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Bharat Forge: Weakness all around

Feb 11, 2013

Bharat Forge Ltd announced the third quarter results of financial year 2012-2013 (3QFY13). The company has reported a 28.5% YoY drop in revenues, while profits plunged 54% YoY. Here is our analysis of the results.

Performance summary
  • Standalone net sales fall by 28.5% YoY during the quarter on account of slowdown across all segments and geographies.
  • Operating margins decline by 4.2% to 21.2% during the quarter due to higher manufacturing expenses and staff costs (as a percentage of sales).
  • Led by the poor performance at the topline and operating level, net profits fall by 54% YoY.

Standalone performance snapshot
(Rs m) 3QFY12  3QFY13  Change 9mFY12  9mFY13  Change 
Sales 9,412 6,726 -28.5% 27,088 24,766 -8.6%
Expenditure 7,021 5,302 -24.5% 20,430 18,962 -7.2%
Operating profit (EBDITA) 2,391 1,424 -40.5% 6,658 5,804 -12.8%
Operating profit margin (%) 25.4% 21.2%   24.6% 23.4%  
Other income 113 195 71.8% 516 645 24.9%
Interest 473 363 -23.1% 1,160 1,200 3.4%
Depreciation 558 574 2.8% 1,614 1,694 4.9%
Profit before tax 1,474 681 -53.8% 4,400 3,555 -19.2%
Exceptional items - -   - 106  
Tax 442 206 -53.5% 1,331 1,106 -16.9%
Profit after tax/(loss) 1,031 475 -53.9% 3,070 2,555 -16.8%
Net profit margin (%) 11.0% 7.1%   11.3% 10.3%  
No. of shares (m)       232.9 232.9  
Diluted earnings per share (Rs)*         15.9  
P/E ratio (x)*         13.9  
(*On a trailing 12-month basis and excluding extraordinary items)

What has driven performance in 3QFY13?
  • Bharat Forge's (BFRG) standalone revenues fell by 28.5% YoY during 3QFY13 on account of slowdown across all segments and geographies. Besides the sharp drop in demand both in the domestic and export markets, the company also faced problems of inventory destocking at the OEM level. This led to lower capacity utilization which dropped from 70% in 2QFY13 to 55% in 3QFY13. Bharat Forge had to undertake manufacturing cuts to reduce inventories and match production levels with demand. While revenues from India and the Americas declined by 24% YoY each, those from Europe and Asia Pacific plunged 42% YoY and 41% YoY respectively. The company in particular was impacted by the poor performance of the MHCV industry. In the domestic auto industry, the MHCV sectors, witnessed a decline of 31% YoY on the back of continued weak economic activity and softening of freight rates.

    Cost break-up...
    (Rs m) 3QFY12  3QFY13  Change  9mFY12  9mFY13  Change 
    Raw materials 4,124 2,905 -29.6% 12,091 10,734 -11.2%
    % sales 43.8% 43.2%   44.6% 43.3%  
    Staff cost 625 627 0.3% 1,909 1,956 2.4%
    % sales 6.6% 9.3%   7.0% 7.9%  
    Manufacturing expenses 1,638 1,325 -19.1% 4,696 4,667 -0.6%
    % sales 17.4% 19.7%   17.3% 18.8%  
    Other expenditure 633 445 -29.7% 1,735 1,605 -7.5%
    % sales 6.7% 6.6%   6.4% 6.5%  
    Total 7,021 5,302   20,430 18,962  

  • BFRG's operating margins during the quarter declined by 4.2% to 21.2% largely on account of higher manufacturing expenses and staff costs (as percentage of sales). Staff costs increased by 2.7% to 9.3% of sales, while manufacturing expenses rose by 2.3% to 19.7% of sales. This resulted in operating profits falling at a faster pace (down 41% YoY) as compared to the decline in sales.

  • Poor performance at both the topline and the operating profit level led to the 54% YoY drop in BFRG's net profits during the quarter. Even higher other income and lower tax expenses could not do much in arresting this decline.

What to expect?
At the current price of Rs 221, the stock trades at a multiple of nearly 7.4 times our estimated FY15 earnings per share. Growth in the near term could remain sluggish on account of macro headwinds. With demand further weakening all global OEMs are adjusting their production level to correct inventory leading to destocking across the pipeline. As a result, the management expects the next couple of quarters to remain subdued while growth is likely to pick up thereafter. In the longer term, exports growth is expected to be driven by the non-auto business and new product development. Based on the subdued performance for 9mFY13, we will have to revise our estimates downwards for the full year. Despite this, with valuations being attractive at the current levels, we maintain our 'Buy' view on the stock.

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