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Bharat Forge (BHFC IN)
Automobiles
In a sweet spot. Bharat Forge is in a sweet spot with the ramp-up in its non-auto
business, recovery in heavy truck market in developed markets (US and EU) and
minimum capex requirements over the next two years which is likely to generate strong
cash flows for the company. We believe the company could re-rate from current levels
driven by strong earnings growth and visibility of improvement in revenues. We
maintain our ADD rating with a target price of Rs395.
Non-auto business picking up pace
Non-auto business is likely to form around 38% of Bharat Forge’s standalone revenues and 28% of
consolidated revenues in FY2011E. We expect non-auto revenues to form 32% of consolidated
revenues by FY2013E. Non-auto business is likely to grow at 87% yoy in FY2011E driven by new
customer wins in Europe and US and strong growth in orders from existing clients. Bharat Forge’s
non-auto customers are seeing sharp improvement in their revenues (please see Page 5) having
grown at 19% yoy in 3QFY11, which gives us confidence about continuing ramp-up in non-auto
revenues.
Exports growing at a handsome pace driven by recovery in heavy truck volumes in EU and US
Bharat Forge’s exports revenues have grown by 76% yoy in 9MFY11 driven by an 86% yoy
increase in European revenues and 53% yoy increase in US revenues. US heavy truck volumes have
started to recover after a sharp decline over the past four years as replacement demand has
started to kick in (North American truck production is at 40% of its peak volumes). European
exports for Bharat Forge has been boosted by both heavy truck volumes increasing at a strong
pace and addition of new non-auto customers which has boosted non-auto revenues. We forecast
Bharat Forge’s exports to grow at 24% yoy in FY2012E.
Margins expected to improve driven by improvement in product mix
We estimate consolidated EBITDA margins to improve by 120 bps yoy in FY2012E driven by (1)
increase in non-auto business revenues to 32% of consolidated revenues versus 28% in FY2011E,
(2) sharp recovery in export revenues which have higher EBITDA margins than domestic business
and (3) a steady recovery in subsidiary business EBITDA margins.
Valuations trading at 10% discount to historical average
Stock is currently trading at 8.6X EV/EBITDA on our FY2012E consolidated EBITDA estimate at a
10% discount to historical average. We believe stock is likely to re-rate from current levels driven
by (1) strong growth in revenues aided by exports and non-auto business and (2) improvement in
EBITDA margins. We estimate earnings to increase at a 36% CAGR over FY2011-13E.
Valuations trading at a discount to its historical averages
Bharat Forge is trading at a 10% discount to its historical average despite a strong earnings
growth projected over the next two years (36% earnings CAGR over FY2011-13E). Stock is
currently trading at 8.6X EV/EBITDA on our FY2012E consolidated EBITDA estimate. We
value the stock based on the sum of the parts valuation methodology. Our target price of
Rs395 is based on – (1) we value the standalone business at 10X EV/EBITDA on our FY2012E
EBITDA estimate, (2) we ascribe a 4X EV/EBITDA multiple to our FY2012E estimate for
abroad subsidiaries and (3) we value Bharat Forge’s 50% stake in the Bharat Forge-Alstom
joint venture at Rs24/share (at a 20% discount to its fair value). At our target price, stock
would trade at 9.3X EV/EBITDA on our FY2012E estimates which is in line with its historical
valuations.
Bharat Forge has enjoyed premium valuations over its auto component peers due to the
following reasons – (1) strong pricing power due to virtual monopoly in the commercial
vehicle forgings segment with Indian auto manufacturers, (2) sustainability of high EBITDA
margins over the past 10 years in standalone business and average ROE of ~15% over this
period and (3) strong growth in exports to Europe and US (27% CAGR between FY2002
and FY2010).
Bharat Forge’s business used to be dependent on cyclicality of commercial vehicle business
as majority of its revenues (~55% of consolidated revenues) were dependent on the
commercial vehicle business. Company has focused on de-risking its business by increasing
revenues in the non-automotive segment (mainly power, oil and gas, marine etc.) from 17%
of consolidated revenues in FY2008 to 28% in FY2011E. This is a higher margin business
and is less cyclical than a commercial vehicle business. We forecast non-automotive revenues
to form 32% of consolidated revenues by FY2013E which could lead to re-rating of the
company due to improvement in EBITDA margins and greater consistency of revenue growth.
