low level of research and development capability, Exposed to critical downturn in the automotive industry, Most Forging companies are dependent on global majors for Technologies, Heavy dependence on US and European markets having its own business cycle and technological & regulatory requirements Low Labor Productivity Infrastructure Bottlenecks Threats Presence of a large counterfeit components market possesses a significant threat. Pressure on prices from Original Equipment Manufacturing (OEM’s11) continues, Imports pose price based competition in the replacement market, Competition from low cost component manufacturing countries such as Thailand and China

8 9

R&D – Research and Development YOY - Year on Year 10 VAT - Value Added Tax 11 OEM - Original Equipment Manufacturer

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Security Analysis of Bharat Forge Limited

Industrial Life Cycle
The industrial life cycle is a term used for classifying industry vitality over time. Industry life cycle classification generally groups industries into one of four stages: Introduction, growth, maturity and decline. In the Introduction stage, the product has not been widely accepted or adopted. Business strategies are developing, and there is high risk of failure. However, successful companies can grow at extraordinary rates. The Indian Forging Industry has passed this stage quite successfully. In the growth stage from FY07-08, Indian Forging industry registered decent performance riding on demand from domestic automobile industry and export opportunity. However due to the recession there was a slowdown in FY08-09 Indian forging industry has realized the importance of diversification to reduce dependence on automobile industry, which is cyclical in nature and further improve profitability in the long run. Hence forging players have adopted three pronged strategy to diversify in to manufacturing non-automotive components, increase product range with more value added products and end-to-end products and acquire companies and facilities in international markets.

Salient Features of Indian Forging Industry in Growth Stage
  Overall production reached 9,83,000 tpa from 9,29,000 tpa during last year; a YoY growth of 12%. Capacity utilization also improved considerably from 40-50 % in earlier years to 65% of the additional capacity added during the last two years (approx. 1.5 Million tpa) inclusive of overseas acquisitions. Exports recorded a YoY growth of 16% to reach a level of `16billion; CAGR growth of 26% over past five years. Acquisitions in key target markets to acquire additional clientele and also add up capacities Investment in capacity additions to cater to expected upturn in demand from domestic automobile industry in long run, aggressive diversification in to non-automotive applications and grab export opportunity.

  

Indian Forging Industry

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Security Analysis of Bharat Forge Limited

Five Forces Model - Industry
Michael Porter provides a framework that models an industry as being influenced by five forces, this is to develop an edge on rival firms this model can use this model to better understand the industry context in which the firm operates. Degree of Rivalry Despite the high concentration ratio seen in the auto component manufacturing sector, rivalry in the Indian forging sector is intense due to the entry of foreign companies in the market. The industry rivalry is extremely high with any being product being matched in a few months by the competitors. This instinct of the industry is primarily driven by technical capabilities acquired over years of gestation under the technical collaboration with international players, and the stress on M&A’s12 done by the Indian forge companies.

Threat of Substitutes The threat of substitutes to the Indian Forging industry is insignificant. Barriers to entry The barriers to enter forging industry are substantial. For a new company, the startup capital required to establish manufacturing capacity to achieve minimum efficient scale is prohibitive. Although the barriers to new companies are substantial, establishing companies are entering the new markets through strategic partnerships or through buying out or merging with other companies. However, a domestic company, with local knowledge and expertise, has the potential to compete its home market against the global firms who are not well established there.
12

M&A’s – Merger and Acquisition

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Security Analysis of Bharat Forge Limited

Supplier’s power In the relationship between the industry and its suppliers, the power axis is tipped in industry’s favor. The industry is comprised of powerful buyers who are generally able to dictate their terms to the suppliers. Buyers’ Power In the relationship between the forging industry and its customer, the power axis is tipped in the customers favor. This is due to the fairly bulk buying nature and the technological adaption by the forging industry as required by the Automobile industry which is again dependent on the Ultimate consumer who want some think new every time they come out and a very important process is association with selecting among competing brands under immense pressure of cut throat competition.

