Bharat Forge
Export boost; Hold
Key takeaways
Tonnage to grow on low base. Bharat Forge’s production tonnage is
expected to grow 14% yoy during 3QFY14 on a lower base of the previous
year, where the company witnessed shrunken customer demand in India and
Europe. Qoq, the trajectory is expected to be flat. At home, continued
slowdown in M&H CVs and lower non-auto offtake have impacted sales, but
higher exports, along with better rupee realisation would boost it. We are
optimistic about the company’s long-term strategy to become a diversified
forgings-parts manufacturer as well as strong US demand in FY13, but believe
these will not suffice to counter stagnation in domestic revenue.
Standalone profitability benefits from lower base. We expect standalone
income to grow 24.4% yoy, to `8.4bn. We expect a sequential reduction of
40bps in the EBITDA margin, to 26%, and a 52.7% yoy growth in EBITDA.
EBITDA per ton is expected to be 34% higher yoy. Our profit expectation is
`934m, a 96.6% yoy growth on a depressed base.
Subsidiaries too expected to do well. As in 2QFY14, Bharat Forge’s
wholly-owned subsidiary and China revenues are expected to do well, boosted
by strong demand from Europe. The key would be to sustain the momentum
into CY14, which may prove to be difficult. We also expect PBT losses at the
China operations to continue.
Our take. As the company largely depends on M&H CVs, the ongoing
slowdown in the segment could weigh on its results. Favourable currency
movement, though, is a positive, together with a better product mix. On
short-to–medium term concerns, we retain Hold on the stock. It trades at 18x
FY15e consolidated EPS, which would be a 20% discount to its past fouryear average). Risks. Downside: Slowdown in execution, drop in US sales.
Upside: Quicker-than-expected CV recovery, improved overseas demand.
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Export boost; Hold
Key takeaways
Tonnage to grow on low base. Bharat Forge’s production tonnage is
expected to grow 14% yoy during 3QFY14 on a lower base of the previous
year, where the company witnessed shrunken customer demand in India and
Europe. Qoq, the trajectory is expected to be flat. At home, continued
slowdown in M&H CVs and lower non-auto offtake have impacted sales, but
higher exports, along with better rupee realisation would boost it. We are
optimistic about the company’s long-term strategy to become a diversified
forgings-parts manufacturer as well as strong US demand in FY13, but believe
these will not suffice to counter stagnation in domestic revenue.
Standalone profitability benefits from lower base. We expect standalone
income to grow 24.4% yoy, to `8.4bn. We expect a sequential reduction of
40bps in the EBITDA margin, to 26%, and a 52.7% yoy growth in EBITDA.
EBITDA per ton is expected to be 34% higher yoy. Our profit expectation is
`934m, a 96.6% yoy growth on a depressed base.
Subsidiaries too expected to do well. As in 2QFY14, Bharat Forge’s
wholly-owned subsidiary and China revenues are expected to do well, boosted
by strong demand from Europe. The key would be to sustain the momentum
into CY14, which may prove to be difficult. We also expect PBT losses at the
China operations to continue.
Our take. As the company largely depends on M&H CVs, the ongoing
slowdown in the segment could weigh on its results. Favourable currency
movement, though, is a positive, together with a better product mix. On
short-to–medium term concerns, we retain Hold on the stock. It trades at 18x
FY15e consolidated EPS, which would be a 20% discount to its past fouryear average). Risks. Downside: Slowdown in execution, drop in US sales.
Upside: Quicker-than-expected CV recovery, improved overseas demand.
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