Overseas subsidiaries still form 35% of Bharat Forge’s consolidated revenues and are in a
turnaround stage at this juncture which makes it difficult for us to ascribe a higher valuation
to the business given uncertainty of turnaround at businesses abroad.
We maintain our ADD rating on the stock with a target price of Rs395. At our target price,
stock would trade at a 19.6X PE on our FY2012E consolidated EPS estimate (excluding
Rs24/share of Bharat Forge-Alstom value).
view
We expect domestic commercial vehicle segment volume growth to moderate in FY2012E
driven by moderating industrial production growth, likely increase in interest rates and
increase in cost of ownership of vehicles for freight operators (driven by higher fuel prices
and interest rates). The commercial vehicle segment forms around 35% of Bharat Forge’s
India revenues and 20% of standalone revenues. We expect this segment to grow at 12%
CAGR over FY2011-13E driven by 10% volume growth and 2% improvement in pricing/mix.
Company is planning to increase machining capacities by 30% over the next two years to
improve contribution margins in the automotive business.
Bharat Forge is currently operating at ~53% capacity utilization in India and at 50% capacity
utilization in overseas subsidiaries. Hence company will not need any capex for capacity
expansion for the next 2-3 years except for non-auto business where capacities will need to
be increased due to very strong growth in the segment.
Current forging capacities (tons/annum)
By region
Forging capacity (tons per annum)
India 365,000
Auto 240,000
Non auto 125,000
Europe 200,000
USA 6 0,000
China 135,000
Global capacity 7 60,000
Source: Company
Non-auto business picking up pace
Non-auto business is likely to form around 38% of Bharat Forge’s standalone revenues and
28% of consolidated revenues in FY2011E. We expect non-auto revenues to form 32% of
consolidated revenues by FY2013E. Non-auto business is likely to grow at 87% yoy in
FY2011E driven by new customer wins in Europe and US and strong growth in orders from
existing clients. We have also analyzed the sales growth of Bharat Forge’s key customers
which indicates that most of Bharat Forge’s non-auto customers are seeing strong sales
growth over the past few quarters which bodes well for Bharat Forge.
New non-auto facilities at Mundhwa and Baramati are currently operating at 41% capacity
utilization and we expect the capacity utilization of non-auto business to increase to 78% by
FY2012E. Company has achieved Rs3,050 mn of non-auto revenues in 9MFY11. Company
plans to add machining capacities by 20-30% in both automotive and non-automotive
businesses to increase the value-added portion of the business. We forecast 20% increase in
non-auto capacities in FY2013E.
Exports seeing a sharp revival driven by recovery in European and US
commercial vehicle segment
Bharat Forge’s exports revenues have grown by 76% yoy in 9MFY11 driven by an 86% yoy
increase in European revenues and 53% yoy increase in US revenues. US heavy truck
volumes have started to recover after a sharp decline as replacement demand has started to
kick in (North American truck production is at 40% of its peak volumes). European exports
for Bharat Forge has been boosted by both heavy truck volumes increasing at a strong pace
and addition of new non-auto customers which has boosted non-auto revenues. We
forecast Bharat Forge’s exports to grow at 24% yoy in FY2012E.
Subsidiaries slowly turning around but China operations could surprise positively
Subsidiaries are operating at 50% capacity utilization and are at breakeven levels currently.
Revenue growth for the 9MFY11 has been around 3% but EBITDA margins have improved
by 350 bps yoy to 6.5% driven by restructuring actions taken by Bharat Forge. The China
subsidiary has already started making profits but company does not report China subsidiary
numbers on a quarterly basis.
EBITDA margins likely to improve driven by improvement in product mix
We estimate consolidated EBITDA margins to improve by 120 bps yoy in FY2012E driven by
(1) an increase in non-auto business revenues to 32% of consolidated revenues versus 28%
in FY2011E, (2) sharp recovery in export revenues which have higher EBITDA margins than
domestic business and (3) a steady recovery in subsidiary business EBITDA margins.
