Bharat Forge - Exports early beneficiary of overseas recovery.:: Kotak Sec

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Bharat Forge (BHFC)
Automobiles
Exports early beneficiary of overseas recovery. We raised our FY2012E earnings
estimate slightly for Bharat Forge to reflect the stronger-than-expected cadence in
exports. The company’s exports are benefiting from strong CV volumes in the US. Our
target increases to Rs400 from Rs385 to reflect higher estimates. We maintain our ADD
rating but see limited earnings upside as our estimates are largely discounting a
recovery overseas and continued domestic strength.


Raising our FY2012E EPS estimate by 3% to reflect stronger export revenues
We are tweaking up our FY2012E EPS estimate to Rs20.3 from Rs19.7 to reflect stronger export
volumes. Exports grew at a faster-than-expected pace in 2QFY11 and we expect the strength to
continue into 2HFY11E and FY2012E. We now expect exports to grow 45% in FY2011E 15% and
another 15% in FY2012E on the back of continued recovery in the US and European commercial
vehicles demand. Our FY2012E EPS estimate of Rs12.3 is based on 24% consolidated revenue
growth and 250 bps of margin improvement. The 24% revenue growth is driven by strong growth
in non auto revenues and continued recovery in European and US CV markets. The margin
recovery is driven by European subsidiaries and higher margins of the non-auto business to 7.5%
levels.
Conference call highlights
Management indicated that utilization at the company’s overseas subsidiaries were at the 40-45%
range while domestic utilizations were at the 70% range. The utilization rate at the new non-auto
facilities were 39% and revenues from these facilities totaled Rs1 bn for the quarter. On the JV
front, the company indicated that they have invested Rs300 mn into the Alstom JV till date. Total
equity investment by Bharat Forge into the JV is expected to be in the Rs3.5 bn range.
Raising target to Rs400 in-line with higher earnings estimates
We are raising our target to Rs400 from Rs385 to reflect the 3% higher standalone EBITDA
estimate for FY2012E. Our SOTP-based valuation assigns a Rs357 valuation for the wholly owned
component operations and a Rs42 valuation for the company’s stake in its JV with Alstom. We
give a 20% discount to the DCF-based value for the JV. We now value the stake at 2.6X book
value. The increase was driven by the higher revenue assumptions in our DCF valuation driven by
the increased visibility given the determination of the Alstom JV as the lowest bidder for the NTPC
contract.