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The near-term demand outlook for auto parts in the US and Europe is still strong (50% of
consolidated sales), but macro worries and our economists' GDP forecast revisions lead us
to put a limit on future company growth rates. We trim our EPS forecasts and TP, but
maintain Buy given Bharat Forge's pricing power
Short-term demand trend strong, but macro concerns may impact FY13F growth
Discussions with Bharat Forge and industry experts at the recent Frankfurt auto show
indicate that the automobile demand outlook in Europe and the US remains positive and that
debt crisis concerns have yet to cause material damage. Our European analyst, Jose
Asemundi, is also positive on short-term demand growth, recently upgrading volume growth
for trucks (6-8%) though reducing car volume growth (1-3%) for CY11-12F (Automobiles &
Parts – Europe, 20 September). As a result, we adjust sales forecasts marginally, as our cut
in international division sales is offset by currency gains from exports and translation.
Rupee appreciation limits EPS reduction to 3-8% for FY12-13F
As part of its currency hedging policy, Bharat Forge takes simple forward hedges for half of
its planned export sales on a 12-month rolling basis. Thus we expect the recent 10% rupee
depreciation vs the USD to boost FY12 revenues (USD-denominated sales were 31% of the
total in FY11). We build USD realisation of Rs46 into FY12F and FY13F. However, we also
factor in the impact of lower capacity utilisation in European operations, currently operating
near break-even levels, and, so, cut our PAT forecasts 2-7% for FY12-13F.
Business restructuring since 2009 should limit damage in current crisis
The sharp increase in domestic capacity and demand has helped Bharat Forge’s consolidated entity
reduce its dependence on developed markets, like Europe and US, by 20ppt over FY09-11. These
markets still form half its sales, but since the exposure is in premium cars and heavy trucks, which
we believe to be in the early stages of an uptrend, we feel the impact of the European debt crisis will
be limited. Also, cost cuts made in 2009 to reduce break-even levels should limit the impact of
volume reductions. Hence, we feel the company is better placed now to handle global weakness.
Our bear-case scenario shows a yoy decline of 11% in FY13F EBITDA vs 21% during the last
downturn in FY09. We maintain Buy, but cut our DCF-based TP to Rs319 (8x FY12F EV/EBIDTA)
on the back of our reduced forecasts.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The near-term demand outlook for auto parts in the US and Europe is still strong (50% of
consolidated sales), but macro worries and our economists' GDP forecast revisions lead us
to put a limit on future company growth rates. We trim our EPS forecasts and TP, but
maintain Buy given Bharat Forge's pricing power
Short-term demand trend strong, but macro concerns may impact FY13F growth
Discussions with Bharat Forge and industry experts at the recent Frankfurt auto show
indicate that the automobile demand outlook in Europe and the US remains positive and that
debt crisis concerns have yet to cause material damage. Our European analyst, Jose
Asemundi, is also positive on short-term demand growth, recently upgrading volume growth
for trucks (6-8%) though reducing car volume growth (1-3%) for CY11-12F (Automobiles &
Parts – Europe, 20 September). As a result, we adjust sales forecasts marginally, as our cut
in international division sales is offset by currency gains from exports and translation.
Rupee appreciation limits EPS reduction to 3-8% for FY12-13F
As part of its currency hedging policy, Bharat Forge takes simple forward hedges for half of
its planned export sales on a 12-month rolling basis. Thus we expect the recent 10% rupee
depreciation vs the USD to boost FY12 revenues (USD-denominated sales were 31% of the
total in FY11). We build USD realisation of Rs46 into FY12F and FY13F. However, we also
factor in the impact of lower capacity utilisation in European operations, currently operating
near break-even levels, and, so, cut our PAT forecasts 2-7% for FY12-13F.
Business restructuring since 2009 should limit damage in current crisis
The sharp increase in domestic capacity and demand has helped Bharat Forge’s consolidated entity
reduce its dependence on developed markets, like Europe and US, by 20ppt over FY09-11. These
markets still form half its sales, but since the exposure is in premium cars and heavy trucks, which
we believe to be in the early stages of an uptrend, we feel the impact of the European debt crisis will
be limited. Also, cost cuts made in 2009 to reduce break-even levels should limit the impact of
volume reductions. Hence, we feel the company is better placed now to handle global weakness.
Our bear-case scenario shows a yoy decline of 11% in FY13F EBITDA vs 21% during the last
downturn in FY09. We maintain Buy, but cut our DCF-based TP to Rs319 (8x FY12F EV/EBIDTA)
on the back of our reduced forecasts.
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