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Bharat Forge -Export, non-auto traction drives growth…
Bharat Forge (BFL) reported positive numbers for Q3FY11 that were in
line with our estimates as net sales grew to | 754.2 crore (I-direct
estimate: | 764.6 crore), up 52.1% YoY and 7.7% QoQ mainly due to
realisation improvement of 3.3% QoQ and 4.3% volume jump.
Consolidated revenues jumped to | 1235.3 crore, 50.2% YoY and 11.1%
QoQ growth with recovery in subsidiaries performance with global
improvements. BFL has successfully countered rising costs through
complete pass through, which has led to margin maintenance at 24.3%.
On the subsidiaries front, the EBITDA margins have nearly doubled to
4.9% YoY. Standalone PAT performance was also strong at | 82.6 crore
(~207% YoY, 39% QoQ) due to the strong operative performance and
higher other income at | 12.6 crore (up 46.4% QoQ).
Highlights of the quarter
The quarter has seen a strong resurgence from the European region with
revenue contribution moving up ~320 bps to 19.6%. Overall exports have
jumped ~80% YoY to | 359.4 crore increasing its share in total revenue
by 810 bps to 46.2%. Domestic M&HCVs had seen a weak Q3 (8.1%QoQ)
due to the pre-norms buying in September 2010, which pushed domestic
revenue decline of 7.6% QoQ supported through higher realisations. The
overall realisation improvement was 3.3% QoQ and 11.5% YoY with
improvement in product mix towards higher degree of machining. The
non-auto segment has maintained Q2 traction in sectors like power, oil &
gas and construction with the segment contribution rising ~11% YoY to
37% of standalone revenues. The company has seen an improvement in
subsidiaries performance with margins rising 230 bps YoY to 4.9%.
Valuation
We have factored in continued traction from resurgence in export markets
with domestic trigger in the power JV with Alstom. At CMP of | 358, the
stock is trading at 26.4x FY11E and 17.0x FY12E consolidated EPS. Using
SOTP, we value the standalone business at 18x FY12 EPS of | 18.4 at |
332/share, subsidiaries at 7.0x FY12 EPS of | 2.3 at | 16/share and Alstom
JV at 11x FY12 EV/EBITDA at | 61.4/share.Our target price of | 409
implies an upside potential of 14%. We maintain BUY rating on the stock.
Geographical review
India
The domestic automotive industry (ex-two wheelers) volumes had seen a
QoQ tempering mainly due to the festive season in Q2FY11 with a 0.5%
decline QoQ though YoY remained robust with 23.5% jump. The CV
segment grew at a robust 32.3% YoY, remaining flat QoQ on the back of
the performance of LCVs shielding the decline in volumes in the M&HCV
segment (8.1% QoQ) to which BFL primarily caters. The soft domestic
performance has led to a revenue decline of 7.6% QoQ, which was,
however, supported to a certain degree by higher realisations. The strong
export performance has reduced the domestic dependency of revenues
by 700 bps QoQ (refer Exhibit 2). The increasing migration of OEMs
towards more stringent Euro-V and BS-IV norms has led to a shift towards
completely machined parts. This provides BFL the edge as a
technological intensive supplier. Thus, the outlook continues to remain
bright in the domestic automotive front, which is expected to continue the
robust growth momentum even as intermediate headwinds of rising input
prices and hardening interest rates continue to persist.
US
The US automotive industry has continued with the improving traction
with ~1.9 million units and YoY growth of 6.4%. The US market saw a
volume growth in which the M&HCV segment has seen a 13.7% YoY
jump. This also marked the resurgence of the class-8 segment trucks
helping BFL’s sales. Major OEMs in the US have a positive growth outlook
in the US market as the sales are still below 60% of peak sales in 2006.
BFL is expected to maintain the export traction to the US, which has
grown to | 171.6 crore with 31.9% YoY growth.
Europe
The European market has seen a positive bounce back with an
unexpected recovery, which was catalysed through M&HCV growth of
~50% YoY at 91,483 units. BFL’s European revenues have jumped
147.6%. This was also aided significantly by the non-auto traction in the
oil & gas, construction and railways segments. The revival in freight traffic
witnessed in the previous quarter has seen more fruition into automotive
sales and is expected to continue, going forward.
The continued demand in the domestic automotive market as well as
non-automotive demand has led to an increase in utilisation in domestic
operations to ~ 70% levels. The improving traction in the export markets
with the resurgence in the EU region along with American continent auto-
& non-auto pick-up has pushed up the export contribution by 810 bps to
46.2% in Q3FY11. The increasing demand for machined products is
leading to an improvement in the product mix and improving realisations
and profitability.