BCG13 MATRIX
In an economy, different industries are present and different industries have different growth rate as compared to the growth of the economy. In an economy, there are a number of major industries and they all occupy different positions on the BCG matrix according to their growth and contribution towards the economy. In the Indian economy, some of the major sectors are FMCG14, automobiles, banking and insurance, Infrastructure, software, pharmacy, Agriculture, Oil and gas and retail sectors and these can be placed in the different positions in the matrix as shown below:

Industrial BCG Matrix
13 14

BCG - Boston Consulting Group FMCG - Fast Moving Consumer Goods

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Security Analysis of Bharat Forge Limited

BCG matrix is used to determine the relative position of the companies of an industry or different SBU’s15 of any institution, in terms of the market growth rate and the market share of the company in the industry. In the Indian forging sector, the major players are Bharat Forge Ltd, Electrosteel casting, Jayaswal Neco Industries, Mahindra Forgings Ltd, Ahmednagar Forging and Kalyani Forge Ltd. In the BCG matrix, the companies are placed in one of the following four categories: Star, Cash Cows, Dogs and Question marks. In the Stars we place the companies with high market growth and high market share, cash cows are the companies who have low market growth rate and high relative market share, the category of the question marks include the companies with low relative market share and high market growth rate and dogs include the companies who have low relative market share and low market growth rate, the below BCG matrix is built on the profit, number of players in the industry, and incorporation of the industry and sales percentage for the past 5 years, and computed:

Company BCG Matrix

15

SBU - Strategic Business Unit

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Security Analysis of Bharat Forge Limited

Security Analysis

External Environment

T

O

S Internal Environment

W

The size of the Indian forging industry is growing at a compound annual growth rate (CAGR16) of about 23 per cent over the previous five years. The industry is expected to grow to `1800 billion by 2016. Among the 640 players present in the Indian market, only 160 constitute the organized sector and contribute more than 77 per cent of the country’s total production of auto components. The unorganized units generally employ open-die process at lower capital cost, while the organized players dominate the closed die segment, which is almost 65% of total Indian Forging Industry, It has more strength in internal market yet global market has to be explored, so the investors should exploit this industry.

Company Analysis
The company analysis shows the long-term strength of the company that what is the financial Position of the company in the market where it stand among its competitors and who are the key drivers of the company, what is the future plans of the company, what are the policies of government towards the company and how the stake of the company divested among different groups of people.

16

CAGR – Compound annual growth rate

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Security Analysis of Bharat Forge Limited

Profile of Bharat Forge Ltd
Bharat Forge Ltd (BFL), a flagship company of Kalyani group, BFL is a full service supplier of forged and machined-engine and chassis components. It is a primary exporter of auto components from India and chassis component manufacturer worldwide. The company’s manufacturing facilities spread across 12 locations and six countries, four in India, three in Germany, one each in Sweden, Scotland, United States and two in China. Bharat Forge conducts its operations in the following geographical areas such as Europe, North America and Asia. Its customer base includes Cummins, BMW, Iveco, Dana Corporation, General Motors, Volkswagen, Renault, Ford, Honda, Volvo, Toyota, Daimler Chrysler, Arvin Meritor, Detroit Diesel and Audi.

Key Recent Developments
     Mar 15, 2010: NTPC Energy Systems Begins Construction Work On Manufacturing Facility In Maharashtra, India Mar 14, 2010: Bharat Forge, NTPC starts construction on manufacturing facility in India Jan 06, 2010: Pune Based Companies Enter Into Nuclear Equipment Supply Deal In India Jan 04, 2010: Bharat Forge Commissions New Ring Rolling Facility in Baramati, India Jan 04, 2010: Bharat Forge plans manufacturing facility in Maharashtra, India.
Directors Name B N Kalyani S M Thakore S D Kulkarni P G Pawar Uwe Loos (Prof.) (Dr.) P C Bhalerao Lalita D Gupte (Ms.) P H Ravikumar Alan Spencer Naresh Narad V K Jairath T Mukherjee G K Agarwal Amit B Kalyani B P Kalyani S E Tandale P K Maheshwari Sunil K Chaturvedi Beejal Desai Designation Ch & Md Director Director Director Director Director Director Addnl. Director Director Addnl. Director Addnl. Director Addnl. Director Deputy Md Exec. Director Exec. Director Exec. Director Exec. Director Exec. Director Co. Secretary

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Security Analysis of Bharat Forge Limited