Low capex + strong revenue growth bodes well for return ratios, free cash flow
Bharat Forge is operating at close to 50% capacity utilization and is well-placed to benefit
from the recovery in exports and non-automotive business. Company plans to spend Rs500-
1,000 mn annually over the next two years for maintenance capex and increasing machining
capacities. Company also plans to spend about Rs2,000 mn in investments for its capital
goods forays (Alstom, Areva, NTPC joint ventures). Hence we expect free cash flow
generation to be very strong for the company over the next two years. We estimate
company to generate a free cash flow yield of ~4% in FY2012E and ~6% in FY2013E at the
current market price.
Earnings revision
We increase our consolidated revenue estimates by 4-8% over FY2011-2013E due to
increase in our export and non-auto revenue estimates. We have cut our EBITDA margin
estimates by 100-130 bps over FY2012-2013E to build in higher input cost pressures than
earlier envisaged.
We value Bharat Forge’s 51% stake in Alstom JV at Rs30/share
We value Bharat Forge’s 51% stake in Bharat Forge-Alstom joint venture at Rs30/share.
Bharat Forge and Alstom are setting up a 5,000 MW turbine genset plant at a cost of Rs15
bn. The construction work has already started and is likely to be completed by mid-CY2011E.
Revenue booking would start in FY2013E. At its full capacity, the joint venture may have a
revenue potential of Rs 50-60 bn but this could be achievable only by FY2016E or beyond.
However, we forecast capacity utilization to improve from 20% in the first year of operation
to 75% by FY2018E due to aggressive competition by other players. Bharat Forge has
emerged as a L1 bidder for five 660 MW turbine gensets awarded by NTPC recently and is
also under contention for another 9*800 MW turbine orders which will be placed by NTPC
in the next 2-3 quarters.
Hence revenue visibility for the Bharat Forge-Alstom joint venture is quite good, in our view,
and there could be upside potential to our current estimates.
Bharat Forge has also started construction of its plant at Solapur, Maharashtra and plans to
manufacture products for balance of plant operations at power plants. Company has also
formed a joint venture with Areva which will get commissioned once Areva gets finalized
orders and advance from Indian government for setting up nuclear power plants. We do not
factor the revenue potential from these two joint ventures currently due to limited visibility
on the ramp-up at these joint ventures.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Forge (BHFC IN)
Automobiles
In a sweet spot. Bharat Forge is in a sweet spot with the ramp-up in its non-auto
business, recovery in heavy truck market in developed markets (US and EU) and
minimum capex requirements over the next two years which is likely to generate strong
cash flows for the company. We believe the company could re-rate from current levels
driven by strong earnings growth and visibility of improvement in revenues. We
maintain our ADD rating with a target price of Rs395.
Non-auto business picking up pace
Non-auto business is likely to form around 38% of Bharat Forge’s standalone revenues and 28% of
consolidated revenues in FY2011E. We expect non-auto revenues to form 32% of consolidated
revenues by FY2013E. Non-auto business is likely to grow at 87% yoy in FY2011E driven by new
customer wins in Europe and US and strong growth in orders from existing clients. Bharat Forge’s
non-auto customers are seeing sharp improvement in their revenues (please see Page 5) having
grown at 19% yoy in 3QFY11, which gives us confidence about continuing ramp-up in non-auto
revenues.
Exports growing at a handsome pace driven by recovery in heavy truck volumes in EU and US
Bharat Forge’s exports revenues have grown by 76% yoy in 9MFY11 driven by an 86% yoy
increase in European revenues and 53% yoy increase in US revenues. US heavy truck volumes have
started to recover after a sharp decline over the past four years as replacement demand has
started to kick in (North American truck production is at 40% of its peak volumes). European
exports for Bharat Forge has been boosted by both heavy truck volumes increasing at a strong
pace and addition of new non-auto customers which has boosted non-auto revenues. We forecast
Bharat Forge’s exports to grow at 24% yoy in FY2012E.
Margins expected to improve driven by improvement in product mix
We estimate consolidated EBITDA margins to improve by 120 bps yoy in FY2012E driven by (1)
increase in non-auto business revenues to 32% of consolidated revenues versus 28% in FY2011E,
(2) sharp recovery in export revenues which have higher EBITDA margins than domestic business
and (3) a steady recovery in subsidiary business EBITDA margins.
