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Bharat Forge
Continued impressive sales growth
Bharat Forge's consolidated net profit surprised us by 12%, driven by robust
growth in Indian exports (up 80% yoy and 31% qoq) and better-than-expected
margin expansion of international subsidiaries. We see potential upside to our
forecasts and reiterate Buy.
Impressive exports growth led to consolidated profit surprise
! Bharat Forge's December 10 quarter normalised standalone PAT came Rs.826m (up 102%
yoy and 21% qoq) on the back of net sales of Rs.7.7bn (up 53% yoy and 8% qoq). The
impressive sales growth on both yoy and qoq basis was driven mainly by export sales, which
grew ~80% yoy and 31% qoq, negating the 6% qoq decline in domestic sales that were
affected due to weaker industry volumes. Standalone EBITDA for the quarter came in at
Rs1.89bn, up 58% yoy and 8% qoq (up 11% from RBS forecasts). Standalone margins for the
quarter rose 82bp yoy to 24.3%, but remained flat on qoq basis. Standalone depreciation
came in line at Rs.496m, up 21% yoy but flat qoq. Also, the impact of higher-than-expected
net interest expenses was negated by higher-than-expected other income on PBT line.
Normalised standalone EPS for the quarter was Rs.3.5/share.
! On consolidated basis, December 10 quarter normalised consolidated net profit rose 52% yoy
and 34% qoq to Rs.814m (12% above our forecasts) on net sales of Rs.12.4bn (up 50% yoy
and 11% qoq). Taking into account a one time restructuring expense of Rs.81m, the reported
net profit for the quarter came in at Rs.733m, up 190% yoy and 21% qoq. The company's
international subsidiaries (excluding China JV) posted a 46% yoy and 17% qoq sales growth
during 3QFY11, and also posted positive normalised PBT of Rs.8m, against a loss of
Rs.151m last year and Rs.73m in 2QFY11. The EBITDA margin for International subsidiaries
rose to 7.5% in 3Q vs 5.5% last year and 5.1% in 2Q (RBS forecast was 7.2%). Consolidated
normalised EPS for the quarter was Rs3.4.
! For the 9MFY11, the company reported a normalised standalone net profit of Rs2.1bn (up
148% yoy) on net sales of Rs.21.3bn (up 64% yoy). Consolidated net profit for 9MFY11 was
Rs.2.0bn, up 629% yoy as the losses from international subsidiaries were limited during the
period. Consolidated normalised EPS for the 9MFY11 was Rs.8.5/share.
Expect growth momentum to continue
! We expect sales momentum to continue in 4QFY11 post a strong showing in 3QFY11. The
4Q is a seasonally strong quarter for the domestic auto market and we expect the company to
reap the benefits of being the leading player in the auto segment. The high-margin nonautomotive contribution towards total revenue during 3QFY11 was 37% (flat qoq) and the
segment is on track to achieve the 40% contribution by year end, in line with guidance. The
M&HCV market in the US recorded volume growth in 3QFY11 for the first time since FY07
and bodes well for the exports sales growth of the company, for which USA remains the
largest overseas market. Further, as EBITDA margins expand, international subsidiaries are
on course to breakeven at the PAT level by year end as the normalised PAT level loss
reduced to just Rs12m. With growth momentum in key markets of the company intact, we see
potential upside to our earnings forecasts driven by the sales upgrade, but would wait for the
management conference call before making any changes to our forecasts.
Valuation
! The stock is trading at 22.5x our FY12F EPS estimate of Rs15.5. We are currently forecasting
a 33% yoy growth in FY12 earnings. The strong sales traction surprised us during the quarter
as Bharat Forge consolidates its position as the leading forging player in the domestic market.