MANAGEMENT
The Company was incorporated on June 19, 1961 and we commenced business in 1966. We were originally promoted by Kalyani family headed by Dr. Neelkanth Kalyani. Our initial equity was subscribed by Kalyani family. The Company is managed by the Managing Director and Whole-time Directors under the overall supervision of the Board of Directors. Other members of the Board are renowned personalities and having significant expertise in their field and have been actively contributing through their valuable advice and support. The overall management of the Company is vested with the Board of Directors comprising persons with industrial, management, legal and administration experience. However the day-to-day affairs are looked after by Mr. B.N. Kalyani, Managing Director, and Mr. P C Bhalerao, Mr. G K Agarwal and Mr Amit Kalyani, the Whole-time Directors, who hold substantial powers of management. They are assisted by a team of professionals in the fields of engineering, marketing, finance and management.

SUBSIDIARY COMPANIES
The Company has 13 Subsidiaries of which 12 are overseas and 1 is in India, a significant portion of the consolidated revenues is generated by the subsidiary companies.  CDP Bharat Forge GmbH, Germany,  Bharat Forge Holding GmbH, Germany  Bharat Forge Aluminiumtechnik GmbH & Co. K.G., Germany  Bharat Forge Aluminiumtechnik Verwaltungs GmbH, Germany  Bharat Forge Daun GmbH, Germany  Bharat Forge America Inc., u.S.A.  Bharat Forge Beteiligungs, GmbH, Germany  Bharat Forge Kilsta AB, Sweden  Bharat Forge Scottish Stampings Ltd., Scotland  Bharat Forge Hong Kong Limited (Formerly, Lucrest Limited), Hongkong  FAW Bharat Forge (Changchun) Company Limited, China.  BF New Technologies GmbH, Germany and  BF NTPC Energy Systems Ltd., India

JOINT VENTURES
Apart from the acquisitions BFL have entered into Joint-Ventures (JV’s) with the following companies:  Joint venture with NTPC,  Joint venture with ALSTOM,  Joint venture with AREVA. Share Transfer Agents and Share Transfer and Demat system: Bharat Forge has no share transfer agents. Securities of the Company are transferred in-house by the Secretarial Department

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Security Analysis of Bharat Forge Limited

of the company. Bharat Forge’s equity shares are traded in the stock exchanges compulsorily in Demat mode. The Board’s Executive Committee meets twice a month for dealing with matters concerning securities of the company.

Distribution of equity holding by type of investors
1.64 Promoters Mutual Funds/UTI Banks, FIs,Insurance Cos. FIIs Corporate Bodies Individuals Others 10.88 6.41 9.93 12.08 15.09 43.97

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Security Analysis of Bharat Forge Limited

Business Outlook
The business outlook for Bharat Forge on both the domestic and export front remains extremely strong. The company will use its entry into the new segment of passenger car components as one of the levers of its export growth strategy. The immense opportunity in the area of machined heavy duty crankshafts for the global markets is expected to boost the company’s exports in the future. BFL is aiming for global leadership in both these segments in the coming years. The recent conclusion of two significant orders from Ford and DaimlerChrysler are a step in the direction of achieving our goals. The recent opening up on several International Purchasing Offices by leading global majors in India is adding to our export market potential. BFL is working very closely with most of these IPO’s in identifying opportunities for their global requirements. The outlook remains buoyant domestically on the back of a demand revival across the automotive market segments and the beginning of outsourcing by Global OE manufacturers who have setting up manufacturing facilities in India. BFL is working closely with domestic customers in new product development initiatives that will further catalyze the company’s leadership position in the domestic market and enable it to grow its market share further.

Product Profile
Company manufactures wide range of safety and critical components for passenger vehicles, commercial vehicles and diesel engines in the automotive segment. Some of key automotive components manufactured include Crankshafts, Front Axle Beams, Steering Knuckle, Connecting Rods, Rocker arm, Transmission Parts and hubs. It also manufactures specialized components for non-automotive industries such as Railways & Marine, Aerospace, Oil & Gas, Conventional & Non-Conventional Energy, Mining & Metals, Construction equipment’s etc.

