Annual Report Analysis - Bharat Forge :: Edelweiss

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Bharat Forge’s (BF) FY14 annual report analysis highlights improvement in operating performance as revenue surged 30% and PBT margin increased to 9.3% (FY13:8.1%). However, operating cash flow (post interest) declined from INR7.1bn in FY13 to INR2.6bn in FY14 due to heavy investment in working capital (WC) of INR4.5bn (FY13: release of INR 1.4bn) consequent to increase in revenue. Cash conversion cycle adjusted for bills discounted of INR5.4bn (FY13: INR3.7bn) declined moderately to 80 days (FY13: 102), supported by higher payable days (FY14: 80, FY13: 56) and lower inventory days (FY14: 87, FY13: 101). Purchases from related parties accounted for 51% (FY13: 52%) of raw material costs. Derivatives exposure to hedge expected sales catapulted 274% to INR32bn as at March 2014 from INR8.5bn as at March 2013. Net debt rose by INR4bn (excluding reduction of debt due to disposal of subsidiary). The company capitalised MTM forex loss, net of amortisation, of INR1.1bn (17.3% of PBT) versus INR0.75bn (17.9% of PBT) in FY13.

What’s on track?

FY14 revenue and profitability (PBT before exceptional items) catapulted 30% and 50%, respectively, along with higher RoCE and RoE of 15.4% and 18.1% (FY13: RoCE-11.7%, RoE-12.7%), respectively.

Disposal of 2 loss-making subsidiaries having aggregate losses of INR367mn (FY13:INR795mn) will result in improvement in consolidated profitability.

Cash conversion cycle declined to 80 days (FY13: 102) led by higher payable days at 80 (FY13: 56) and lower inventory days at 87 (FY13: 101). Trade receivables increased to 72 days (FY13: 57).

The company’s D/E ratio (gross) declined to 0.95x in FY14 from 1.2x in FY13. Further, cash and other liquid investments increased by 27% to ~INR12bn.

What needs tracking?

Subsidiaries/JVs were a drag on the consolidated profitability and cash flows owing to their low margins (PBT of 1.3%) and negative operating cash flows (post interest), which declined from INR1.8bn in FY13 to negative INR 2bn in FY14. BF’s total exposure (investment and advances) to subsidiaries/JVs stood at INR5.5bn (March 2013: INR 6.7bn), representing 21% of its net worth.

PAT margin is low at 3.9% in the newly started JV (49% stake) with Alstom (Alstom JV) for manufacture of power equipment. BF’s equity investment in the JV stood at INR732.9mn. RoCE of the JV stands lower at 10% as it is not fully operational.

Despite improvement in operating performance, consolidated net debt adjusted for reduction in debt and cash proceeds from disposal of investment in subsidiary, increased by INR4bn in FY14.

Wholly-owned subsidiary BF Infrastructure Ltd(BFIL) incurred loss (PBT level) of INR226.9mn (before exceptional items) in FY14, its first year of operations. BF’s total investment (equity/preference shares) in BFIL stood at INR318mn, against which impairment loss of INR308mn was recognised in FY14. Advance of INR47.2mn is recoverable from BFIL.

BF invested INR466.5mn as equity in subsidiaries and the JV, of which INR400mn was invested in subsidiary, BF Infrastructure Ventures (BIVL). BIVL did not carry out operations in FY14.