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Bharat Forge (BFRG.BO)
More than Just Bharat – All the World’s a Stage
BHFC’s growth drivers are now global — With 41% of revenues (standalone) from
overseas markets, BHFC has transitioned from an Indian auto ancillary into a globally
diversified component manufacturer with linkages to the global auto/machinery/
diversified equipment sectors. We therefore take a fresh look at our model and
valuation approach. While diversification is a long-term positive, the flipside is
heightened sensitivity to industrial production across developed/emerging markets.
CIRA recently cut industrial production forecasts for the US/EU zone to 2.8%/1.1%
(down from 3.8%/2.7%) for CY12. These geographies accounted for 20%/18% of
BHFC’s standalone revenues (FY11).
We forecast BHFC’s consolidated revenue/EBITDA growth to decelerate —
Globally, our analysts are more bullish on commodity linked markets like Ag equipment,
oil & gas and mining; less so on trucks as lower GDP implies lower freight volumes. We
estimate BHFC’s revenue growth to decelerate to ~7% in FY13, reflecting macro
slowdown and 2 strong years (FY11/12) of recovery. Consolidated EBITDA growth
should also decelerate to ~15%/11% over FY12/13.
BHFC is better positioned today — than in the previous downturn, with a healthy net
debt – equity ratio (0.62 end FY11), relatively lower capex outlay (~Rs 5bn over
FY12/13), diversification through domestic non auto businesses and restructured
overseas subsidiaries (especially China).
Valuations: Secular de-rating — We assign Rs240 (13x FY13E cons EPS) to the
consolidated operations. BHFC’s past trading range is of little relevance, given its
global thrust and shift into non auto. The multiple will continue to evolve, as the
earnings contribution from the various JVs (turbine generators, balance of plant
equipment) increase. At 13x, BHFC would trade at a c30% premium to global peers,
justified given slightly better growth prospects in India. We add Rs21 for the Alstom JV,
to arrive at our Rs261 TP. Revising risk rating to Low from High.
Key risks — a) Growth in end industries is greater than forecast, b) global GDP/IP
upgrades, c) Non auto business grows at faster than anticipated rate.
Bharat Forge
Company description
Bharat Forge is a global-scale forging major and one of the largest exporters of auto
components in India. As global automakers increase component outsourcing to
offset declining profitability, Bharat Forge sees a larger export market, as well as
steady sales domestically. The company has made a successful initial foray into the
non auto forgings space (forgings for oil and gas, power, et al, and is now making a
foray into the power equipment sector through 2 JVs with Alstom (for turbine
generators and associated equipment and 1 JV with NTPC (for balance of plant
equipment).
Investment strategy
We rate Bharat Forge shares Sell / Low Risk (3L). India's advantages in auto parts
are well documented: skilled engineers and relatively low wages. Structurally,
Bharat Forge is well-positioned to benefit from increased outsourcing of auto parts
to low-cost countries. Cyclically, given its dependence on mature economies (US,
Eurozone), which are witnessing recessionary headwinds, we believe BHFC's nearterm revenue growth could be challenged. We expect the stock to underperform
over the near term, as the weakening global and domestic macro environment
impacts revenue growth. Faster-than-forecast revenue growth from the non-auto
business might result in a re-rating, as the non-auto business enjoys superior
economics.
Valuation
Our Target Price of Rs 261 is based on sum-of-parts valuation methodology. We
assign 13x P/E on Mar 2013 earnings to arrive at a value of Rs240/share for the
consolidated business. We value BHFC’s stake in the Alstom turbine generator JV
at around Rs21 / share (derived via a DCF based methodology after 20% holding
company discount). The P/E multiple is a c30% premium to global machinery /
diversified equipment players (BHFC’s end customers). It is a significant premium to
domestic auto ancillary players like Amtek Auto (a one-time peer which currently
trades at around 7x / 4x on FY12 /13 consensus EPS) – though we reckon BHFC’s
business today is very different from that of the former. Global machinery /
diversified equipment players are at present trading at a c20% discount to the
S&P500 on CY12 earnings, given where they are in the cycle, and the macro
outlook.
Citi India strategist Aditya Narain assigns a 1 year forward multiple of ~15x to arrive
at his Sensex target. In line with the global discount, we ascribe a c10-15%
discount, to value BHFC at 13x. The implied EV / EBITDA a 13x P/E multiple
equates to is around 6.5x FY13 EBITDA. Again, this is at a premium to global peers
that are trading at around 5x CY12 (FY13); in line with the premium accorded to on
earnings. We don’t split the businesses and ascribe different multiples to the parent
business and the subsidiaries (not for EV / EBITDA) given that the subsidiaries in
aggregate will account for less than 10% of the profits of the consolidated business
Risks
We rate Bharat Forge shares Low Risk, in line with our quantitative risk-rating
system, which tracks 260-day historical share price volatility. From a fundamental
perspective, we reckon that the risk rating should be Low, to reflect a healthy
balance sheet, and a macro environment that is less adverse than in CY08/09.
BHFC also doesn’t have meaningful capex outlay (unlike 3 years ago) which implies
that the cash flow outlook appears fairly healthy. BHFC’s global peers are rated at
Medium risk, but we reckon that with BHFC’s margin profile and cost structure, a
lower risk rating is merited. Key upside risks to our recommendation which could
continue to sustain the shares above our target price include: 1) faster-than-forecast
margin improvement in subsidiaries' operations, which might impact our forecasts,
2) reduction in input costs and the attendant positive impact on earnings, and 3)
Better-than-expected growth in non-automotive business. Downside risks include:
1) rising cost pressures, 2) decline in demand from key OEM clients, and 3) product
liability claims, which might impact profitability
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Forge (BFRG.BO)
More than Just Bharat – All the World’s a Stage
BHFC’s growth drivers are now global — With 41% of revenues (standalone) from
overseas markets, BHFC has transitioned from an Indian auto ancillary into a globally
diversified component manufacturer with linkages to the global auto/machinery/
diversified equipment sectors. We therefore take a fresh look at our model and
valuation approach. While diversification is a long-term positive, the flipside is
heightened sensitivity to industrial production across developed/emerging markets.
