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Bharat Forge: Cracking under stress - Views on News from Equitymaster
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Bharat Forge: Cracking under stress
Jan 22, 2009

Performance summary
  • Standalone topline suffers a fall of 19% YoY during the quarter, led by 41% fall in domestic sales
  • Operating margins tumble by 540 basis points as costs fail to decline in line with the topline during the quarter
  • Bottomline suffers a decline of 93% YoY on the back of mark-to-market forex based losses. Decline in PBT, which excludes the impact of forex losses, comes in little lower at 66% YoY.
  • Bottomline for the nine month period has come in lower by 78% YoY on the back of a 9% YoY growth in topline. Excluding forex losses, bottomline has remained flat.
  • On a consolidated basis, the company has suffered losses to the tune of Rs 37 m during the third quarter while topline has declined by 11% YoY.

Standalone financials
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 5,567 4,531 -18.6% 16,168 17,660 9.2%
Expenditure 4,177 3,645 -12.8% 12,383 13,637 10.1%
Operating profit (EBDITA) 1,390 886 -36.3% 3,785 4,023 6.3%
EBDITA margin (%) 25.0% 19.6%   23.4% 22.8%  
Other income 153 112 -26.6% 497 335 -32.5%
Interest (net) 294 278 -5.5% 801 709 -11.5%
Depreciation 353 419 18.6% 1,034 1,185 14.7%
Profit before tax 895 301 -66.4% 2,448 2,464 0.7%
Extraordinary income/(expense) (23) (282)   419 (1,851)  
Tax 290 (24) -108.4% 959 192 -80.0%
Profit after tax/(loss) 582 44 -92.5% 1,907 422 -77.9%
Net profit margin (%) 10.5% 1.0%   11.8% 2.4%  
No. of shares (m) 222.7 222.7   222.7 222.7  
Diluted earnings per share (Rs)*         5.6  
Price to earnings ratio (x)*         13.0  
(* on trailing twelve months earnings)

What has driven performance in 3QFY09?
  • As mentioned, the 19% drop in topline was primarily led by domestic sales, which witnessed a 39% decline. Bharat Forge is a major supplier to the Indian CV industry and since this industry suffered a massive decline of 62% in production during the quarter, Bharat Forge’s topline from domestic markets also came in for some heavy pounding. Exports however minimized some damage as they grew by 6% YoY. Although the auto sector in the company’s key exports markets also performed miserably, the company was able to grow its exports on the back of market share increases as well as due to supply to the non automotive sectors. With non automotive supplies expected to grow at a faster rate in the near future, the company would be able to further reduce its dependence on the auto sector.

    Cost break-up…
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Raw materials 2,472 2,127 -14.0% 7,329 8,300 13.3%
    % sales 44.4% 46.9%   45.3% 47.0%  
    Staff cost 381 358 -6.0% 1,072 1,124 4.8%
    % sales 6.8% 7.9%   6.6% 6.4%  
    Manufacturing expenses 984 802 -18.5% 2,813 2,926 4.0%
    % sales 17.7% 17.7%   17.4% 16.6%  
    Other expenditure 341 358 5.2% 1,179 1,288 9.2%
    % sales 6.1% 7.9%   7.3% 7.3%  

  • Once again it was the high denominator effect that wreaked havoc on the company’s operating margins during the quarter. Although increase in prices of raw materials is a pass through, the absolute amount that is passed on forms a lower percent of topline than the operating profits and this puts pressure on operating margins. Furthermore, higher staff costs and other expenditure have also played their part in the erosion of the company’s operating margins by a huge 5.4% during 3QFY09.

    Consolidated financials
    (Rs m) 3QFY08 3QFY09 Change
    Net sales 10,800 9,599 -11.1%
    Expenditure 9,024 8,625 -4.4%
    Operating profit (EBDITA) 1,776 974 -45.2%
    EBDITA margin (%) 16.4% 10.1%  
    Other income 192 143 -25.3%
    Interest (net) 325 325 0.0%
    Depreciation 545 689 26.4%
    Profit before tax 1,098 103 -90.6%
    Extraordinary income/(expense) (23) (467)  
    Tax 365 2 -99.5%
    Profit after tax/(loss) 710 (366)  
    Net profit margin (%) 6.6% -3.8%  
    No. of shares (m) 222.7 222.7  
    Diluted earnings per share (Rs)*   3.2  
    Price to earnings ratio (x)*   27.2  
    (* on trailing twelve months earnings)

  • The company’s bottomline has suffered a fall of 93% YoY during the quarter. Apart from the poor operating performance, higher depreciation on account of new capacities and forex losses on its foreign currency liabilities have been instrumental in pulling down the company’s net profits by such a huge percentage. Consolidated bottomline has been no better as extremely weak demand has shrunk profits by 91% at the PBT level. Infact, if one also takes into account the extraordinary items, then the company’s bottomline has actually shown a loss of Rs 367 m as against a profit of Rs 710 m during same quarter last year.

What to expect?
At the current price of Rs 75, the stock trades at a P/E multiple of just 2.7 times its expected FY11 standalone earnings per share. Had it not been for the sudden drop in demand, which now make the next couple of quarters extremely challenging, the company was well on its way of meeting our FY09 targets (excl the forex impact). However, taking into account the economic scenario, it looks unlikely that the company would be able to do that. Hence, we will have to revise our projections downwards for the company. We will soon come out with an updated report.

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