Even in the backdrop of higher input prices, the company has performed
well on the margins front due to the diversified product mix and stronger
pricing power leading to effective costs pass through ability for BFL. The
company expects to witness stronger margins contribution from wholly
owned subsidiaries that, at present, have risen 230 bps YoY to 4.9% in
Q3FY11. The management has indicated high single digit margins going
forward.
Outlook
The non-automotive segment along with the recouping export market has
been a strong supporter for the company’s growth in this quarter. The
company is on target to achieve non-auto contribution of 40% in FY11
and expects better product mix and realisations in non-auto in
comparison to auto due to a superior machining mix. The company has
started to turn around all its subsidiaries with all its major subsidiaries
including FAW China contributing positively to the bottomline of the
company. The company had to undertake one-time restructuring cost of |
8.1 crore towards union negotiation pertaining to transfer of business
from Scottish subsidiaries.
The management has a positive outlook towards increasing volume
growth as the requirement of higher degree of machining requirements
from both the automotive OEMs and non-auto segments is increasing
rapidly. The company is set to work on de-bottlenecking capacities in the
machining facilities, which could see incremental capacity addition of
~30%. BFL is also open to using any idle capacity in its subsidiaries to
cater to any demand spurt in the domestic market. The company
continues to be focused on the domestic operations and expects the
passenger car market to quadruple by FY20. The company also has
confirmed being the lowest bidder in the NTPC tender via Alstom JV
towards boilers and would see revenue flow in during FY12-13. The KPIT
Cummins JV is also bearing fruit with completion of successful trials and
would be marketed to fleet operators post March 2011 post the start of
production.
Valuation
We have factored in continued traction from the resurgence in export
markets with domestic trigger in the power JV with Alstom. We have also
valued the joint venture with Alstom, which is expected to provide
significant addition to revenues from FY12-13 onwards. At the CMP of |
358, the stock is trading at 26.4x FY11E and 17.0x FY12E consolidated
EPS. We have used the SOTP methodology to value the stock. The
standalone business is valued at 18x FY12 EPS of | 18.4 at | 332 per
share while the subsidiaries are valued at 7x FY12 EPS of | 2.3 at | 16 per
share while the Alstom JV is valued at 11x FY12 EV/EBITDA at | 61.4 per
share. Our target price of | 409 implies an upside potential of 14%. We
have maintained a BUY rating on the stock.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Forge -Export, non-auto traction drives growth…
Bharat Forge (BFL) reported positive numbers for Q3FY11 that were in
line with our estimates as net sales grew to | 754.2 crore (I-direct
estimate: | 764.6 crore), up 52.1% YoY and 7.7% QoQ mainly due to
realisation improvement of 3.3% QoQ and 4.3% volume jump.
Consolidated revenues jumped to | 1235.3 crore, 50.2% YoY and 11.1%
QoQ growth with recovery in subsidiaries performance with global
improvements. BFL has successfully countered rising costs through
complete pass through, which has led to margin maintenance at 24.3%.
On the subsidiaries front, the EBITDA margins have nearly doubled to
4.9% YoY. Standalone PAT performance was also strong at | 82.6 crore
(~207% YoY, 39% QoQ) due to the strong operative performance and
higher other income at | 12.6 crore (up 46.4% QoQ).
Highlights of the quarter
The quarter has seen a strong resurgence from the European region with
revenue contribution moving up ~320 bps to 19.6%. Overall exports have
jumped ~80% YoY to | 359.4 crore increasing its share in total revenue
by 810 bps to 46.2%. Domestic M&HCVs had seen a weak Q3 (8.1%QoQ)
due to the pre-norms buying in September 2010, which pushed domestic
revenue decline of 7.6% QoQ supported through higher realisations. The
overall realisation improvement was 3.3% QoQ and 11.5% YoY with
improvement in product mix towards higher degree of machining. The
non-auto segment has maintained Q2 traction in sectors like power, oil &
gas and construction with the segment contribution rising ~11% YoY to
37% of standalone revenues. The company has seen an improvement in
subsidiaries performance with margins rising 230 bps YoY to 4.9%.
Valuation
We have factored in continued traction from resurgence in export markets
with domestic trigger in the power JV with Alstom. At CMP of | 358, the
stock is trading at 26.4x FY11E and 17.0x FY12E consolidated EPS. Using
SOTP, we value the standalone business at 18x FY12 EPS of | 18.4 at |
332/share, subsidiaries at 7.0x FY12 EPS of | 2.3 at | 16/share and Alstom
JV at 11x FY12 EV/EBITDA at | 61.4/share.Our target price of | 409
implies an upside potential of 14%. We maintain BUY rating on the stock.
