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Bharat Forge: Domestic outshines exports - Views on News from Equitymaster

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Bharat Forge: Domestic outshines exports
Jan 27, 2010

Performance summary
  • Topline suffers a growth of 12% YoY during the quarter led by a 48% growth in domestic sales
  • Expansion of 3.8% seen in operating margins as the company manages to bring down raw material and staff costs
  • Lower interest and depreciation charges lead to a 101% growth in PBT. Net profits surge nearly nine fold as significantly lower forex losses further boost profits
  • Bottomline for the nine month period grow 56% YoY on the back of a 27% decline in topline


(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 4,531 5,078 12.1% 17,660 12,940 -26.7%
Expenditure 3,645 3,887 6.7% 13,637 9,976 -26.8%
Operating profit (EBDITA) 886 1,191 34.4% 4,023 2,964 -26.3%
EBDITA margin (%) 19.6% 23.4%   22.8% 22.9%  
Other income 112 92 -18.5% 335 203 -39.5%
Interest (net) 278 268 -3.7% 709 767 8.1%
Depreciation 419 409 -2.4% 1,185 1,202 1.4%
Profit before tax 301 606 101.1% 2,464 1,199 -51.3%
Extraordinary income/(expense) (282) (29)   (1,851) (208) -88.8%
Tax (24) 197 -905.3% 192 333 73.9%
Profit after tax/(loss) 44 380 773.3% 422 658 56.0%
Net profit margin (%) 1.0% 7.5%   2.4% 5.1%  
No. of shares (m) 222.7 222.7   222.7 222.7  
Diluted earnings per share (Rs)*         5.7  
Price to earnings ratio (x)*         48.8  
(* on trailing twelve months earnings)

What has driven performance in 3QFY10?
  • The 12% growth in the company’s topline was brought about by a 48% growth in the company’s domestic operations and an 18% fall in the company’s exports. It should be remembered that the same stood at negative 17% and negative 56% during the second quarter. Thus, the company seems to have made sizeable improvement, especially on the domestic front. The company is a major supplier of forgings to CV and passenger vehicles manufacturers and the buoyancy in their sales has rubbed off on Bharat Forge as well.

  • Exports witnessed a fall on a YoY basis but improved substantially on a sequential basis. The pick up in exports is beginning to take place in North America and some increased volumes of exports to China. Also, the company’s non auto business has continued with its uptrend. The company’s target is to achieve 40% of its total sales in the form of non-auto business by 2012.

  • On the margins front, with both raw materials costs and the staff expenses forming a lower percentage of sales as compared to previous corresponding quarter, operating margins have come in higher by a sizeable 3.8%. The fall in raw material expenses could be a result of lower commodity prices.

    Cost break-up...
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Raw materials 2,127 2,253 5.9% 8,300 5,764 -30.6%
    % sales 46.9% 44.4%   47.0% 44.5%  
    Staff cost 358 373 4.2% 1,124 1,089 -3.1%
    % sales 7.9% 7.3%   6.4% 8.4%  
    Manufacturing expenses 802 893 11.3% 2,926 2,119 -27.6%
    % sales 17.7% 17.6%   16.6% 16.4%  
    Other expenditure 358 369 3.0% 1,288 1,005 -22.0%
    % sales 7.9% 7.3%   7.3% 7.8%  

  • Company’s PBT has come in higher by 101% YoY. As can be seen, this improvement, as compared to the operating performance, was mainly on account of lower interest and depreciation charges. Although the company’s bottomline has come in higher by 773% over the previous quarter, it may not exactly be comparable as it includes forex charges levied under different accounting standards.

  • The company’s combined financial performance has also managed to turn the corner, posting a profit of Rs 252 m during the quarter as against a loss of Rs 3.7 bn.

What to expect?
At Rs 278, the stock is trading at a price to earnings multiple of 16.5x times our FY12 estimates. While the company has underperformed our estimates, the recovery which it recently witnessed would aid its growth going forward. Further, de-risking of its revenue model would also open up several opportunities for growth. Its strong focus on cost front would also benefit the company. Valuations however, seem to be bordering on the expensive side currently. We advise investors to practice caution.

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