1. Please refer to important disclosures at the end of this report 1
Consolidated Y/E March (` cr) 2QFY11 2QFY10 % chg (yoy) Angel est. % diff.
Net sales 1,111.2 710.7 56.4 1,052.9 5.5
EBITDA 194.2 94.6 105.2 185.9 4.5
EBITDA margin (%) 17.5 13.3 416bp 17.7 (18bp)
Reported PAT 60.6 (40.7) - 62.0 (2.2)
Source: Company, Angel Research
Consolidated performance above expectations: For 2QFY2011, Bharat Forge
(BFL) reported top-line growth of 56% yoy to `1,111cr, above our expectation of
`1,053cr. Growth was largely aided by the substantial jump in domestic
operations. EBITDA margin grew by 416bp yoy to 17.5%, 18bp below our
estimate, on improved operating leverage in domestic and overseas operations.
Net profit stood at `60.6cr (net loss of `40.7cr in 2QFY2010), as against our
estimate of `62cr, largely aided by improved operating performance.
Standalone Y/E March (` cr) 2QFY11 2QFY10 % chg (yoy) Angel est. % diff.
Net sales 718.7 427.6 68.1 643.9 11.6
EBITDA 174.1 102.4 70.0 160.8 8.3
EBITDA margin (%) 24.2 24.0 27bp 25.0 (75)bp
Reported PAT 68.1 26.8 154.0 62.3 9.4
Source: Company, Angel Research
Standalone performance: BFL posted 68% yoy jump in standalone revenue at
`719cr, mainly aided by ~60% jump in domestic revenue and ~84% jump in
exports. EBITDA margin expanded by 27bp yoy to 24.2%, down 96bp qoq,
reflecting surge in steel prices. Net profit posted 154% yoy growth to `68cr,
beating our estimate of `62cr, owing to higher-than-expected other income.
Outlook and valuation: On the valuation front, at `379, the stock is trading at a
P/E of 18.8x FY2012E EPS and EV/EBITDA of 10.9x on a consolidated basis.
We remain positive on BFL and recommend an Accumulate rating to the stock to
play the turnaround of developed markets (US and Europe). At our Target Price of
`404, the stock would trade at 20x P/E and 11.6x EV/EBITDA on FY2012E basis.
Key Financials (Consolidated)
Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E
Net sales 4,711 3,286 4,373 5,287
% chg 2.5 (30.3) 33.1 20.9
Net profit 58.7 (63.3) 285.6 470.2
% chg (80.5) - - 64.6
EBITDA (%) 7.6 6.2 15.1 16.3
EPS (`) 2.6 (2.8) 12.3 20.2
P/E (x) 143.9 - 30.9 18.8
P/BV (x) 5.1 5.8 4.5 3.7
RoE (%) 3.6 (4.1) 16.6 21.7
RoCE (%) 2.8 (1.0) 10.5 17.1
EV/Sales (x) 2.2 3.0 2.2 1.7
EV/EBITDA (x) 29.3 50.0 14.9 10.9
Source: Company, Angel Research
ACCUMULATE
CMP `379
Target Price `404
Investment Period 12 Months
Stock Info
Sector
Bloomberg Code BHFC@IN
Shareholding Pattern (%)
Promoters 42.1
MF / Banks / Indian Fls 28.3
FII / NRIs / OCBs 15.0
Indian Public / Others 14.6
Abs. (%) 3m 1yr 3yr
Sensex 11.3 20.1 14.5
Bharat Forge 13.6 36.9 32.5
2
20,166
6,066
BFRG.BO
8,834
1.2
390/232
129,896
Auto Ancillary
Avg. Daily Volume
Market Cap (` cr)
Beta
52 Week High / Low
Face Value (`)
BSE Sensex
Nifty
Reuters Code
Vaishali Jajoo
022-4040 3800 Ext: 344
vaishali.jajoo@angelbroking.com
Yaresh Kothari
022-4040 3800 Ext: 313
yareshb.kothari@angelbroking.com
Bharat Forge
Performance Highlights
2QFY2011 Result Update| Auto Ancillary
October 22, 2010
3. Bharat Forge | 2QFY2011 Result Update
October 22, 2010 3
Top line above expectations, exceeds estimates by 11.6%: BFL recorded substantial
68.1% yoy growth in net sales (standalone) during 2QFY2011, largely on the back
of the 59.5% yoy growth in domestic revenue and 84.2% yoy increase in exports.
