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Bharat Forge -Healthy outlook
We met Bharat Forge’s management last week and came away convinced
of the company’s prospects for FY12. The company anticipates healthy
growth on the auto side, particularly in the US and European markets, as
well as continuing scale up in the new non-auto facilities. The passthrough
on steel prices alongside efficiency gains from rising utilisation
should support margins. Modest capacity addition plans imply limited
capex and healthy FCF. Valuations remain reasonable. Reiterate BUY.
Demand outlook healthy
Bharat Forge seemed confident of the demand outlook for FY12 with strong
(25%+) growth in auto exports alongside modest 10-15% growth in domestic
auto. The robust outlook for overseas demand also implies healthy
performance in the subsidiaries. The company expects to nearly double
quarterly revenues in the new non-auto facilities by mid FY13 as utilisation
scales up. Whilst we are cautious on growth in the domestic CV market for
FY12, we remain optimistic on non-auto and export demand and expect 20%
growth in standalone sales for FY12.
Margins tailwinds
Whilst steel prices have been rising, Bharat Forge has a pass through
arrangement with its customers for such escalation and its per unit margins
remain unaffected. Besides this, capacity utilisation levels remain low at 70-
72% for domestic auto and ~50% for non-auto with headroom for as much
as 300-400bps of Ebitda margin improvements from rising utilisation.
Modest capex plans imply healthy cash generation
Given the moderate utilisation levels, Bharat Forge’s capex needs are modest.
Over FY12-13, the company expects to invest Rs1.5-1.8bn in machining
facilities (where utilisation levels are already approaching 100%) and ~Rs0.8-
1bn in forging capacity. Besides this, there is maintenance capex of
Rs0.5bn/year. Even with the ongoing investments into the power JVs, we
expect the company to generate Rs6.7bn of FCF (standalone) over FY12-13.
Valuations justified, retain BUY
Given expectations of strong growth in exports and overseas revenues, we see
upside potential to our consolidated FY12 estimates. We like BFL due to its
diversified revenue growth drivers, accelerated profit growth and option value
from JV’s. We value Bharat Forge on a SOTP basis with a 21x FY12 PE for
standalone earnings, 13.5x for the subsidiaries and 1.2x P/B for the JV
investments, giving our price target of Rs435, 27% upside. We reiterate BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Forge -Healthy outlook
We met Bharat Forge’s management last week and came away convinced
of the company’s prospects for FY12. The company anticipates healthy
growth on the auto side, particularly in the US and European markets, as
well as continuing scale up in the new non-auto facilities. The passthrough
on steel prices alongside efficiency gains from rising utilisation
should support margins. Modest capacity addition plans imply limited
capex and healthy FCF. Valuations remain reasonable. Reiterate BUY.
Demand outlook healthy
Bharat Forge seemed confident of the demand outlook for FY12 with strong
(25%+) growth in auto exports alongside modest 10-15% growth in domestic
auto. The robust outlook for overseas demand also implies healthy
performance in the subsidiaries. The company expects to nearly double
quarterly revenues in the new non-auto facilities by mid FY13 as utilisation
scales up. Whilst we are cautious on growth in the domestic CV market for
FY12, we remain optimistic on non-auto and export demand and expect 20%
growth in standalone sales for FY12.
Margins tailwinds
Whilst steel prices have been rising, Bharat Forge has a pass through
arrangement with its customers for such escalation and its per unit margins
remain unaffected. Besides this, capacity utilisation levels remain low at 70-
72% for domestic auto and ~50% for non-auto with headroom for as much
as 300-400bps of Ebitda margin improvements from rising utilisation.
Modest capex plans imply healthy cash generation
Given the moderate utilisation levels, Bharat Forge’s capex needs are modest.
Over FY12-13, the company expects to invest Rs1.5-1.8bn in machining
facilities (where utilisation levels are already approaching 100%) and ~Rs0.8-
1bn in forging capacity. Besides this, there is maintenance capex of
Rs0.5bn/year. Even with the ongoing investments into the power JVs, we
expect the company to generate Rs6.7bn of FCF (standalone) over FY12-13.
Valuations justified, retain BUY
Given expectations of strong growth in exports and overseas revenues, we see
upside potential to our consolidated FY12 estimates. We like BFL due to its
diversified revenue growth drivers, accelerated profit growth and option value
from JV’s. We value Bharat Forge on a SOTP basis with a 21x FY12 PE for
standalone earnings, 13.5x for the subsidiaries and 1.2x P/B for the JV
investments, giving our price target of Rs435, 27% upside. We reiterate BUY.
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