Bharat Gears - Cautiously optimistic; visit note; : Edelweiss PDF link

Bharat Gears (BG IN, INR 75, Not Rated)

We recently met the CFO of Bharat Gears (BG), one of the largest gear suppliers to tractor makers. While the company perceives FY13 demand scenario to be challenging, orders have improved compared to previous quarter as OEM’s inventory levels have dipped and production has improved. The company expects to maintain margins at FY12 level.

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About company

·       BG manufactures gears for tractors, commercial vehicles (CV) and construction equipment (CE). It is also present in the aftermarket.

·       The company earns three fourths of its revenue from OEMs, of which 50-55% comes from tractor OEMs. While CE contributes 5-7%, CV and UV segments contribute the balance revenue.  Exports are largely via OEMs.

·       Aftermarket accounts for ~20% of sales; serviced using owned distribution network.

·       In the aftermarket, BG faces stiff competition from Tata Motors. In the OEM segment, its primary competitiors are Hi-Tech Gear, Fair Field, Eicher, among others.

·       John Deere (~30%), Carraro-India (~15%) and Spicer India (~15%) are top clients.

·       The company has major plants at two locations—Pune and Faridabad. Both run at ~90% capacity utilisation.

·       High capex requirement acts as an entry barrier. 

Outlook: FY13 likely to be difficult for OEM; robust for aftermarket

·       Sales: BG anticipates FY13 to be a difficult year as the OEM segment is going through a slow down. However, in the current quarter, sales/orders have improved as tractor OEMs have lowered inventory. However, aftermarket demand is still robust.

·       Margins: The company expects FY13 margins to be at FY12 level. Structurally, EBITDA margins have dipped from 15% plus in FY06-07 to 11% in FY12 due to rising competition from both captive gear making facilities and third party gear makers.

·       Capex: BG expects capacity to rise 10% in FY13 driven by both brownfield and greenfield expansions at Pune. BG is likely to incur INR350mn for the same.

·       BG is trading at 3x FY12 EPS of INR23.8. We do not cover the stock, hence, we do not have a recommendation on the stock.

Bharat Gears - Cautiously optimistic; visit note; Not Rated

Regards,