Strong Customer Profile
BFL has strong domestic customer base including TATA Motors, Mahindra, Ashok Leyland, Escorts, Bajaj, BHEL, Larsen & Toubro, Kirloskar. On the global front, company has elite customers in its fold, including BMW, Audi, DaimlerChrysler, Ford, General Motors, Toyota, Volkswagen, Volvo, MAN, Honda, Audi, Renault, Caterpillar, SAAB, Cummins, DAF, DANA, Perkins, Porsche, Renault, IVECO, Land rover, ArvinMeritor etc. BFL has already crossed the stringent acceptability threshold of global OE customers. BFL will here on wards focus on building collaborative relationships which will result into cost reduction to the global OE customers and global business leadership in chosen field of activity to BFL. This is a key to a long- term win-win mutually beneficial relationship for both BFL and its customers

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Security Analysis of Bharat Forge Limited

Bharat Forge Ltd - SWOT Analysis

Strengths
     Diversified and de-risked business model with widespread geographical reach and product range Strategic proximity and strong customer relationships on domestic as well as international front Dual Offshore and fully integrated manufacturing capabilities along with strong customer and product profile Technological and man-power cost advantage Strong group comfort of Kalyani Group 

Weaknesses
Heavy dependence on US and European markets having its own business cycle and technological & regulatory requirements Exposed to currency fluctuation risk (however, it is an opportunity as well as risk) Frequent equity dilution

 

Opportunities
 Huge business opportunity in automotive as well as non-automotive applications in India as well as international markets Access to better technology and work practices across globe Presence in developed as well as high growth developing economies to supplement topline as well as bottomline  

Threats
Integrating subsidiaries operations and delay in ramping up of new capacities Slowdown in demand from domestic auto OEM's and global auto industry considering cyclical nature of automotive business Competition from low cost component manufacturing countries such as Thailand and China Political and economical conditions in India as well as countries in which company and its subsidiaries are operating.

 

 

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Security Analysis of Bharat Forge Limited

Five Forces Model - Bharat Forge ltd

Threat of competitors • There are 38 players in this organized industry. • Dominated by nonorganized players • Fragmented industry

Low Bargaining power of Suppliers. • Nature of suppliers(provider s of same services) • Few alternatives • Depends on Steel industry • Suppliers are not concentrated • forward integration

PRESENT COMPETITION Electro steel Casting

Bharat Forge ltd Here

High Bargaining power of consumer • Large no. of alternatives • Low switching costs • Undifferentiated services • Full information about the market

Threat of substitutes • Plastic fibers being used in the cars • No much substitutes for the industry

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Security Analysis of Bharat Forge Limited

Ratios (Standalone)
Particulars
Profitability & Return Ratios EBITDA Margin (%) NP Margin (%) EPS BVPS ROE ROACE Operating efficiency and other ratios Inventory T/o Debtors T/o Interest Coverage (x) Asset/Turnover (x) D/E (x) Valuation Ratios P/E (x) P/CEPS (x) P/BV (x) Mcap/Sales (x) EV/Sales (x) EV/EBITDA (x)

Mar 2006
24.40 11.80 9.26 56.80 25.77 16.10 2.30 0.85 8.77 0.09 0.85 48.04 27.2 6.8 5 5.3 20.8

Mar 2007
24.63 11.61 10.78 66.90 19.68 12.30 2.62 1.06 7.38 0.10 1.06 29.22 22 6 4.2 4.2 17.9

Mar 2008
24.54 10.98 12.26 84.20 19.54 12.10 5.77 0.87 6.25 0.14 0.87 21.81 19.7 4.7 3.6 3.6 15.9

Mar 2009
16.85 4.50 4.64 106.90 6.78 12.50 2.87 1.22 3.11 0.14 1.22 21.13 16.6 3.7 3.2 3.2 13.2

Mar 2010
21.84 6.41 5.71 124.20 8.43 13.10 3.07 1.21 3.02 0.39 1.21 43.2 13.8 3.2 2.7 2.7 10.8

Liquidity ratios (times)
Bharat Forge Ltd. Particulars Cash to current liabilities Cash to avg. cost of sales Quick ratio Current ratio Current ratio (incl. mktbl. securites) Debt to equity ratio Interest cover Interest incidence (%) Mar 2006 0.45 125.45 0.75 1.3 1.53 0.85 8.77 5.75 Mar 2007 0.57 153.04 0.91 1.38 1.54 1.06 7.38 4.67 Mar 2008 0.14 29.04 0.6 1.28 1.53 0.87 6.25 5.67 Mar 2009 0.42 70.95 0.89 1.83 1.83 1.22 3.11 4.89 Mar 2010 0.47 108.6 0.9 1.6 1.82 1.21 3.02 4.86

