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Bharat Forge: The year of consolidation… - Views on News from Equitymaster
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Bharat Forge: The year of consolidation…
May 22, 2007

Performance summary
Bharat Forge, India’s largest forging company has announced its 4QFY07 and full year FY07 results. During the quarter, the company has reported a topline growth of 18% YoY on a standalone basis, while the bottomline growth has come in at a little higher 21% YoY. The operating margins have however remained stable. For the full year though, there has been a marginal expansion in operating margins. Despite this, the bottomline growth at 16% YoY has come in at a lower rate than the topline growth of 18% YoY. On the consolidated front, while the bottomline growth has been a similar 16% YoY for the full year, the topline growth has stood at much higher 38% YoY.

  Standalone performance Consolidated
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change FY06 FY07 Change
Net sales 4,384 5,161 17.7% 15,779 18,644 18.2% 30,189 41,783 38.4%
Expenditure 3,330 3,917 17.6% 11,882 13,968 17.6% 24,961 35,319 41.5%
Operating profit (EBDITA) 1,054 1,243 18.0% 3,897 4,676 20.0% 5,228 6,464 23.6%
EBDITA margin (%) 24.0% 24.1%   24.7% 25.1%   17.3% 15.5%  
Other income 143 222 55.1% 530 809 52.5% 661 969 46.6%
Interest (net) 155 234 50.9% 548 821 49.9% 683 1,067 56.1%
Depreciation 214 267 24.5% 730 998 36.6% 1,281 1,881 46.9%
Extraordinary income/(expense) - -   - (68)   - (121)  
Profit before tax 828 965 16.5% 3,149 3,666 16.4% 3,925 4,485 14.3%
Tax 298 322 8.1% 1,079 1,189 10.1% 1,419 1,529 7.7%
Profit after tax/(loss) & MI 530 643 21.3% 2,070 2,410 16.4% 2,505 2,906 16.0%
Net profit margin (%) 12.1% 12.5%   13.1% 12.9%   8.3% 7.0%  
No. of shares (m) 222.3 222.7   222.3 222.7   222.3 222.7  
Diluted earnings per share (Rs)* 9.5 11.5   9.3 10.8   11.3 13.0  
Price to earnings ratio (x)**               25.1  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Bharat Forge (BFRG) is the second largest forging company in the world with an installed capacity of 200,000 tonnes in FY06. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world. BFRG manufactures a wide range of critical components for passenger cars, commercial vehicles and diesel engines. On the domestic front, the company's clientele includes Tata Motors, Ashok Leyland, Eicher, M&M, Toyota and Maruti Udyog. On the international front, the list consists of Volvo, Caterpillar, Toyota, Renault and Daimler Chrysler, to name a few. In the last few years, the company has expanded its presence geographically through acquisitions (in FY04, it acquired two German companies, in 1QFY06, Federal Forge of US was acquired and in the same fiscal, it acquired Imatra Kilsta of Sweden). With CDP and Aluminiumtechnik and now Imatra Kilsta in its kitty, it has gained a strong foothold in Europe.

What has driven performance in FY07?
A well-diversified growth: The company is a leading supplier of forgings to the domestic CV industry, which witnessed one of its best years ever. Not surprisingly, the good performance rubbed off on Bharat Forge’s standalone performance too as its domestic sales were higher by 22% YoY during FY07. While exports growth slowed down to a sedate 5% during the last quarter, it nonetheless crossed the year with a 15% YoY growth in exports. Since the US CV industry still accounts for more than 50% of the company’s exports, a slowdown there between January to March 2007 also impacted Bharat Forge’s export performance during the quarter. Having said that, the company, over the years has done well to reduce its dependence on the US CV industry, further reinforced by the fact that the share of exports to the industry has come down from 73% in FY06 to 53% at the end of FY07.

On the consolidated performance, the company crossed the US$ 1 bn revenue mark a year ahead of schedule and forayed into the non-automotive forging space. This segment now accounts for 17% of the company’s consolidated topline, thus marking a significant step towards further de-risking the company’s business model. On a geographical basis also, the topline of the company had a very diversified look with US, India, Europe and Asia Pacific accounting for 21%, 26%, 5% and 48% of the consolidated topline respectively. The company entered into three large long-term contracts worth over US$ 50 m each during the fiscal (one in the automotive and two in the non-automotive space), to be executed over the next 12 to 18 months. Bharat Forge’s new facility in Baramati is progressing on schedule and should start producing non-automotive forgings by the last quarter of FY08.

Material and man power led pressure: As can be seen from the table below, consolidated operating margins of Bharat Forge have taken a 180 basis points dip for the full year on a YoY basis. The company has faced pressure both on the raw material as well as staff costs front. While business presence in Europe and US is diluting the overall margins for the company, once the China operation starts gathering steam, margins should see an upward movement. Further, the company has said that it hopes to improve margins further from its operations in Europe and US. Nonetheless, despite immense inflationary pressure, margin improvement for the full year in the standalone business is indeed commendable.

cost break up
(Rs m) FY06 FY07 Change
Raw materials 13,898 19,907 43.2%
% sales 46.0% 47.6%  
Staff cost 4,165 6,164 48.0%
% sales 13.8% 14.8%  
Manufacturing expenses 4,916 6,824 38.8%
% sales 16.3% 16.3%  
Other expenditure 1,983 2,425 22.2%
% sales 6.6% 5.8%  

With the company increasing its capacities significantly, depreciation charges both on a standalone as well as consolidated basis have jumped by a significant 47%, putting pressure on profit at the before tax levels. Further, at 50% and 56% YoY (standalone and consolidated), growth in interest expenses is also on the higher side. Not surprisingly, PBT growth has come in at a lower rate than operating profit growth for both the operations under consideration for the full year FY07.

What to expect?
At Rs 327, the stock is trading at a price to earnings multiple of 25 times its consolidated FY07 earnings. Over the years, the company has done well to de-risk its business model and while it has spent the past couple of years in consolidating its acquisition and expanding capacities, we believe growth should really kick in from FY09 onwards. Hence, investors need to be patient with respect to the stock.

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