With growth in the underlying auto industry in both domestic and overseas markets expected
to remain good, we reiterate Buy on the stock. Higher fuel prices along with higher interest
rates in an inflationary environment could be the risk factor for underlying domestic auto
market growth.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Forge
Continued impressive sales growth
Bharat Forge's consolidated net profit surprised us by 12%, driven by robust
growth in Indian exports (up 80% yoy and 31% qoq) and better-than-expected
margin expansion of international subsidiaries. We see potential upside to our
forecasts and reiterate Buy.
Impressive exports growth led to consolidated profit surprise
! Bharat Forge's December 10 quarter normalised standalone PAT came Rs.826m (up 102%
yoy and 21% qoq) on the back of net sales of Rs.7.7bn (up 53% yoy and 8% qoq). The
impressive sales growth on both yoy and qoq basis was driven mainly by export sales, which
grew ~80% yoy and 31% qoq, negating the 6% qoq decline in domestic sales that were
affected due to weaker industry volumes. Standalone EBITDA for the quarter came in at
Rs1.89bn, up 58% yoy and 8% qoq (up 11% from RBS forecasts). Standalone margins for the
quarter rose 82bp yoy to 24.3%, but remained flat on qoq basis. Standalone depreciation
came in line at Rs.496m, up 21% yoy but flat qoq. Also, the impact of higher-than-expected
net interest expenses was negated by higher-than-expected other income on PBT line.
Normalised standalone EPS for the quarter was Rs.3.5/share.
! On consolidated basis, December 10 quarter normalised consolidated net profit rose 52% yoy
and 34% qoq to Rs.814m (12% above our forecasts) on net sales of Rs.12.4bn (up 50% yoy
and 11% qoq). Taking into account a one time restructuring expense of Rs.81m, the reported
net profit for the quarter came in at Rs.733m, up 190% yoy and 21% qoq. The company's
international subsidiaries (excluding China JV) posted a 46% yoy and 17% qoq sales growth
during 3QFY11, and also posted positive normalised PBT of Rs.8m, against a loss of
Rs.151m last year and Rs.73m in 2QFY11. The EBITDA margin for International subsidiaries
rose to 7.5% in 3Q vs 5.5% last year and 5.1% in 2Q (RBS forecast was 7.2%). Consolidated
normalised EPS for the quarter was Rs3.4.
! For the 9MFY11, the company reported a normalised standalone net profit of Rs2.1bn (up
148% yoy) on net sales of Rs.21.3bn (up 64% yoy). Consolidated net profit for 9MFY11 was
Rs.2.0bn, up 629% yoy as the losses from international subsidiaries were limited during the
period. Consolidated normalised EPS for the 9MFY11 was Rs.8.5/share.
Expect growth momentum to continue
! We expect sales momentum to continue in 4QFY11 post a strong showing in 3QFY11. The
4Q is a seasonally strong quarter for the domestic auto market and we expect the company to
reap the benefits of being the leading player in the auto segment. The high-margin nonautomotive contribution towards total revenue during 3QFY11 was 37% (flat qoq) and the
segment is on track to achieve the 40% contribution by year end, in line with guidance. The
M&HCV market in the US recorded volume growth in 3QFY11 for the first time since FY07
and bodes well for the exports sales growth of the company, for which USA remains the
largest overseas market. Further, as EBITDA margins expand, international subsidiaries are
on course to breakeven at the PAT level by year end as the normalised PAT level loss
reduced to just Rs12m. With growth momentum in key markets of the company intact, we see
potential upside to our earnings forecasts driven by the sales upgrade, but would wait for the
management conference call before making any changes to our forecasts.
Valuation
! The stock is trading at 22.5x our FY12F EPS estimate of Rs15.5. We are currently forecasting
a 33% yoy growth in FY12 earnings. The strong sales traction surprised us during the quarter
as Bharat Forge consolidates its position as the leading forging player in the domestic market.
With growth in the underlying auto industry in both domestic and overseas markets expected
to remain good, we reiterate Buy on the stock. Higher fuel prices along with higher interest
rates in an inflationary environment could be the risk factor for underlying domestic auto
market growth.
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