Valuations trading at 10% discount to historical average
Stock is currently trading at 8.6X EV/EBITDA on our FY2012E consolidated EBITDA estimate at a
10% discount to historical average. We believe stock is likely to re-rate from current levels driven
by (1) strong growth in revenues aided by exports and non-auto business and (2) improvement in
EBITDA margins. We estimate earnings to increase at a 36% CAGR over FY2011-13E.
Valuations trading at a discount to its historical averages
Bharat Forge is trading at a 10% discount to its historical average despite a strong earnings
growth projected over the next two years (36% earnings CAGR over FY2011-13E). Stock is
currently trading at 8.6X EV/EBITDA on our FY2012E consolidated EBITDA estimate. We
value the stock based on the sum of the parts valuation methodology. Our target price of
Rs395 is based on – (1) we value the standalone business at 10X EV/EBITDA on our FY2012E
EBITDA estimate, (2) we ascribe a 4X EV/EBITDA multiple to our FY2012E estimate for
abroad subsidiaries and (3) we value Bharat Forge’s 50% stake in the Bharat Forge-Alstom
joint venture at Rs24/share (at a 20% discount to its fair value). At our target price, stock
would trade at 9.3X EV/EBITDA on our FY2012E estimates which is in line with its historical
valuations.
Bharat Forge has enjoyed premium valuations over its auto component peers due to the
following reasons – (1) strong pricing power due to virtual monopoly in the commercial
vehicle forgings segment with Indian auto manufacturers, (2) sustainability of high EBITDA
margins over the past 10 years in standalone business and average ROE of ~15% over this
period and (3) strong growth in exports to Europe and US (27% CAGR between FY2002
and FY2010).
Bharat Forge’s business used to be dependent on cyclicality of commercial vehicle business
as majority of its revenues (~55% of consolidated revenues) were dependent on the
commercial vehicle business. Company has focused on de-risking its business by increasing
revenues in the non-automotive segment (mainly power, oil and gas, marine etc.) from 17%
of consolidated revenues in FY2008 to 28% in FY2011E. This is a higher margin business
and is less cyclical than a commercial vehicle business. We forecast non-automotive revenues
to form 32% of consolidated revenues by FY2013E which could lead to re-rating of the
company due to improvement in EBITDA margins and greater consistency of revenue growth.
Overseas subsidiaries still form 35% of Bharat Forge’s consolidated revenues and are in a
turnaround stage at this juncture which makes it difficult for us to ascribe a higher valuation
to the business given uncertainty of turnaround at businesses abroad.
We maintain our ADD rating on the stock with a target price of Rs395. At our target price,
stock would trade at a 19.6X PE on our FY2012E consolidated EPS estimate (excluding
Rs24/share of Bharat Forge-Alstom value).
view
We expect domestic commercial vehicle segment volume growth to moderate in FY2012E
driven by moderating industrial production growth, likely increase in interest rates and
increase in cost of ownership of vehicles for freight operators (driven by higher fuel prices
and interest rates). The commercial vehicle segment forms around 35% of Bharat Forge’s
India revenues and 20% of standalone revenues. We expect this segment to grow at 12%
CAGR over FY2011-13E driven by 10% volume growth and 2% improvement in pricing/mix.
Company is planning to increase machining capacities by 30% over the next two years to
improve contribution margins in the automotive business.
Bharat Forge is currently operating at ~53% capacity utilization in India and at 50% capacity
utilization in overseas subsidiaries. Hence company will not need any capex for capacity
expansion for the next 2-3 years except for non-auto business where capacities will need to
be increased due to very strong growth in the segment.
Current forging capacities (tons/annum)
By region
Forging capacity (tons per annum)
India 365,000
Auto 240,000
Non auto 125,000
Europe 200,000
USA 6 0,000
China 135,000
Global capacity 7 60,000
Source: Company
Non-auto business picking up pace
Non-auto business is likely to form around 38% of Bharat Forge’s standalone revenues and
28% of consolidated revenues in FY2011E. We expect non-auto revenues to form 32% of
consolidated revenues by FY2013E. Non-auto business is likely to grow at 87% yoy in
FY2011E driven by new customer wins in Europe and US and strong growth in orders from
existing clients. We have also analyzed the sales growth of Bharat Forge’s key customers
which indicates that most of Bharat Forge’s non-auto customers are seeing strong sales
growth over the past few quarters which bodes well for Bharat Forge.
