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Bharat Forge (BHFC)
Automobiles
Impressive quarter driven by ramp-up in domestic revenues. 1QFY12 consolidated
profit before tax of Rs1.58 bn (+74% yoy, 6% qoq) was 32% above our estimates
driven by higher-than-expected increase in domestic revenues despite a 15% sequential
decline in domestic MHCV industry production. We maintain our ADD rating on the
stock as we believe the company will maintain its strong growth trajectory while
valuations are attractive at these levels.
1QFY12 profits were boosted by higher-than-expected domestic revenues
Bharat Forge consolidated profit before tax of Rs1.58 bn (+74% yoy, +6% qoq) was 32% above
our estimates. Standalone profit of Rs974 mn (+53% yoy, -3% qoq) was 24% ahead of our
estimates. Subsidiaries reported a profit before tax of Rs111 mn (+54% yoy) driven by
improvement in European subsidiaries.
Standalone revenues of Rs8.6 bn (+36% yoy, +4% qoq) were 12% ahead of our estimates driven
by strong growth in both domestic (+17% yoy, +5% qoq) and export revenues (+67% yoy, +6%
qoq). Domestic revenues increased by 5% qoq despite a 15% qoq decline in domestic MHCV
industry production driven by improvement in higher share of domestic non-auto revenues and
higher machining revenues.
Export revenues were boosted by strong growth in European export revenues (+20% qoq) while
US export revenues declined by 4% qoq. Non-auto revenues increased by 29% yoy driven by new
customer additions and ramp-up in revenues from existing customers. Non-auto revenues formed
33% of standalone revenues versus 36% in 4QFY11.
We maintain our ADD rating on the stock but revise our target price to Rs320 (from Rs355)
We retain our ADD rating but reduce our target price to Rs320 (from Rs355 earlier) as the stock
trades at 6.3X EV/EBITDA on our FY2013E estimates at a 30% discount to its long-term historical
average and we expect an earnings CAGR of 25% over the next two years which should lead to
re-rating of the company from current levels.
We have revised downwards our standalone earnings by 9-10% over FY2012-2013E and revise
downwards our consolidated earnings by 10-12% over FY2012-2013E. Our earnings revision
reflects – (1) 24% downward revision in non-auto revenues as we expect slower ramp-up in
power/oil and gas non-auto revenues partly offset by increase in domestic revenues aided by
increase in machining revenues and (2) significant downward revision in our subsidiary profit
estimates due to decline in commercial vehicle sales in China and slower growth in European
subsidiaries.
1QFY12 results were buoyed by higher domestic revenues
Bharat Forge consolidated profit before tax of Rs1.58 bn (+74% yoy, +6% qoq) was 32%
above our estimates. Standalone profit of Rs974 mn (+53% yoy, -3% qoq) was 24% ahead
of our estimates. Subsidiaries reported a profit before tax of Rs111 mn (+54% yoy) driven by
sharp improvement in European subsidiaries.
Standalone revenues of Rs8.6 bn (+36% yoy, +4% qoq) were 12% ahead of our
estimates driven by strong growth in both domestic (+17% yoy, +5% qoq) and export
revenues (+67% yoy, +6% qoq).
Domestic revenues increased by 5% qoq despite a 15% qoq decline in domestic MHCV
industry production driven by improvement in higher share of domestic non-auto
revenues and higher machining revenues.
Export revenues were boosted by strong growth in European export revenues (+20% qoq)
while US export revenues declined by 4% qoq.
Non-auto revenues increased by 29% yoy driven by new customer additions and ramp-up
in revenues from existing customers. Non-auto revenues formed 33% of standalone
revenues versus 36% in 4QFY11. Non-auto revenues have been static for the past 4
quarters which is a cause of concern while the management is confident of achieving
>30% yoy growth in non-auto revenues in FY2012E. New non-auto facilities contributed
Rs1.62 bn of revenues (+97.9% yoy). Capacity utilization levels for automotive forgings is
around 75% while for non-automotive business is ~50%.