Domestic market growth was aided by substantial growth in overall auto volumes,
especially in the CV segment. On the exports front, as per management, volumes
(particularly in the US) recorded an improvement in 4QFY2010, which continued
in 1HFY2011. At present, BFL is operating at optimum utilisation levels, which is
expected to improve going forward. Production volumes, in tonnage terms, have
improved from 30,296 tonnes in 2QFY2010 to 46,140 tonnes in 2QFY2011.
Exhibit 3: Domestic revenue up 59.5%
Source: Company, Angel Research
Exhibit 4: Reviving exports growth, up 84.2%
Source: Company, Angel Research
Exhibit 5: Volumes and utilisation levels continue to rise
Source: Company, Angel Research
Exhibit 6: Geographical break-up of revenue
Source: Company, Angel Research
Higher raw-material costs restrict margin expansion: BFL’s operating margins
increased marginally by 27bp yoy to 24.2% during 2QFY2011. Raw-material costs
increased by 193bp yoy and accounted for 46% (44.1%) of net sales, largely
because of surge in steel prices. The company achieved significant operating
leverage, following the reduction in staff costs and other expenditure to the extent
of 153bp and 129bp, respectively. Thus, overall, the company recorded a 70% yoy
jump in operating profit to `174cr on a standalone basis.
(38.4) (17.6)
48.2
99.2 82.9
59.5
(60)
(40)
(20)
0
20
40
60
80
100
120
0
50
100
150
200
250
300
350
400
450
500
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
(%)(` cr) Domestic revenue yoy change (RHS)
(52.0)
(56.3)
(18.2)
84.2
63.3
84.2
(80)
(60)
(40)
(20)
0
20
40
60
80
100
0
50
100
150
200
250
300
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
(%)(`cr) Export revenue yoy change (RHS)
26
36
42
46
51
55
0
10
20
30
40
50
60
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
(%)(MT) Volume (tonnage) Capacity Utilisation
60
66
61 61 63 62
17
20
26
22
19 19
22
13 12
15 16 16
1 1 1 1 3 3
0
10
20
30
40
50
60
70
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
(%) India US Europe Others
4. Bharat Forge | 2QFY2011 Result Update
October 22, 2010 4
Exhibit 7: EBITDA margins up 430bp
Source: Company, Angel Research
Exhibit 8: Net profit beats estimates
Source: Company, Angel Research
Net profit at `68.1cr, beats estimates: BFL recorded net profit of `68.1cr (`26.8cr)
during the quarter due to overall improvement in volumes and operating leverage.
Higher other income also aided the better growth in net profit, to a certain extent,
during the quarter. However, interest cost and depreciation cost increased by
30% yoy and 20% yoy respectively, for the quarter.
Consolidated performance exceeds expectation: Consolidated performance was
marginally above our expectations with top-line growth of 56.4% yoy to `1,111cr
(`711cr). Bottom line stood at `61cr (net loss of `41cr in 2QFY2010), largely on
account of the turnaround in overseas operations. In 2QFY2011, BFL’s OPM, on a
consolidated basis, improved by almost 416bp yoy to 17.5% (13.3%).
Overall, turnaround of the overseas subsidiaries supported the recovery at
consolidated levels. Management expects turnaround of overseas subsidiaries in
the next few quarters.
