Trail of strong performances continues! • Bharat Forge :ICICI Securities, report

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Trail of strong performances continues! • Bharat Forge (BFL) reported revenues of | 1198 crore (up ~44% YoY), higher than estimates due to strong export revenue beat • EBITDA margin was at 30.2% (~447 bps YoY jump), which was a surprise with gross margins expanding ~200 bps QoQ to ~61% • Subsequently, PAT came ahead of estimates at | 196.3 crore on the back of a strong operative performance Undisputed leader in CV forgings to benefit as recovery kicks in! BFL is a leading global “Tier-1.5” automotive forgings supplier, boasting top-5 global OEMs as customers. CV business is ~55-60% of the consolidated business & remains a key driver for overall growth. BFL saw strong growth in the US marker as class-8 truck demand has improved over last year, driven by pre-buying before emission norm changes. Stabilisation of the EU region would also aid growth in FY16E, FY17E. On the domestic side, BFL is a clean play on the recovery of domestic CV cycle recovery, as it commands > 60% market share in M&HCV components. Thus, BFL remains a strong play for economic recovery. Business diversification mantra, exports, machining paying dividends BFL broadened its revenue stream by entering new segments (non-auto) and global markets. The share of the auto business has declined from ~80% in FY07 to ~53% in FY15E while the share of India has reduced from ~60% to ~38% in standalone operations. Further, it has increased value addition by focusing on machined components, the contribution of which has increased>51%, boosting realisation & margins. Focus on new business verticals via Make in India to aid consistency In the recent past, the PV space focus has also increased and could be an important growth driver as in terms of opportunity globally it could be 3- 4x of traditional CV business. The non-auto segment offers significant growth potential, as it is much larger than the auto segment. BFL is targeting ~60% of its standalone revenues from the non-auto segment, up from the current ~40%. Its partnerships with global players (Alstom, Areva, Elbit Systems David Brown) bear testimony to its globally cost competitive engineering /manufacturing capabilities. BFL is focusing on the defence opportunity (~| 40,000 crore FY13 imports) where it is looking at using its engineering capabilities to develop indigenous products (e.g. 155 mm artillery gun). Mild capital intensity, higher utilisations to aid margins & revenues In the last couple of years BFL had remained extremely tight on capital expenditure and working capital leading to a decline in D/E to 0.4x (1.5x FY11). However, the company is now comfortably placed and looks set to increase capacity and utilisation in the coming years as the management targets ~| 7,000 crore revenue by FY17E-18E. These factors, we believe, will keep both margins as well as revenue growths above industry trend. Scarcity premium of Tier- 1.5 supplier commands premium valuation! We believe BFL’s business franchise is unique and provides investors a great opportunity to own one of the few India listed “Global/Local Tier- 1.5” ancillary supplier. We believe on the financials front, strong EBITDA margins (~30% FY17E) performance will be coupled with strong RoCEs (~25% in FY17E). We, thus, value BFL on an SOTP basis with standalone business at 23x FY7E EPS of | 11.4 and other subsidiaries at | 54/share to arrive at a target price of | 1178. We ascribe HOLD rating to the stock.

LINK
http://content.icicidirect.com/mailimages/IDirect_BharatForge_Q3FY15.pdf