Total tonnage sold in the quarter was 52,959 tons (+24% yoy, 3% qoq) while the
average realizations/ton increased by 9% yoy.
EBITDA margins remained at flat qoq (at 24.3%) due to rise in manufacturing and raw
material expenses offset by lower other expenses.
Subsidiaries reported revenues of Rs7.1 bn in 1QFY12 (+38% yoy) while EBITDA grew by
36% yoy. EBITDA margins for subsidiaries were flat yoy (at 5.6%). China subsidiary
reported a profit of Rs35 mn while overall subsidiary profit before tax was Rs111 mn in
1QFY12. Capacity utilization levels at the subsidiaries are at 50% currently. The company
indicated that they would focus on improving margins at the subsidiaries by increasing
value add in the business.
Consolidated profits were up 74% yoy driven by strong growth in both parent and
subsidiary operations.
The company plans to spend Rs2-2.5 bn annually every year as they plan to expand their
machining capacities by 30%. Machining revenues as a percentage of overall parent
revenues are 50% currently and the company plans to increase them to 65% over the
next two years. The company’s new machining capacity for non-auto and automotive
business will be added over the next 12-15 months.
Bharat Forge plans to start commercial production at Alstom-Bharat Forge joint venture in
early 2013. It has emerged as an L1 bidder for an order worth Rs4.5 bn from NTPC and is
expected to be ordered soon. The company plans to invest Rs3.5 bn in this joint venture
over the next two years.
The company is also expected to start commercial production at a joint venture with
NTPC in Solapur to manufacture critical balance of plant equipment for power plants and
the plant is expected to start commercial production in 2012. It has invested Rs1.15 bn in
these two joint ventures uptil now. The company plans to invest another Rs200 mn in the
NTPC JV over the next couple of years.
The company is also aggressively targeting the EPC business and has formed a separate
subsidiary for the EPC business. It has secured orders worth Rs18 bn for setting up a 3X
150 MW power plant which will be executed over a span of two years starting FY2012.
Carrying forward its non-auto strategy, the company has entered into a 50:50 JV with
David Brown Group, UK for gear box manufacturing. The joint venture will manufacture
gear boxes for various industries, supplying both new build gearboxes and aftermarket
services to power, mining, defense, wind, rail and steel sectors.
Maintain ADD rating but cut earnings on the back of slower non-auto ramp-up
and subsidiary growth
We retain our ADD rating but reduce our target price to Rs320 (from Rs355 earlier) as the
stock trades at 6.3X EV/EBITDA on our FY2013E estimates at a 30% discount to its longterm
historical average and we expect an earnings CAGR of 25% over the next two years
which should lead to re-rating of the company from current levels. We have revised
downwards our standalone earnings by 9-10% over FY2012-13E and revise downwards our
consolidated earnings by 10-12% over FY2012-13E.
Our earnings revision reflects:
(1) 24% downward revision in our non-auto revenues as we believe ramp-up in nonautomotive
revenues could be slower than expected given concerns of slowing
economic growth in US, European geographies and slower growth in power sectors
in India. Bharat Forge’s key clients for non-auto revenues are Cummins India,
Halliburton, Caterpillar, GE transportation, John Deere and Siemens. We believe
slowdown in addition in power generation, moderation in oil drilling activities will
lead to slower growth in non-auto revenues.
(2) We have increased our domestic automotive revenues by 11-24% over FY2012-
2013E driven by increase in machining revenues in the automotive business.
(3) We have also increased our interest and depreciation expenses as we have
increased our capex estimates from Rs3 bn to Rs4bn over the next two years.