Exhibit 9: Quarterly performance – Consolidated
Y/E March (` cr) 2QFY11 2QFY10 1QFY11 % yoy chg % qoq chg
Revenue 1,111.2 710.7 1,012.6 56.4 9.7
EBITDA 194.2 94.6 184.7 105.2 5.2
PBT & EOI 94.5 9.0 90.6 950.6 4.3
PAT after EOI 60.6 (40.7) 62.1 - (2.4)
EPS (`) 2.7 (1.8) 2.8 - (2.4)
Source: Company, Angel Research
20.9
24.0 23.4 25.0 25.2 24.2
46.3 44.9 45.4 45.0 46.1 47.2
0
5
10
15
20
25
30
35
40
45
50
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
(%) EBITDA margin RM cost/net sales (excl. other opr. Inc.)
0.3
6.4
7.7
11.2
9.8
9.7
0
2
4
6
8
10
12
0
10
20
30
40
50
60
70
80
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
(%)(` cr) Net profit (LHS) Net profit margin (RHS)
5. Bharat Forge | 2QFY2011 Result Update
October 22, 2010 5
Exhibit 10: Top-line growth at 56.4%
Source: Company, Angel Research
Exhibit 11: Improving EBITDA margins, profitability
Source: Company, Angel Research
Conference call – Key highlights
International operations: BFL’s international operations contributed ~38% to
total revenue during 2QFY2011 and continued to grow driven by recovery in
offtake from both US and European markets. US and Europe contributed
~19% and ~17% to total revenue, respectively, during 2QFY2011. Exports to
the US grew 57.1% yoy, driven by offtake from CV and engine manufacturers.
Utilisation levels on the international front remained in the range of 40–45%,
which the management is targeting to raise to 50–55%. The company is
witnessing an uptick in volume offtake in the US M&HCV segment after three
continuous years of significant volume reduction. However, Europe’s scenario
remains bleak and is expected to show signs of a revival in the second half of
FY2011E. Going ahead, on the back of an improvement in operating
leverage, management expects expansion in margins.
China JV: BFL’s China JV has turned profitable since the commencement of
operations in April 2006. Management expects ~25% top-line growth from
the venture.
Non-auto business: BFL’s non-auto business revenue during 2QFY2011 stood
at ~`275cr, up ~32% qoq. Revenue contribution from the new facility at
Baramati and Mundhwa stood at ~`100cr during the quarter. Utilisation level
improved to ~39% in 2QFY2011 from ~30% in 1QFY2011. Management
intends to ramp it up further to 50% by the end of FY2011. BFL is targeting
~40% of its total revenue from non-auto business by FY2012 and is currently
closer to 30%. Management remains optimistic on the power side of the
business and its JV with Alstom; revenue contribution is expected to begin from
FY2012. Further, work on the EPC contract bagged during 1QFY2011 is
expected to commence from 3QFY2011.
BFL intends to incur a capital expenditure of `100cr during FY2011E for
Indian operations and has no plans to incur any capital expenditure overseas.
As of September 2011, the company reported net debt of ~`1,450cr and
cash balance of ~`400cr.
(54.0)
(63.2)
(15.4)
47.3
66.3
56.4
(80)
(60)
(40)
(20)
0
20
40
60
80
0
200
400
600
800
1,000
1,200
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
(%)(` cr) Total revenue yoy growth (RHS)
9.6
13.3
15.5
17.5
18.2
17.5
0
2
4
6
8
10
12
14
16
18
20
(100)
(50)
0
50
100
150
200
250
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
(%)(` cr) EBITDA Net profit EBITDA margin (RHS)
6. Bharat Forge | 2QFY2011 Result Update
October 22, 2010 6
Investment arguments
Strong rebound in domestic operations continue on healthy CV demand: BFL,
being a market leader in the CV space for products such as crankshaft, axle
beams and connecting rods, with almost 90% market share, has been able to
register robust growth sequentially. Over the last few quarters, following the
overall recovery in economic and industrial activity, CV volumes have also
been showing good recovery. We estimate the domestic heavy CV segment to
record a 13% CAGR over FY2010–12E. Thus, BFL is expected to be one of the
biggest beneficiaries on anticipated higher offtake by the CV segment over the
next couple of years.
