Target-A-Year

Bharat Forge Limited (BFL)

Current Market price: 260
Target 1: 379
Target 2: 410

Current Quote of Bharat Forge

BFL reported 17.7% rise in net sales with strong 21.3% rise in net profit for the quarter ended 4FY07. For FY07, net sales grew 18.2% in line with projected revenues and net profit by 6.4%. On consolidated basis, BFL reported 38.4% rise in net sales and 16% rise in net profit. Improving performance of subsidiaries supported the excellent performance on consolidated basis. Earning estimates are pretty positive for coming years on the back improving performance in domestic market, increasing utilization of domestic as well as acquired companies, improvement in Chinese operations and increasing contribution from non-automotive business (high value, high margin business) post capex.

FY07 Key highlights (Standalone)

Net sales spur 18.2%

BGL reported 18.2% rise in net sales to Rs1, 864.4 crore on the back of strong 21.7% increase in sales from domestic market to Rs1, 269.2 crore. Exports grew 14.6% to Rs751.3 crore. Domestic forging capacity utilization improved marginally to 76% (73%) and machining capacity is at 84%.

EBITDA margins improved

Improvement in raw material to sales ratio helped BFL to improve EBITDA margins 40 bps to 25.1%. EBITDA improved 20% to Rs 467.6 crore.

Net profit up 16.4%

The company has raised funds through FCCB and GDR to finance its acquisition and expansion project. Unutilized funds have been parked in fixed deposits and other short term investments, which generated other income of Rs 69.6 crore in full year, up 52.3%. Higher other incomes and savings in effective tax rate at 33% (34.3%) despite higher depreciation due to capital expenditure supported 16.4% rise in net profit to Rs 245.3 crore, translating into EPS of Rs10.8.

Q4FY07 performance highlights

• The 30.1% rise in domestic sales brought 17.7% rises in net sales for the period. Exports were subdued reporting marginal growth of 4.6%
• Improvement in raw material costs helped mitigate the impact of higher operational costs, EBITDA margins remained flat at 24%
• Other income improved 54% to Rs22.2 crore, however, borrowings resulted into higher interest outgo, up 50.9%
• Lower effective tax rate of 33.8%, aided net profit expansion by 21.3%, net margins improved 40 bps to 12.5%

Consolidated FY07 performance highlights

• Net sales surged 38.4% to Rs 4,178.3 crore from Rs 3,018.9 crore; revenues crossed $1 billion mark
• Higher raw material and staff costs brought EBITDA margins under pressure, dipped 200 bps to 15.2%
• BFL accounted extraordinary expenses of Rs 12.1 crore of which Rs 6.8 crore was towards reversal of export incentives and Rs 5.4 crore establishment expenses for Chinese operations
• Higher interest charges and depreciation provisions due to ongoing capex, mitigated the positive impact of higher other income, net profit margin declined to 6.8% from 8.3%. Net profit grew 16% to Rs 291.4 crore, translating into consolidated EPS of Rs 13.1. Adjusting for above mentioned extraordinary expenses, net profit grew 16.3%.
• Revenues from subsidiary companies other than Chinese joint venture – FAW Bharat Forge, soared 49.6% to Rs 2,155.2 crore. EBITDA margins were at 9.4% as against 10.1%, due to higher operating expenses
• Comparatively lower effective tax of 34% as against 43.8%, helped net profit of subsidiary companies to rise 50.4% to Rs 65.6 crore
• Chinese operations were operating at 40% of their capacity utilization and reported loss of Rs16.4 crore on revenue of around Rs 162.7 crore

Valuations

At CMP of Rs 260, the stock is trading at 31.1x and 21.7x its standalone FY08E and FY09E EPS and 22x and 15.9x its FY08E and FY09E consolidated EPS. Higher domestic capacity utilization, turnaround in various global operations and improving contribution from high margin non auto component business are key growth triggers for the company. The stock is an Outperformer with target price of Rs 410 (20x con.FY09E EPS).

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