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Security Analysis of Bharat Forge Limited

Review of Business
Domestic revenues grew by 84.0% & 15.9% on a YoY and QoQ basis despite a 12.3% QoQ drop in domestic M&HCV volumes. Exports continued to grow for the 5th straight quarter driven by recovery in both US & European markets. Export revenues grew by 63.2% & 6.0% on a YoY and QoQ basis. EBITDA margins have expanded both on a YoY & QoQ basis to 25.2% in Q1 FY1118 driven by improved operating leverage. Utilization for Indian operations improved on the back of continued strong off-take from domestic OEM’s coupled with improvement in utilization of new facilities and continuing recovery in export markets. The subsidiaries’ performance in the quarter is significantly influenced by the Factors like, Improvement in capacity utilization across the subsidiaries from 25% in Q1 FY10 to 39% in Q1 FY11. The restructuring actions carried out in CY09 with aim of lowering the breakeven levels are starting to positively impact the financial performance. EBITDA % for the overseas subsidiaries has improved to 4.2% in this quarter from 2.5% in Jan – Mar 2010. China JV has turned the corner and has posted a profit for the first time since the commencement of operations in April 2006.
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The Indian automotive markets have cooled off a bit post the year end & have witnessed a small volume reduction of 5.4% on a QoQ basis. The M&HCV segment, which is BFL main addressable segment saw volumes drop by 12.3% on a QoQ basis but jumped by 57.1% on a YoY basis. In spite of the volume drop, BFL domestic sales surpassed previous highs and recorded growth of 84.0% & 15.9% on a YoY and QoQ basis respectively. BFL’s sales for automotive applications have witnessed growth across both the commercial & passenger vehicles segments. The US Automotive industry has witnessed moderate growth in CY10 YTD on the back of overall economic recovery & improvement in consumer sentiments. BFL focuses mainly on the M&HCV segment with strong relations with both OEM’s & Engine manufacturers. The segment is now clearly showing signs of growth after 3 continuous years of significant volume reduction. The segment in CY10 has witnessed several significant news flows relating to new order bookings from fleet operators which were virtually non-existent in CY2007-CY2009 period, suggesting the beginning of replacement cycle. The automotive markets in both India & the export markets, especially USA are on a steady growth trajectory. The demand in India is being driven by strong economic activity led by infrastructure & capital goods. The entry of global OEM’s into the Indian markets bode well for both the industry and Bharat forge ltd.

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Quarter on Quarter Financial Year 2011 –Quarter 1(one)

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Security Analysis of Bharat Forge Limited

Peer Comparison
Bharat Forge is second largest auto forging company in world with it's operations spread out in India, U.S, Europe and China. BFL has total forging capacity of 600000 M.T and is adding another 100000 M.T capacity for nonautomotive applications. As a matter of strategy BFL acquired slightly weak companies at low investments to diversify in to different geographies, enhance overall forging capacities and also enrich its customer profile. Lower profitability of these subsidiaries has affected company's consolidated profitability; however, BFL is in process of restructuring these subsidiaries and thereby supplement its topline as well as bottom-line. Similarly many other forging companies are pursuing organic as well as inorganic growth strategy to tap the opportunity lying in automotive and non-automotive sector. Electrosteel casting is also prominent auto component manufacturer engaged in manufacturing casting, forgings, high value machined parts and other auto components. BFL commands premium valuations due to its global leadership positioning, large scale of operations, de-risked business model, strong group comfort and fundamentals and future growth prospects. I believe that companies with global scale of operations such as Bharat Forge and Electrosteel casting will be able to sustain any downturns and emerge as dominant players in global auto component sector. Below is a tabular representation of the EPS, P/E, Sales and Profit/Loss from 9 companies which consists of 3 Large cap (Bharat Forge Ltd, Electrosteel casting, Jayaswal Neco Industries) 3Mid cap (Mahindra Forgings Ltd, Ahmednagar Forging, Kalyani Forge Ltd) & 3 Small Cap (Hinduja Foundries Ltd, MM Forgings Ltd, Ramkrishna Forgings Ltd) and below the tabular representation there is a Graphical representation:

