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Bharat Forge: Exceptional to the rescue - Views on News from Equitymaster
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Bharat Forge: Exceptional to the rescue
May 20, 2008

Performance summary
  • Standalone sales grow 18% YoY for the full year, courtesy a 28% YoY growth in exports.
  • Pressure on costs has led to the operating margins eroding by 130 basis points (1.3%).
  • Bottomline growth has stood at 14% YoY for the full year thanks mainly to an exceptional item. Excluding the same, bottomline suffers a marginal fall of 2% YoY
  • On a consolidated basis, PAT has grown by 4% YoY in FY08 on the back of an 11% YoY topline growth
  • The company has recommended a dividend of Rs 3.5 per share (dividend yield of 1.2% based on current market price) subject to approval of shareholders

Financial performance: Standalone snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 5,161 5,797 12.3% 18,644 21,965 17.8%
Expenditure 3,917 4,360 11.3% 13,968 16,743 19.9%
Operating profit (EBDITA) 1,243 1,437 15.6% 4,676 5,222 11.7%
EBDITA margin (%) 24.1% 24.8%   25.1% 23.8%  
Other income 222 (32)   809 884 9.3%
Interest (net) 234 249 6.7% 821 1,050 27.9%
Depreciation 267 356 33.3% 998 1,389 39.2%
Profit before tax 965 800 -17.1% 3,666 3,666 0.0%
Extraordinary income/(expense) - 303   (68) 303  
Tax 322 275 -14.7% 1,189 1,234 3.8%
Profit after tax/(loss) 643 828 28.9% 2,410 2,736 13.5%
Net profit margin (%) 12.5% 14.3%   12.9% 12.5%  
No. of shares (m) 222.7 222.7   222.7 222.7  
Diluted earnings per share (Rs)*         12.3  
Price to earnings ratio (x)*         24.2  
(* on trailing twelve months earnings)

What has driven performance in FY08?
  • The 18% YoY growth in standalone topline for the full year was led by exports, which managed to grow at an impressive 28% YoY. Infact, had it not been for the 9% appreciation of the rupee against the dollar, growth in exports would have stood even better at 40% YoY. US markets, the mainstay of the company’s exports, witnessed a marked slowdown in CV sales and as a consequence, export to US declined marginally by 1%. But thanks to company’s robust business model, it was more than compensated by a strong 82% YoY growth in exports to Europe and a 92% YoY growth in exports to rest of Asia, thus enabling the company to close the year with a healthy 28% growth in exports. As far as domestic markets are concerned, here too, owing to sharp slowdown in growth of CV sales, topline in value terms managed to clock an 11% YoY growth, helped to a significant extent by growth in the passenger vehicles segment.

    Cost break-up…
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Raw materials 2,402 2,594 8.0% 8,409 9,913 17.9%
    % sales 46.5% 44.8%   45.1% 45.1%  
    Staff cost 280 377 34.5% 1,077 1,449 34.6%
    % sales 5.4% 6.5%   5.8% 6.6%  
    Manufacturing expenses 880 968 10.1% 3,223 3,782 17.3%
    % sales 17.0% 16.7%   17.3% 17.2%  
    Other expenditure 356 421 18.2% 1,259 1,600 27.1%
    % sales 6.9% 7.3%   6.8% 7.3%  

  • As far as operating margins are concerned, the same have fallen by 130 basis points (1.3%) over FY07. This could be attributed to a significant jump of 35% YoY in staff costs and a rise of 27% in other expenses of the company during the year. It should be remembered that the company is entering new businesses and hence, while revenues from these new ventures have not yet started flowing in, expenses like staff costs and certain other expenses are already being incurred and hence the drop in operating margins for the full year. Furthermore, lower rupee revenues from exports also impacted margins a bit. Raw material costs for the company are mostly a pass through and hence they have managed to grow in line with revenues.

  • Bottomline growth at 14% YoY has come in slightly higher than the growth in operating profits mainly due to the presence of an exceptional item to the tune of Rs 303 m. This gain can be attributed to profits on sale of interest in a subsidiary to another wholly owned subsidiary. Excluding the same, bottomline has suffered a marginal fall of 2% YoY, which could also be attributed to a significant jump in interest costs and depreciation charges, expenses incurred during setting up capacities for new lines of businesses.

Consolidated numbers
(Rs m) FY07 FY08 change
Net sales 41,783 46,523 11.3%
Expenditure 35,319 39,478 11.8%
Operating profit (EBDITA) 6,464 7,045 9.0%
EBDITA margin (%) 15.5% 15.1%  
Other income 969 993 2.5%
Interest (net) 1,067 1,269 19.0%
Depreciation 1,881 2,271 20.7%
Profit before tax 4,485 4,498 0.3%
Extraordinary income/(expense) (121) -  
Tax 1,529 1,589 4.0%
Profit after tax/(loss) 2,835 2,908 2.6%
Net profit margin (%) 6.8% 6.3%  
No. of shares (m) 222.7 222.7  
Diluted earnings per share (Rs)* 12.7 13.1  
Price to earnings ratio (x)**   22.7  
(* on trailing twelve months earnings)

What to expect?
At the current price of Rs 297, the stock is trading at a multiple of 12 times our expected FY10 standalone earnings. The company’s earnings have come in 15% below our estimates, mainly on account of lower than expected operating margins. Over the next few years, the company’s business model is likely to witness a structural shift with close to 40% of the revenues due to come from the non-automotive segment, an industry which holds tremendous potential. We will incorporate a suitable upside from the same when we come out with our revised estimates for the company.

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