Bharat Forge -Non-auto revenue boosts standalone earnings: Standard Chartered Research,

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Bharat Forge Limited
Non-auto revenue boosts standalone earnings


 Standalone revenue rose 53%, driven by ramp up of the
non-auto business
 Earnings doubled yoy, supported by strong revenue
growth and stable margins
 Subsidiaries break-even at the PBT level; consolidated
net profit up 191% yoy to Rs733m
 Maintain OUTPERFORM and price target of Rs450.
Standalone earnings boosted by non-auto ramp up –
Bharat Forge’s 3Q revenue climbed 53% yoy (up 8% qoq)
to Rs7.8bn, driven by ramp up at new non-auto facilities
(exports up 80% yoy to Rs3.6bn) even as domestic
revenue declined 7% qoq to Rs3.9bn due to 7% qoq
decline in overall MHCV sales in the quarter. Earnings
jumped 107% to Rs826mn yoy driven by strong revenue
growth and stable margin (at 24.3% – up 90bps yoy).
Subsidiaries break-even at the PBT level – Bharat
Forge’s consolidated earnings rose 191% yoy to Rs733m,
driven by a 150bps yoy improvement in margin (18.1%).
Subsidiaries reported marginal PBT of Rs8m (against
losses of Rs122m in 3Q FY10 and Rs72m in 2Q FY11).

Valuations – Strong domestic demand, non-auto ramp up
and restructuring at its subsidiaries are likely to lead to a
sharp earnings expansion going forward, in our view. The
new power JVs with Alstom, NTPC and Areva would
further boost earnings from FY13 onwards. Maintain
OUTPERFORM with a SOTP-based price target of Rs450.
(attributing Rs428 to the standalone entity at 12x FY12E
EV/EBITDA – its historic average multiple, Rs6 to its
subsidiaries at 4x FY12E EV/EBITDA – comparable to
global peer group multiple and Rs17 to the Alstom JV).


Robust non-auto ramp up drives topline growth
Bharat Forge’s standalone revenue grew 53% yoy (up 8% qoq) to Rs7.8bn on account of export
ramp up led by incremental growth from the non-auto segment. Overall, tonnage growth for the
quarter came in at 33% yoy to 48,116 MT. Domestic revenue for the quarter, though up 33% yoy,
declined 7% qoq to Rs3.9bn primarily due to an 7% decline in overall MHCV sales in 3Q FY11.
Export revenue posted strong 80% yoy growth (up 31% qoq) to Rs3.6bn led by the ramp up of
the new non-auto facilities at Baramati and Mundhwa. The non-auto business in the quarter has
now increased to 37% of net sales (Rs2.9bn) from 26% in 3Q FY10 (Rs1.3bn).  


Strong topline growth boosts standalone earnings
Led by a strong revenue growth, absolute EBITDA grew 58% yoy to Rs1.9bn. Margin for the
quarter grew 90bps yoy to 24.3%. With improved operating cash flows, other income increased to
Rs126m in 3Q FY11 (Rs86m in 2Q FY11 and Rs92m in 3Q FY10). As a result, net profit more
than doubled (up 107% yoy and 21% qoq) to Rs826m.


Subsidiaries break-even at the PBT level
On a consolidated basis, revenue grew 50% yoy (up 11% qoq) to Rs12.4bn. Consolidated margin
was up 150bps yoy (up 60bps qoq) at 18.1%. As a result, net profit grew 191% yoy (up 21% qoq)
to Rs733m. At the subsidiary level, the company reported a marginal PBT of Rs8m in 3Q FY11
against a loss of Rs122m in 3QFY10 and a loss of Rs72m in 2Q FY11. At the net profit level,
subsidiaries reported a Rs93m loss primarily on account of restructuring costs incurred during the
quarter.


Conference call highlights
 The extra-ordinary expense of Rs80m for the quarter included:
 Rs50m settlement with the union from its US subsidiary. This is likely to lead to ~30%
reduction in wages in the long term
 Rs30m incurred for transfer of its Scottish facility to Bharat Forge Kilsta
 The capacity utilization for the standalone entity stands at 70% while that for its overseas
subsidiaries is at 55-60%. For the new non-auto facilities, the one at Baramati is working at
40-45% utilization while the Mundhwa facility is operating at 30% utilization.
 Post restructuring, subsidiary performance has substantially improved and the company
hopes to post a PAT level break-even for overall subsidiaries in FY12. The China JV has been
profitable for the last three successive quarters.
 The company is expanding machining facility at Baramati to cater to the auto business.
 BFL is likely to incur Rs1-1.2bn  in capex (excluding investment in JVs) for FY12
 The net debt at BFL now stands at Rs10.1bn

Valuations and Outlook
Sustained demand from the domestic automobile segment and the robust ramp up of the nonauto business are likely to drive a strong 38% CAGR over FY10-13E in standalone revenue.
Further, restructuring and cost-cutting measures are likely to lead to BFL’s European subsidiaries
and Chinese JV breaking even by FY11 (has achieved PBT level break-even in the current
quarter). Potential upside could come from the power JVs entered with Areva, NTPC and Alstom
from FY13 onwards. Led by a robust earnings outlook and improving return ratios, maintain
OUTPERFORM with a SOTP based target price of Rs450 (attributing Rs428 to the standalone
entity at 12x FY12E EV/EBITDA – its historic average multiple, Rs6 to its subsidiaries at 4x
FY12E EV/EBITDA – comparable to global peer group multiple and Rs17 to the Alstom JV).