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Security Analysis of Bharat Forge Limited

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Security Analysis of Bharat Forge Limited

Technical Analysis
Technical Analysis does not consider values in the sense in which fundamental analysis applies it. Fundamental Analysis allows the analyst to forecast the holding period and the riskiness of the holding but this does not help an investor in identifying a buy or sell action. Technical Analysis, however, may be useful in timing a buy and sell action. Following is the Technical Analysis of Bharat Forge Ltd, to understand their pattern and behavior of share prices in the market. The time taken is from 17th August 2009 to 30th October 2010. The first chart shows the basic graphical pattern of the movement of share prices of BFL on NSE (National Stock Exchange) with comparison to CNX100 index.

The following were analyzed;

Correlation Coefficient = Beta =

0.2072 0.0760

Bharat Forge Ltd, have a positive co-relation with the CXN100 Index Bharat Forge Ltd, is volatile in comparison with the CNX100 Index

If there is an Increase of 10% in CNX100 Index then there would be a Increase of 0.95% in Bharat forge ltd If there is an Decrease of 10% in CNX100 Index then there would be a decrease of 0.76% in Bharat forge ltd

29

Security Analysis of Bharat Forge Limited

As a peer comparison the second chart shows a graphical representation of the two stocks Bharat Forge Ltd, with Kalyani Forge which are competitors in Forging and casting Industry.

The following were analyzed;

Correlation Coefficient = Beta =

0.0444 0.1508

Bharat Forge Ltd, have a positive co-relation with the stock of Kalyani Forge Ltd., Bharat Forge Ltd, is volatile in comparison with the stock of Kalyani Forge Ltd.,

If there is an Increase of 10% in Kalyani Forge ltd stock value then there would be a Increase of 1.98% in Bharat forge ltd If there is an Decrease of 10% in Kalyani Forge ltd stock value then there would be a decrease of 1.51% in Bharat forge ltd

30

Security Analysis of Bharat Forge Limited

The third chart is does an analysis of the comparison between Bharat Forge ltd, (BFL) and S&P - CNX Index

The following were analyzed;

Correlation Coefficient = Beta =

0.2005 0.0719

Bharat Forge Ltd, have a positive co-relation with the S&P CNX Index Bharat Forge Ltd, is volatile in comparison with the S&P CNX Index

If there is an Increase of 10% in S&P CNX Index then there would be an Increase of 0.97% in Bharat forge ltd If there is an Decrease of 10% in S&P CNX Index then there would be a decrease of 0.72% in Bharat forge ltd

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Security Analysis of Bharat Forge Limited

Resistance & Support Level
This Technical tool helps in telling that what would be the price band of share price in which it move in near future on the basis of past high and low levels made by a particular scrip. Resistance Level shows the price above which share price will not move in normal case on the other hand Support level shows the minimum share price which can be touched by share or crossing of this share will not be there in normal market condition Following is the Resistance & Support level of Bharat Forge ltd., for the period of 13 months is below as a long term;

Below is the graph of the Resistance & Support level of Bharat Forge ltd., for the period of 3 months as a Short term;

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Security Analysis of Bharat Forge Limited

As it is seen in the past 3 months BFL share price moved up and it keeps making on new level so perfect resistance level for this share is not easy to predict as performance of this share is very good compare to all scrip’s of this segment. The above band of resistance and support level shows that the price of shares will move in between this range only until unless any wrong reaction came out in economy or when any correction takes place the prices will move in between this band only.

Simple Moving Average
Moving Average is an indicator that shows the average value of a security's price over a period of time. The method of interpreting a moving average is to compare the relationship between moving averages of the security's price with the security's price itself. In the below figure we have the share price of Bharat Forge Ltd, on a moving average of 20 period as Short Term, 50 period for Medium Term respectively. A buy signal is generated when the security's price rises above its moving average and a sell signal is generated when the security's price falls below its moving average. It is designed to keep you in line with the security's price trend by buying shortly after the security's price bottoms and selling shortly after it tops. It shows that Bharat Forge ltd is performing better, so industry as whole is also performing outstanding. So keeping a hold position for the companies would be profitable in future.