New non-auto facilities at Mundhwa and Baramati are currently operating at 41% capacity
utilization and we expect the capacity utilization of non-auto business to increase to 78% by
FY2012E. Company has achieved Rs3,050 mn of non-auto revenues in 9MFY11. Company
plans to add machining capacities by 20-30% in both automotive and non-automotive
businesses to increase the value-added portion of the business. We forecast 20% increase in
non-auto capacities in FY2013E.
Exports seeing a sharp revival driven by recovery in European and US
commercial vehicle segment
Bharat Forge’s exports revenues have grown by 76% yoy in 9MFY11 driven by an 86% yoy
increase in European revenues and 53% yoy increase in US revenues. US heavy truck
volumes have started to recover after a sharp decline as replacement demand has started to
kick in (North American truck production is at 40% of its peak volumes). European exports
for Bharat Forge has been boosted by both heavy truck volumes increasing at a strong pace
and addition of new non-auto customers which has boosted non-auto revenues. We
forecast Bharat Forge’s exports to grow at 24% yoy in FY2012E.
Subsidiaries slowly turning around but China operations could surprise positively
Subsidiaries are operating at 50% capacity utilization and are at breakeven levels currently.
Revenue growth for the 9MFY11 has been around 3% but EBITDA margins have improved
by 350 bps yoy to 6.5% driven by restructuring actions taken by Bharat Forge. The China
subsidiary has already started making profits but company does not report China subsidiary
numbers on a quarterly basis.
EBITDA margins likely to improve driven by improvement in product mix
We estimate consolidated EBITDA margins to improve by 120 bps yoy in FY2012E driven by
(1) an increase in non-auto business revenues to 32% of consolidated revenues versus 28%
in FY2011E, (2) sharp recovery in export revenues which have higher EBITDA margins than
domestic business and (3) a steady recovery in subsidiary business EBITDA margins.
Low capex + strong revenue growth bodes well for return ratios, free cash flow
Bharat Forge is operating at close to 50% capacity utilization and is well-placed to benefit
from the recovery in exports and non-automotive business. Company plans to spend Rs500-
1,000 mn annually over the next two years for maintenance capex and increasing machining
capacities. Company also plans to spend about Rs2,000 mn in investments for its capital
goods forays (Alstom, Areva, NTPC joint ventures). Hence we expect free cash flow
generation to be very strong for the company over the next two years. We estimate
company to generate a free cash flow yield of ~4% in FY2012E and ~6% in FY2013E at the
current market price.
Earnings revision
We increase our consolidated revenue estimates by 4-8% over FY2011-2013E due to
increase in our export and non-auto revenue estimates. We have cut our EBITDA margin
estimates by 100-130 bps over FY2012-2013E to build in higher input cost pressures than
earlier envisaged.
We value Bharat Forge’s 51% stake in Alstom JV at Rs30/share
We value Bharat Forge’s 51% stake in Bharat Forge-Alstom joint venture at Rs30/share.
Bharat Forge and Alstom are setting up a 5,000 MW turbine genset plant at a cost of Rs15
bn. The construction work has already started and is likely to be completed by mid-CY2011E.
Revenue booking would start in FY2013E. At its full capacity, the joint venture may have a
revenue potential of Rs 50-60 bn but this could be achievable only by FY2016E or beyond.
However, we forecast capacity utilization to improve from 20% in the first year of operation
to 75% by FY2018E due to aggressive competition by other players. Bharat Forge has
emerged as a L1 bidder for five 660 MW turbine gensets awarded by NTPC recently and is
also under contention for another 9*800 MW turbine orders which will be placed by NTPC
in the next 2-3 quarters.
Hence revenue visibility for the Bharat Forge-Alstom joint venture is quite good, in our view,
and there could be upside potential to our current estimates.
Bharat Forge has also started construction of its plant at Solapur, Maharashtra and plans to
manufacture products for balance of plant operations at power plants. Company has also
formed a joint venture with Areva which will get commissioned once Areva gets finalized
orders and advance from Indian government for setting up nuclear power plants. We do not
factor the revenue potential from these two joint ventures currently due to limited visibility
on the ramp-up at these joint ventures.
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