Annual Report Analysis - Bharat Forge:: Edewleiss

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Performance of subsidiaries deteriorates further

n  During FY10, Bharat Forge’s (BF) subsidiaries on an aggregate incurred operating losses of ~INR 0.8 bn (FY09 operating profits of INR 0.9 bn) on the back of ~45.8% dip in subsidiaries’ revenue contribution from INR 27.1 bn in FY09 to INR 14.7 bn in FY10.

Going concern assumption still doubtful in overseas subsidiaries

n  Bharat Forge America (BFA), a wholly owned subsidiary, has registered losses that have substantially eroded its net worth. Auditors of BFA, have drawn attention to the appropriateness of going concern assumption used for preparing their respective financial statements. In CY09, the company had reported net loss of INR 234.5 mn (CY08: INR 264.3 mn) on a turnover of INR 993.2 mn (CY08: INR 1.7 bn). 

n  The impairment review carried out by the management did not indicate any impairment loss considering the diminution in value of investment to be temporary in nature. BF has further invested USD 3.5 mn in equity shares of BFA, taking its total equity investment in the company to INR 0.9 bn.

n  Bharat Forge Scottish Stampings, Scotland, a step-down subsidiary, continued to incur losses; its net worth stood at INR (190.2) mn as at FY10 end. Auditors have opined that the going concern assumption is not valid for the subsidiary. Its commercial operations have ceased and assets have been transferred to another subsidiary.

Standalone operating performance improves despite dip in sales

n  BF’s standalone revenues dipped 9.8% to INR 18.6 bn in FY10 from INR 20.6 bn in FY09 on the back of weak exports (declined to INR 7.1 bn in FY10 from INR 10.0 bn in FY09).

n  During FY10, standalone EBIDTA rose 15.5% to INR 4.2 bn (FY09 INR 3.6 bn) as margins expanded from 17.5% in FY09 to 22.4% in FY10, primarily on account of lower raw material cost as a percentage of sales and lower forex losses vis-a-vis previous year.

Accounting policy highlights

n  BFA changed the method for calculating depreciation from years of service to units of production method, resulting in lower depreciation of INR 70.8 mn (USD 1.6 mn), ~73.2% of reported consolidated FY10 PBT before exceptional items.

n  BF had FCCBs of four tranches aggregating USD 183.4 mn o/s on the balance sheet date. The company had earlier not provided for the redemption premium on these FCCBs either through reserves or the P&L account during earlier years. Had the company amortised the redemption premium on YTM basis through P&L, PBT would have been lower by INR 383 mn (~395.4% of PBT before exceptional item).

n  Of the above, two tranches amounting to USD 103.5 mn were maturing in April 2010. Redemption premium on these aggregating INR 1,460.5 mn (including tax amounting to INR 154.9 mn), since crystalised, has been adjusted to the securities premium account, net of deferred tax asset amounting to INR 485.1 mn.