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Bharat Forge: A year full of headwinds - Views on News from Equitymaster
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Bharat Forge: A year full of headwinds
May 20, 2009

Performance summary
  • Standalone topline falls 6% YoY during the fiscal as poor macroeconomic conditions during second half takes toll
  • Operating margins contract 210 basis points (2.1%) from last year’s levels as costs fall at a lower rate than the topline
  • Higher depreciation charges and exceptional losses further compound problems for the company, leading to a 62% YoY drop in bottomline
  • Standalone profits for the fourth quarter fall 26% YoY on the back of a 50% fall in topline
  • Consolidated bottomline plunges 56% YoY despite a 3% growth in topline for the full year

Standalone financials
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 5,797 2,916 -49.7% 21,965 20,576 -6.3%
Expenditure 4,360 2,489 -42.9% 16,743 16,126 -3.7%
Operating profit (EBDITA) 1,437 427 -70.3% 5,222 4,450 -14.8%
EBDITA margin (%) 24.8% 14.6%   23.8% 21.6%  
Other income 126 153 20.7% 623 488 -21.7%
Interest (net) 249 295 18.3% 1,050 1,004 -4.4%
Depreciation 356 309 -13.1% 1,389 1,494 7.6%
Profit before tax 958 (24)   3,406 2,440 -28.4%
Extraordinary income/(expense) 145 988 579.4% 564 (863)  
Tax 275 352 28.1% 1,234 544 -55.9%
Profit after tax/(loss) 829 611 -26.2% 2,736 1,033 -62.2%
Net profit margin (%) 14.3% 21.0%   12.5% 5.0%  
No. of shares (m) 222.7 222.7   222.7 222.7  
Diluted earnings per share (Rs)*         4.6  
Price to earnings ratio (x)*         34.5  
(* on trailing twelve months earnings)            
(* on trailing twelve months earnings)

What has driven performance in FY09?
  • Just like most other companies, it has been a year of two contrasting halves for the company. While the standalone topline managed to grow 23% for the first half of the year, full year top line has come in lower by 6% YoY, indicating the extent of decline in business during the second half. With the financial markets remaining virtually dysfunctional since Sept/Oct 08, its impact also spilled over into the real economy and companies across the globe pulled back production big time. Thus, with its customers pruning production, Bharat Forge had to also toe the line, resulting in a 19% drop in topline during the third quarter and an even more severe 50% drop in topline during 4QFY09.

  • Exports emerged as the saving grace for the company, registering a 4% growth for the full year. Important to add that the exports grew despite the drastic fall in production in the company’s exports markets because of two factors. One, the company managed to increase its market share and second, it tapped newer segments like the non-automotive forgings. Speaking of latter, its contribution to the company’s standalone topline increased to 28% from 20% in FY08. The fact that the rupee weakened against the dollar and the company was able to pass through raw material cost hikes also helped growth in exports. As far as the prospects for the current fiscal are concerned, the company is of the belief that the worst is behind us and Bharat Forge’s own performance might be better than that witnessed in the second half of the fiscal.

    Cost break-up…
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Raw materials 2,594 1,505 -42.0% 9,913 9,805 -1.1%
    % sales 44.8% 51.6% 45.1% 47.7%
    Staff cost 377 268 -28.9% 1,449 1,392 -3.9%
    % sales 6.5% 9.2% 6.6% 6.8%
    Manufacturing expenses 969 451 -53.4% 3,782 3,377 -10.7%
    % sales 16.7% 15.5% 17.2% 16.4%
    Other expenditure 421 265 -37.1% 1,600 1,553 -3.0%
    % sales 7.3% 9.1% 7.3% 7.5%

  • On the costs front, standalone operating margins have come in lower by 2.1% as compared to last year. The key culprit has been the raw material expense, rising by 2.6% as a percentage of sales. 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. However, the company has done well to keep manufacturing expenses under check and this has lent some respite on the margin front.

  • Apart from fall in operating profits, movement in all the other P&L items has also remained adverse, putting further pressure on the company’s standalone profitability. Furthermore, forex losses to the tune of Rs 863 m on account of revaluation of foreign currency assets/liabilities also hurt its performance. These factors put together have led to a 62% drop in company’s standalone bottomline during the fiscal.

  • The company’s consolidated topline grew 3% for the full year on a YoY basis. This was more a function of favorable exchange rates than the overall business environment, which as mentioned earlier, continued to remain weak.

What to expect?
At the current price of Rs 165, the stock trades at a P/E of 10x its expected FY11 earnings per share. Although the company’s earnings have come in much below our expectations, the feeling that we got from the management con call makes us believe that the company would be able to meet our FY11 estimates. We maintain our positive view on the stock.

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