20 Days Moving Average

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Security Analysis of Bharat Forge Limited

50 days Moving Average

100 days Moving Average The graph also represents the point at which you have a chance of buying the shares and selling then based on the moving averages.

34

Security Analysis of Bharat Forge Limited

A buy signal is generated when the security's price rises above its moving average and a sell signal is generated when the security's price falls below its moving average. In the near future based on the Moving average show Hold signal as their security prices rises above its moving average. This shows that an investor can kept a hold position or can buy for longer period of time but as we can see in case the moving average line is also rising which shows that Buy n hold position for very long period could be unprofitable a minor correction in the share price can bring down the share price line and then moving average line will easily cross the share price line.

Trend line

A trend line is formed when you can draw a diagonal line between two or more price pivot points. They are commonly used to judge entry and exit investment timing when trading securities trend line is a bounding line for the price movement of a security. Bharat Forges ltd have a upward trend line on the long term but the security had a stagnant trend line for a period of 6 months from January 2010 to June 2010.

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Security Analysis of Bharat Forge Limited

MACD19

As shown in the chart above, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting "faked out" or entering into a position too early, as shown by the first arrow. This means upside momentum is increasing. Negative MACD indicates that the 12-day EMA20 is below the 26-day EMA. Negative values increase as the shorter EMA diverges further below the longer EMA. Above graph shows the MACD of Bharat Forge Ltd., for the period of 13 months. The MACD is the difference between a 50-day a 25-day exponential moving average (EMA), called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities. From the 25-day moving average it shows a Sell opportunity and on 50-day moving average on MACD shows a Hold Opportunity.

19 20

Moving Average Convergence / Divergence Exponential Moving Average

36

Security Analysis of Bharat Forge Limited

Conclusion
Indian Automobile Industry is in the growth phase and the expected growth rate is 23% for FY2009-10 compare to last year growth rate which was just 0.7% and the above facts and figures in our study also support this truth. According to Indian Statistical Organization the per capita income (Rs.38000) is increasing and national income at the rate of 14.4% which shows potential to buy vehicle in auto industry. The growth rate of Indian forging and casting industry is so fast that by 2016 Indian Industry will be world 7 largest manufacturers in all sections. The Indian auto market is still untapped the majority of the people in country don’t own a four wheeler and all the major auto companies are trying to increase their sales by several moves. By the way Bharat Forge Ltd (BFL) are now concentrating not only the automobile industry, they are trying in the area of relative diversification and non-relative diversification such as power (electricity) which is proved to be the big money spender industry in terms of volume and growth, due to the importance given by the government agencies to spend more on infrastructure, and Power sector is one to be benefited, to which BFL have a Joint venture with NTPC which is a India’s biggest power supplier and Alstom of France the world largest, producer of electricity. From the Technical Analysis i come to know that the share price of Bharat Forge Ltd, will move in the Price band of band of Rs.301.39 to Rs.270.17 if you are looking for a long term investment and if you are looking for a short term like 3 months then the price will move in the range of Rs. 357.80 to Rs. 328.69. Also the share price through the trend line and the moving average is on the uptrend, for long term considering 13 month period and as well as short term for 3 months is also have uptrend, but off late it is on the stagnant trend line.

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Security Analysis of Bharat Forge Limited

References
http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=132756 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Mode=S&FinCode=113335 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=113509 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Mode=S&FinCode=100493 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=100128 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Mode=S&FinCode=122285 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=122241 http://money.livemint.com/CompanyProfile/QuoteFinder.aspx?id=43&Fincode=122241 http://money.livemint.com/IID64/F132527/Financial/Ratios/Company.aspx http://money.livemint.com/IID42/F100493/QuickQuote/Company.aspx Annual report of Bharat Forges ltd – 2008-09 & 2009-10 KJMC Research – on BFL 2008 Indiainfoline Research –on BFL march 2010 www.ibef.org www.rbi.org.in www.moneycontrol.com www.nseindia.com http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=INR http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=INR http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=INR www.bharatforge.com Investment analysis and Portfolio management – M.ranganathan & R.madhumathi Investment analysis and Portfolio management – F.Reilly & K.Brown CMIE – Prowess

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