Annual Report Analysis - Bharat Forge :Edelweiss

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Bharat Forge’s (BF) FY11 annual report highlights continuing negative FCFO on the back of consistent capex/acquisition. Efficiency ratios deteriorated as capex over the years failed to translate into revenue growth. Subsidiaries continue to report losses; however, during the year, they reported operating profits. Auditors of two subsidiaries highlighted reservation on going concern assumptions.

Consistent capex led to negative FCFO; deteriorated efficiency ratio

Over the past five years though BF’s cumulative capex was INR 25.4 bn, turnover posted a meager 4.0% CAGR. Consequently, the company’s fixed asset turnover ratio (ex CWIP) dipped from 3.1x in FY07 to 2.1x in FY11.

BF’s free cash flow for FY11 stood at INR (3.2) bn, primarily on account of huge capex. Out of the past five years, the company was able to generate positive free cash flow only in FY10.

Subsidiaries remain an overhang

Subsidiaries continued to report loss before tax of INR 256 mn (FY10: INR 2,085 mn) on back of higher depreciation and interest cost. However, during the year, EBIDTA margin of subsidiaries improved from (5.5)% to 3.2%, primarily on account of German and Chinese subsidiaries.

Auditors of Bharat Forge America (BFA), a wholly owned subsidiary, have drawn attention to the appropriateness of going concern assumption used for preparing its financial statement. In CY10, BFA had reported net loss of INR 210.5.5 mn (CY09: INR 234.5 mn). BF’s total investment in BFA as at FY11 end stood at INR 987.1 mn.

Auditors have opined that the going concern assumption is not valid for Bharat Forge Scottish Stampings (Scotland, BFSS), a step-down subsidiary, on the back of continuing losses. In FY11, BFSS had reported net loss of INR 76.1 mn (FY10: INR 12.1 mn). Its commercial operations have ceased and assets have been transferred to another subsidiary.

QIP, FCCB redemption contain D/E

BF’s D/E improved from 1.5x in FY10 to 1.0x in FY11, primarily on account of funds raised through QIP, warrants and redemption of FCCB.