Geographical review
India
The domestic automotive industry (ex-two wheelers) volumes had seen a
QoQ tempering mainly due to the festive season in Q2FY11 with a 0.5%
decline QoQ though YoY remained robust with 23.5% jump. The CV
segment grew at a robust 32.3% YoY, remaining flat QoQ on the back of
the performance of LCVs shielding the decline in volumes in the M&HCV
segment (8.1% QoQ) to which BFL primarily caters. The soft domestic
performance has led to a revenue decline of 7.6% QoQ, which was,
however, supported to a certain degree by higher realisations. The strong
export performance has reduced the domestic dependency of revenues
by 700 bps QoQ (refer Exhibit 2). The increasing migration of OEMs
towards more stringent Euro-V and BS-IV norms has led to a shift towards
completely machined parts. This provides BFL the edge as a
technological intensive supplier. Thus, the outlook continues to remain
bright in the domestic automotive front, which is expected to continue the
robust growth momentum even as intermediate headwinds of rising input
prices and hardening interest rates continue to persist.
US
The US automotive industry has continued with the improving traction
with ~1.9 million units and YoY growth of 6.4%. The US market saw a
volume growth in which the M&HCV segment has seen a 13.7% YoY
jump. This also marked the resurgence of the class-8 segment trucks
helping BFL’s sales. Major OEMs in the US have a positive growth outlook
in the US market as the sales are still below 60% of peak sales in 2006.
BFL is expected to maintain the export traction to the US, which has
grown to | 171.6 crore with 31.9% YoY growth.
Europe
The European market has seen a positive bounce back with an
unexpected recovery, which was catalysed through M&HCV growth of
~50% YoY at 91,483 units. BFL’s European revenues have jumped
147.6%. This was also aided significantly by the non-auto traction in the
oil & gas, construction and railways segments. The revival in freight traffic
witnessed in the previous quarter has seen more fruition into automotive
sales and is expected to continue, going forward.
The continued demand in the domestic automotive market as well as
non-automotive demand has led to an increase in utilisation in domestic
operations to ~ 70% levels. The improving traction in the export markets
with the resurgence in the EU region along with American continent auto-
& non-auto pick-up has pushed up the export contribution by 810 bps to
46.2% in Q3FY11. The increasing demand for machined products is
leading to an improvement in the product mix and improving realisations
and profitability.
Even in the backdrop of higher input prices, the company has performed
well on the margins front due to the diversified product mix and stronger
pricing power leading to effective costs pass through ability for BFL. The
company expects to witness stronger margins contribution from wholly
owned subsidiaries that, at present, have risen 230 bps YoY to 4.9% in
Q3FY11. The management has indicated high single digit margins going
forward.
Outlook
The non-automotive segment along with the recouping export market has
been a strong supporter for the company’s growth in this quarter. The
company is on target to achieve non-auto contribution of 40% in FY11
and expects better product mix and realisations in non-auto in
comparison to auto due to a superior machining mix. The company has
started to turn around all its subsidiaries with all its major subsidiaries
including FAW China contributing positively to the bottomline of the
company. The company had to undertake one-time restructuring cost of |
8.1 crore towards union negotiation pertaining to transfer of business
from Scottish subsidiaries.
The management has a positive outlook towards increasing volume
growth as the requirement of higher degree of machining requirements
from both the automotive OEMs and non-auto segments is increasing
rapidly. The company is set to work on de-bottlenecking capacities in the
machining facilities, which could see incremental capacity addition of
~30%. BFL is also open to using any idle capacity in its subsidiaries to
cater to any demand spurt in the domestic market. The company
continues to be focused on the domestic operations and expects the
passenger car market to quadruple by FY20. The company also has
confirmed being the lowest bidder in the NTPC tender via Alstom JV
towards boilers and would see revenue flow in during FY12-13. The KPIT
Cummins JV is also bearing fruit with completion of successful trials and
would be marketed to fleet operators post March 2011 post the start of
production.
Valuation
We have factored in continued traction from the resurgence in export
markets with domestic trigger in the power JV with Alstom. We have also
valued the joint venture with Alstom, which is expected to provide
significant addition to revenues from FY12-13 onwards. At the CMP of |
358, the stock is trading at 26.4x FY11E and 17.0x FY12E consolidated
EPS. We have used the SOTP methodology to value the stock. The
standalone business is valued at 18x FY12 EPS of | 18.4 at | 332 per
share while the subsidiaries are valued at 7x FY12 EPS of | 2.3 at | 16 per
share while the Alstom JV is valued at 11x FY12 EV/EBITDA at | 61.4 per
share. Our target price of | 409 implies an upside potential of 14%. We
have maintained a BUY rating on the stock.
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