Rebound in global economy to help in turnaround of overseas operations: BFL
experienced tough times in the overseas market, especially in the US and
Europe in the last two years. Management had adopted various measures to
counter the effects of the downturn, such as rightsizing the company’s
operations globally to adjust to the lower demand levels. Other actions taken
included reduction of manpower, rationalisation of production, salary cuts,
reduction in administrative overheads, increased focus on working capital
reduction, conservation of cash and capex holiday in FY2010. The company
focused on improving its operational efficiencies like yield, scrap reduction,
energy cost and outsourcing reduction.
All these measures have helped BFL in bringing down its breakeven levels to
almost 50% utilisation (60–65% earlier). We believe most of these markets are
now showing signs of recovery, which would help the company to improve its
consolidated performance over FY2010–12E.
Non-auto diversification: BFL has been diversifying its product portfolio in the
non-auto segment. Though the company has order traction in this segment (oil
and gas, power-thermal and nuclear, and rail), lower level of business of its
clients in various industries has affected potential ramp-up of utilisation levels
of new capacities created especially for the segment. Around 60% of the
segment’s revenue comes from exports, while the balance comes from the
domestic market. The company expects to generate ~40% of its revenue from
this segment in FY2011E on total incurred capex of around `500cr.
Management is confident of growing its non-auto business faster, which would
act as a buffer to the prevailing difficult macro environment for its auto
business.
Further, BFL has entered into a JV with Alstom and NTPC to manufacture
state-of-the-art supercritical power plant equipment in India. The JV will
design, engineer, manufacture and deliver turbine generator islands of
600–800MW supercritical range, with total installed capacity of 5,000MW per
annum. Alstom and BFL have agreed to explore the manufacture of turbines
and generators in the subcritical range, as well as for gas and nuclear
applications.
7. Bharat Forge | 2QFY2011 Result Update
October 22, 2010 7
The manufacturing infrastructure will include plants for manufacturing
turbines, generators and all the auxiliaries that go into turbine generator
islands. The JV entails an investment of `1,500cr from both the partners. BFL
is expected to invest around `300cr–350cr in the Alstom JV over the next three
years. The capacity is set to be commissioned in 2012. BFL’s equity
contribution in the NTPC JV would be `50cr over the next two years. The
company has also bagged its maiden order worth `2,000cr in the capital
goods space for an EPC contract. This JV will help the company show healthy
performance at consolidated levels.
Outlook and valuation
A substantial portion of BFL’s revenue comes from the CV segment, where full
recovery has been recorded in the last few quarters. Moreover, a major portion of
the company’s consolidated revenue comes from the US, which was in
recessionary mode and is expected to come out of it in 2010. BFL’s non-auto
business is also expected to start contributing more from FY2011E and mitigate the
effects of the slowdown in the auto segment. On account of the better-than-
expected 2QFY2011 performance, we have marginally revised estimates upwards.
Exhibit 12 : Change in estimates
Y/E March (` cr) Earlier estimates Revised estimates % chg
FY11E FY12E FY11E FY12E FY11E FY12E
Net sales 4,292 5,112 4,373 5,287 1.9 3.4
EBITDA margin (%) 15.0 15.8 15.1 16.3 1bp 50bp
EPS (`) 12.2 18.6 12.3 20.2 0.6 8.8
Source: Company, Angel Research
On the valuation front, at `379, the stock is trading at a P/E of 18.8x FY2012E EPS
and EV/EBITDA of 10.9x on a consolidated basis. We remain positive on BFL and
recommend an Accumulate rating to the stock to play the turnaround of developed
markets (US and Europe). At our Target Price of `404, the stock would trade at
20x P/E and 11.6x EV/EBITDA on FY2012E basis.
13. Bharat Forge | 2QFY2011 Result Update
October 22, 2010 13
Disclosure of Interest Statement Bharat Forge
1. Analyst ownership of the stock Yes
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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