(4) We have also revised our subsidiary profits to Rs27 and Rs57 mn (from Rs248 and
Rs373 mn in FY2012-2013E, respectively) as we believe slowdown in European and
US commercial vehicle revenues and increase in exports from India will moderate
growth in overseas subsidiaries.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Forge (BHFC)
Automobiles
Impressive quarter driven by ramp-up in domestic revenues. 1QFY12 consolidated
profit before tax of Rs1.58 bn (+74% yoy, 6% qoq) was 32% above our estimates
driven by higher-than-expected increase in domestic revenues despite a 15% sequential
decline in domestic MHCV industry production. We maintain our ADD rating on the
stock as we believe the company will maintain its strong growth trajectory while
valuations are attractive at these levels.
1QFY12 profits were boosted by higher-than-expected domestic revenues
Bharat Forge consolidated profit before tax of Rs1.58 bn (+74% yoy, +6% qoq) was 32% above
our estimates. Standalone profit of Rs974 mn (+53% yoy, -3% qoq) was 24% ahead of our
estimates. Subsidiaries reported a profit before tax of Rs111 mn (+54% yoy) driven by
improvement in European subsidiaries.
Standalone revenues of Rs8.6 bn (+36% yoy, +4% qoq) were 12% ahead of our estimates driven
by strong growth in both domestic (+17% yoy, +5% qoq) and export revenues (+67% yoy, +6%
qoq). Domestic revenues increased by 5% qoq despite a 15% qoq decline in domestic MHCV
industry production driven by improvement in higher share of domestic non-auto revenues and
higher machining revenues.
Export revenues were boosted by strong growth in European export revenues (+20% qoq) while
US export revenues declined by 4% qoq. Non-auto revenues increased by 29% yoy driven by new
customer additions and ramp-up in revenues from existing customers. Non-auto revenues formed
33% of standalone revenues versus 36% in 4QFY11.
We maintain our ADD rating on the stock but revise our target price to Rs320 (from Rs355)
We retain our ADD rating but reduce our target price to Rs320 (from Rs355 earlier) as the stock
trades at 6.3X EV/EBITDA on our FY2013E estimates at a 30% discount to its long-term historical
average and we expect an earnings CAGR of 25% over the next two years which should lead to
re-rating of the company from current levels.
We have revised downwards our standalone earnings by 9-10% over FY2012-2013E and revise
downwards our consolidated earnings by 10-12% over FY2012-2013E. Our earnings revision
reflects – (1) 24% downward revision in non-auto revenues as we expect slower ramp-up in
power/oil and gas non-auto revenues partly offset by increase in domestic revenues aided by
increase in machining revenues and (2) significant downward revision in our subsidiary profit
estimates due to decline in commercial vehicle sales in China and slower growth in European
subsidiaries.
1QFY12 results were buoyed by higher domestic revenues
Bharat Forge consolidated profit before tax of Rs1.58 bn (+74% yoy, +6% qoq) was 32%
above our estimates. Standalone profit of Rs974 mn (+53% yoy, -3% qoq) was 24% ahead
of our estimates. Subsidiaries reported a profit before tax of Rs111 mn (+54% yoy) driven by
sharp improvement in European subsidiaries.
Standalone revenues of Rs8.6 bn (+36% yoy, +4% qoq) were 12% ahead of our
estimates driven by strong growth in both domestic (+17% yoy, +5% qoq) and export
revenues (+67% yoy, +6% qoq).
Domestic revenues increased by 5% qoq despite a 15% qoq decline in domestic MHCV
industry production driven by improvement in higher share of domestic non-auto
revenues and higher machining revenues.
Export revenues were boosted by strong growth in European export revenues (+20% qoq)
while US export revenues declined by 4% qoq.
Non-auto revenues increased by 29% yoy driven by new customer additions and ramp-up
in revenues from existing customers. Non-auto revenues formed 33% of standalone
revenues versus 36% in 4QFY11. Non-auto revenues have been static for the past 4
quarters which is a cause of concern while the management is confident of achieving
>30% yoy growth in non-auto revenues in FY2012E. New non-auto facilities contributed
Rs1.62 bn of revenues (+97.9% yoy). Capacity utilization levels for automotive forgings is
around 75% while for non-automotive business is ~50%.
