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Bharat Forge: No slowdown at all

Jan 25, 2011

Bharat Forge Ltd has announced its 3QFY11 results. While standalone revenues are higher by 53% YoY, profits rise by 118% YoY. Here is our analysis of the results.

Performance summary
  • Standalone net sales up by 53% YoY during the quarter led by an 80% YoY and 36% YoY increase in exports and domestic markets respectively.
  • Operating profits rise by 59% YoY as operating margins expand by 0.9% YoY to 24.3% during the quarter. Barring input costs, other cost heads reduce on a YoY basis (as a percentage of sales).
  • Profits rise by 118% YoY led by a strong operating performance, couples with a relatively benign increase in interest and depreciation costs.
  • Standalone net sales and profits during the quarter increase by 64% YoY and 220% YoY during 9mFY11 respectively.
  • Consolidated total income and profits rise by 50% YoY and 190% YoY.

Standalone financial snapshot
(Rs m) 3QFY10  3QFY11  Change 9mFY10  9mFY11  Change
Sales 5,076 7,770 53.1% 12,928 21,257 64.4%
Expenditure 3,887 5,884 51.4% 9,976 16,085 61.2%
Operating profit (EBDITA) 1,189 1,886 58.7% 2,951 5,172 75.2%
Operating profit margin (%) 23.4% 24.3%   22.8% 24.3%  
Other income 94 126 33.9% 216 313 45.1%
Interest 268 301 12.7% 767 920 20.1%
Depreciation 409 496 21.3% 1,202 1,454 21.0%
Exceptional income/(expense) (29) -     (208) -    
Profit before tax 576 1,214 110.6% 991 3,110 213.8%
Tax 197 388 97.4% 333 1,008 202.4%
Profit after tax/(loss) 380 826 117.5% 658 2,102 219.5%
Net profit margin (%) 7.5% 10.6%   5.1% 9.9%  
No. of shares (m)         232.8  
Diluted earnings per share (Rs)*         13.5  
P/E ratio (x)*         26.5  
(*On a trailing 12-month basis)

What has driven performance in 3QFY11?
  • Bharat Forge (BFRG) reported a topline growth of 53% YoY during the quarter ended December 2010. Growth during the quarter was led by an 80% YoY increase in exports, while domestic revenues increased by 36% YoY. Exports contributed to about 45% of revenues (38% last year), while domestic markets contributed to the balance. As per the company, total shipments rose by 36% YoY to about 48,116 tonnes during the quarter as against 35,283 tonnes last year. On a quarter on quarter basis i.e. in comparison with the quarter ended September 2010, shipments rose by 4%. Revenues increased by 14% on a quarter on quarter basis.

    Coming to the geographical breakup of revenues, while details of the Indian markets are mentioned above, revenues from Europe and the US grew by 148% YoY and 32% YoY respectively and contributed to about 22% and 19% of revenues respectively. During the same quarter last year, these markets contributed to 26% and 12% respectively.

    Cost break-up...
    (Rs m) 3QFY10  3QFY11  Change 9mFY10  9mFY11  Change
    Raw materials 2,253 3,538 57.0% 5,764 9,651 67.4%
    % sales 44.4% 45.5%   113.6% 124.2%  
    Staff cost 373 518 39.0% 1,089 1,464 34.4%
    % sales 7.3% 6.7%   21.5% 18.8%  
    Manufacturing expenses 893 1,309 46.5% 2,119 3,533 66.7%
    % sales 17.6% 16.8%   41.7% 45.5%  
    Other expenditure 369 519 40.8% 1,005 1,438 43.1%
    % sales 7.3% 6.7%   19.8% 18.5%  

  • BFRG's strong performance at the operating level continued during the year as its profits increased by 59% YoY as compared to a sales growth of 53% YoY. Margins during the quarter stood at 24.3% as compared to 23.4% during 3QFY10. While the company saw an increase in raw material and manufacturing expenses, other expenses and employee costs increased at a slower pace as compared to the revenue growth, thereby aiding in margin expansion.

  • BFRG's profits grew by 118% YoY during the quarter. In addition to a strong operating performance, a not so quick rise in interest and depreciation coupled with no exceptional item (as against an Rs 30 m exchange loss last year) helped in boosting profits during the quarter. On adjusting for the latter, profits are higher by 102% YoY.

What to expect?
At the current price of Rs 357, the stock trades at a multiple of nearly 21 times our estimated FY13 earnings per share (ResearchPro subscribers, kindly click here.

The December quarter saw BFRG register its highest export revenues. And the company is quite confident of exports growing on a positive note over the medium term. The management has this confidence as it believes that the North American class 8 market is more than 50% below its previous peak of CY06 and the European Heavy Truck market is also well below its CY08 peak volumes. And as such, there is sufficient room for volume growth over the long run. However, considering the uncertainty over the economic performance of these two regions, one could never say how fast the recovery would actually take place.

As far as the Indian market is concerned, the management believes that the slowdown during the previous quarter was a temporary phase and occurred mainly due to a higher base effect (new emission norms coming into play leading to stronger demand prior to October) as well as production levels being hit on the back of OEM's facing issues relating to supply of components. It believes that the Indian auto market will grow steadily in the long run and this region will remain the company's key area of focus.

While BFRG seems to be well placed on the back of it gaining market share and business from many new entrants in the auto space, we believe that over the medium term many factors such as high interest rates, high input costs and high fuel costs will tend to slow down the auto demand. This is especially considering the strong volumes recorded by the industry over the past two years.

As for the non-auto business, the management expects momentum to continue on the back of a growing order pipeline. During the quarter ended December 2010, the non-auto division contributed to nearly 37% of revenues as compared to 26% last year.

On an overall basis, we believe that the company's future prospects are strong. But at current levels, the same seems to be factored in the stock's price currently. We advise investors to be cautious on the stock at current levels.

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