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Risks rising
Bharat Forge is exposed to the cyclical CV markets in India, Europe and
the US, creating the risk of a slowdown in top line growth. While the
company has diversified its revenue base, restructured overseas
businesses and reduced leverage since the previous downturn, the risk of
earnings disappointments remains elevated. We have cut our FY12-13
EPS by 13-26% to reflect more a cautious outlook for the overseas
subsidiaries and the standalone business. While we admire Bharat Forge
for its core manufacturing capabilities and diversified business model,
risks remain to the downside for now. Downgrade to U-PF from BUY.
Revenue base exposed to risky end markets
In FY11, 42% of Bharat Forge’s revenues came from subsidiaries with a bulk
of this coming from operations in Europe, the US and China. While these did
not contribute meaningfully to profits (9% of FY11 Ebitda), these businesses
had seen deeply negative profits during the last downturn (Ebitda margin was
-6.7% in FY10). Even within the profitable standalone business, 38% of FY11
revenues came from exports to the US and Europe, while the domestic
business remains geared to the domestic CV market.
Previous experience suggest vulnerability to cycles
Bharat Forge’s experience in previous downturns suggests that the business is
cyclical. The standalone PBT (pre-exceptional) declined 52% in FY00-02 and
44% in FY07-10, coinciding with downturns in the Indian or US CV markets.
The overseas businesses, which were acquired in 2004-06, saw Ebitda shrink
from Rs1.82bn in FY08 to a loss Rs0.98bn in FY10.
Less exposed now but still vulnerable
Three key changes within the company prevent Bharat Forge from being as
vulnerable as the last downturn: lower gearing, restructuring in overseas
subsidiaries and a growing non-auto business. As such, the company should
not see a repeat of FY09-10, while the new power and capital goods ventures
create medium term potential. However, earnings risks remain elevated given
high dependence on cyclical end markets.
Downgrade earnings; U-PF from BUY earlier
We have downgraded our estimates for the overseas businesses, expecting a
breakeven performance for FY12 but a loss for FY13 as the European
businesses struggle. We have also trimmed forecasts for the standalone
business for FY13 to reflect more moderate growth in the auto business (7%
cut in PAT). This drives a 13-26% decline in consolidated EPS. We have
downgraded our valuation to Rs280 (7x EV/Ebitda, 13x PE; ex-JVs). While the
stock has underperformed the CNX Midcap by 7% in YTD, the risk to earnings
will likely continue to overhang the stock. We downgrade to U-PF from BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Risks rising
Bharat Forge is exposed to the cyclical CV markets in India, Europe and
the US, creating the risk of a slowdown in top line growth. While the
company has diversified its revenue base, restructured overseas
businesses and reduced leverage since the previous downturn, the risk of
earnings disappointments remains elevated. We have cut our FY12-13
EPS by 13-26% to reflect more a cautious outlook for the overseas
subsidiaries and the standalone business. While we admire Bharat Forge
for its core manufacturing capabilities and diversified business model,
risks remain to the downside for now. Downgrade to U-PF from BUY.
Revenue base exposed to risky end markets
In FY11, 42% of Bharat Forge’s revenues came from subsidiaries with a bulk
of this coming from operations in Europe, the US and China. While these did
not contribute meaningfully to profits (9% of FY11 Ebitda), these businesses
had seen deeply negative profits during the last downturn (Ebitda margin was
-6.7% in FY10). Even within the profitable standalone business, 38% of FY11
revenues came from exports to the US and Europe, while the domestic
business remains geared to the domestic CV market.
Previous experience suggest vulnerability to cycles
Bharat Forge’s experience in previous downturns suggests that the business is
cyclical. The standalone PBT (pre-exceptional) declined 52% in FY00-02 and
44% in FY07-10, coinciding with downturns in the Indian or US CV markets.
The overseas businesses, which were acquired in 2004-06, saw Ebitda shrink
from Rs1.82bn in FY08 to a loss Rs0.98bn in FY10.
Less exposed now but still vulnerable
Three key changes within the company prevent Bharat Forge from being as
vulnerable as the last downturn: lower gearing, restructuring in overseas
subsidiaries and a growing non-auto business. As such, the company should
not see a repeat of FY09-10, while the new power and capital goods ventures
create medium term potential. However, earnings risks remain elevated given
high dependence on cyclical end markets.
Downgrade earnings; U-PF from BUY earlier
We have downgraded our estimates for the overseas businesses, expecting a
breakeven performance for FY12 but a loss for FY13 as the European
businesses struggle. We have also trimmed forecasts for the standalone
business for FY13 to reflect more moderate growth in the auto business (7%
cut in PAT). This drives a 13-26% decline in consolidated EPS. We have
downgraded our valuation to Rs280 (7x EV/Ebitda, 13x PE; ex-JVs). While the
stock has underperformed the CNX Midcap by 7% in YTD, the risk to earnings
will likely continue to overhang the stock. We downgrade to U-PF from BUY.
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