CIRA recently cut industrial production forecasts for the US/EU zone to 2.8%/1.1%
(down from 3.8%/2.7%) for CY12. These geographies accounted for 20%/18% of
BHFC’s standalone revenues (FY11).
We forecast BHFC’s consolidated revenue/EBITDA growth to decelerate —
Globally, our analysts are more bullish on commodity linked markets like Ag equipment,
oil & gas and mining; less so on trucks as lower GDP implies lower freight volumes. We
estimate BHFC’s revenue growth to decelerate to ~7% in FY13, reflecting macro
slowdown and 2 strong years (FY11/12) of recovery. Consolidated EBITDA growth
should also decelerate to ~15%/11% over FY12/13.
BHFC is better positioned today — than in the previous downturn, with a healthy net
debt – equity ratio (0.62 end FY11), relatively lower capex outlay (~Rs 5bn over
FY12/13), diversification through domestic non auto businesses and restructured
overseas subsidiaries (especially China).
Valuations: Secular de-rating — We assign Rs240 (13x FY13E cons EPS) to the
consolidated operations. BHFC’s past trading range is of little relevance, given its
global thrust and shift into non auto. The multiple will continue to evolve, as the
earnings contribution from the various JVs (turbine generators, balance of plant
equipment) increase. At 13x, BHFC would trade at a c30% premium to global peers,
justified given slightly better growth prospects in India. We add Rs21 for the Alstom JV,
to arrive at our Rs261 TP. Revising risk rating to Low from High.
Key risks — a) Growth in end industries is greater than forecast, b) global GDP/IP
upgrades, c) Non auto business grows at faster than anticipated rate.
Bharat Forge
Company description
Bharat Forge is a global-scale forging major and one of the largest exporters of auto
components in India. As global automakers increase component outsourcing to
offset declining profitability, Bharat Forge sees a larger export market, as well as
steady sales domestically. The company has made a successful initial foray into the
non auto forgings space (forgings for oil and gas, power, et al, and is now making a
foray into the power equipment sector through 2 JVs with Alstom (for turbine
generators and associated equipment and 1 JV with NTPC (for balance of plant
equipment).
Investment strategy
We rate Bharat Forge shares Sell / Low Risk (3L). India's advantages in auto parts
are well documented: skilled engineers and relatively low wages. Structurally,
Bharat Forge is well-positioned to benefit from increased outsourcing of auto parts
to low-cost countries. Cyclically, given its dependence on mature economies (US,
Eurozone), which are witnessing recessionary headwinds, we believe BHFC's nearterm revenue growth could be challenged. We expect the stock to underperform
over the near term, as the weakening global and domestic macro environment
impacts revenue growth. Faster-than-forecast revenue growth from the non-auto
business might result in a re-rating, as the non-auto business enjoys superior
economics.
Valuation
Our Target Price of Rs 261 is based on sum-of-parts valuation methodology. We
assign 13x P/E on Mar 2013 earnings to arrive at a value of Rs240/share for the
consolidated business. We value BHFC’s stake in the Alstom turbine generator JV
at around Rs21 / share (derived via a DCF based methodology after 20% holding
company discount). The P/E multiple is a c30% premium to global machinery /
diversified equipment players (BHFC’s end customers). It is a significant premium to
domestic auto ancillary players like Amtek Auto (a one-time peer which currently
trades at around 7x / 4x on FY12 /13 consensus EPS) – though we reckon BHFC’s
business today is very different from that of the former. Global machinery /
diversified equipment players are at present trading at a c20% discount to the
S&P500 on CY12 earnings, given where they are in the cycle, and the macro
outlook.
Citi India strategist Aditya Narain assigns a 1 year forward multiple of ~15x to arrive
at his Sensex target. In line with the global discount, we ascribe a c10-15%
discount, to value BHFC at 13x. The implied EV / EBITDA a 13x P/E multiple
equates to is around 6.5x FY13 EBITDA. Again, this is at a premium to global peers
that are trading at around 5x CY12 (FY13); in line with the premium accorded to on
earnings. We don’t split the businesses and ascribe different multiples to the parent
business and the subsidiaries (not for EV / EBITDA) given that the subsidiaries in
aggregate will account for less than 10% of the profits of the consolidated business
Risks
We rate Bharat Forge shares Low Risk, in line with our quantitative risk-rating
system, which tracks 260-day historical share price volatility. From a fundamental
perspective, we reckon that the risk rating should be Low, to reflect a healthy
balance sheet, and a macro environment that is less adverse than in CY08/09.
BHFC also doesn’t have meaningful capex outlay (unlike 3 years ago) which implies
that the cash flow outlook appears fairly healthy. BHFC’s global peers are rated at
Medium risk, but we reckon that with BHFC’s margin profile and cost structure, a
lower risk rating is merited. Key upside risks to our recommendation which could
continue to sustain the shares above our target price include: 1) faster-than-forecast
margin improvement in subsidiaries' operations, which might impact our forecasts,
2) reduction in input costs and the attendant positive impact on earnings, and 3)
Better-than-expected growth in non-automotive business. Downside risks include:
1) rising cost pressures, 2) decline in demand from key OEM clients, and 3) product
liability claims, which might impact profitability
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