Total tonnage sold in the quarter was 52,959 tons (+24% yoy, 3% qoq) while the
average realizations/ton increased by 9% yoy.
EBITDA margins remained at flat qoq (at 24.3%) due to rise in manufacturing and raw
material expenses offset by lower other expenses.
Subsidiaries reported revenues of Rs7.1 bn in 1QFY12 (+38% yoy) while EBITDA grew by
36% yoy. EBITDA margins for subsidiaries were flat yoy (at 5.6%). China subsidiary
reported a profit of Rs35 mn while overall subsidiary profit before tax was Rs111 mn in
1QFY12. Capacity utilization levels at the subsidiaries are at 50% currently. The company
indicated that they would focus on improving margins at the subsidiaries by increasing
value add in the business.
Consolidated profits were up 74% yoy driven by strong growth in both parent and
subsidiary operations.
The company plans to spend Rs2-2.5 bn annually every year as they plan to expand their
machining capacities by 30%. Machining revenues as a percentage of overall parent
revenues are 50% currently and the company plans to increase them to 65% over the
next two years. The company’s new machining capacity for non-auto and automotive
business will be added over the next 12-15 months.
Bharat Forge plans to start commercial production at Alstom-Bharat Forge joint venture in
early 2013. It has emerged as an L1 bidder for an order worth Rs4.5 bn from NTPC and is
expected to be ordered soon. The company plans to invest Rs3.5 bn in this joint venture
over the next two years.
The company is also expected to start commercial production at a joint venture with
NTPC in Solapur to manufacture critical balance of plant equipment for power plants and
the plant is expected to start commercial production in 2012. It has invested Rs1.15 bn in
these two joint ventures uptil now. The company plans to invest another Rs200 mn in the
NTPC JV over the next couple of years.
The company is also aggressively targeting the EPC business and has formed a separate
subsidiary for the EPC business. It has secured orders worth Rs18 bn for setting up a 3X
150 MW power plant which will be executed over a span of two years starting FY2012.
Carrying forward its non-auto strategy, the company has entered into a 50:50 JV with
David Brown Group, UK for gear box manufacturing. The joint venture will manufacture
gear boxes for various industries, supplying both new build gearboxes and aftermarket
services to power, mining, defense, wind, rail and steel sectors.
Maintain ADD rating but cut earnings on the back of slower non-auto ramp-up
and subsidiary growth
We retain our ADD rating but reduce our target price to Rs320 (from Rs355 earlier) as the
stock trades at 6.3X EV/EBITDA on our FY2013E estimates at a 30% discount to its longterm
historical average and we expect an earnings CAGR of 25% over the next two years
which should lead to re-rating of the company from current levels. We have revised
downwards our standalone earnings by 9-10% over FY2012-13E and revise downwards our
consolidated earnings by 10-12% over FY2012-13E.
Our earnings revision reflects:
(1) 24% downward revision in our non-auto revenues as we believe ramp-up in nonautomotive
revenues could be slower than expected given concerns of slowing
economic growth in US, European geographies and slower growth in power sectors
in India. Bharat Forge’s key clients for non-auto revenues are Cummins India,
Halliburton, Caterpillar, GE transportation, John Deere and Siemens. We believe
slowdown in addition in power generation, moderation in oil drilling activities will
lead to slower growth in non-auto revenues.
(2) We have increased our domestic automotive revenues by 11-24% over FY2012-
2013E driven by increase in machining revenues in the automotive business.
(3) We have also increased our interest and depreciation expenses as we have
increased our capex estimates from Rs3 bn to Rs4bn over the next two years.
(4) We have also revised our subsidiary profits to Rs27 and Rs57 mn (from Rs248 and
Rs373 mn in FY2012-2013E, respectively) as we believe slowdown in European and
US commercial vehicle revenues and increase in exports from India will moderate
growth in overseas subsidiaries.
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