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Bharat Forge: Global ops continue to suffer - Views on News from Equitymaster

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Bharat Forge: Global ops continue to suffer

May 22, 2010

Bharat Forge has announced its FY10 results. On a consolidated basis, the company has reported a 30% YoY decline in sales. On the bottomline front, it has reported a net loss during the year. Here is our analysis of the results.

Performance summary
  • Consolidated net sales decline by 30% YoY during FY10, due to weak conditions in the European and US markets. On a standalone basis, sales decline 10% YoY.
  • Operating margins for the consolidated business drop to 10.2% in FY10, from 11.7% in FY09. Stock related adjustments and higher manufacturing expenses lead to this pressure on margins. Margins for the standalone entity rise to 31.7% in FY10.
  • On the back of a 39% YoY decline in consolidated operating profits and lower other income, the company has posted a net loss during the year.
  • Declares a dividend of Re 1 per share (dividend yield of 0.4%).

Financial performance snapshot
  Standalone Consolidated
(Rs m)  FY09    FY10   Change  FY09    FY10   Change
Sales    20,586   18,564 -9.8%   47,751   33,276 -30.3%
Expenditure    14,242   12,678 -11.0%  42,174   29,891 -29.1%
Operating profit (EBDITA)      6,344      5,886 -7.2%     5,577      3,385 -39.3%
Operating profit margin (%) 30.8% 31.7%   11.7% 10.2%  
Other income          477         323 -32.2%         675          511 -24.2%
Interest       1,004      1,028 2.4%     1,291      1,303 0.9%
Depreciation      1,494      1,644 10.0%     2,517      2,451 -2.6%
Profit before tax      2,440      2,021 -17.1%     2,443          142 -94.2%
Tax           544          537 -1.3%         696          119 -82.9%
Share of profit in associates  NA    NA                (5)            (2) -65.2%
Minority interest  NA    NA           (176)       (132) -25.2%
Extraordinary income/(expense)        (863)       (214) -75.2%   (1,336)       (787) -41.1%
Profit after tax/(loss)       1,033      1,270 23.0%         583       (634)  
Net profit margin (%) 5.0% 6.8%   1.2% -1.9%  
No. of shares (m)      222.6     222.6       222.6     222.6  
Diluted earnings per share (Rs)             5.7            (2.8)  
P/E ratio (x)          45.6      NA    

What has driven performance in FY10?
  • Standalone topline for the full year fell by nearly 10% YoY for the company. While this is certainly not encouraging, it should be noted that topline for the first nine months had fallen by 27% YoY and thus, is a huge improvement from those levels. This improvement was brought about by the robust fourth quarter performance of the company where revenues surged by whopping 92%, led by 99% growth in domestic business. It should be noted that the company is a strong player in the Indian auto forgings space and thus, with strong growth recorded by the domestic auto industry, the company’s local business flourished. The company’s international business also managed to grow by more than 80% during the quarter as it enjoyed the benefits of a low base effect. Thus, standalone topline for the year was redeemed a bit by the stellar performance in the fourth quarter.

  • As far as the consolidated performance for the full year is concerned, the same witnessed a fall of 30% YoY on account of weak market conditions in the Europe and the US. It should be noted that the company is likely to see some better days ahead as it is seeing strong traction and recovery in the non auto business and is confident of taking the contribution from this segment to 40% of its overall revenues by FY12.

    Cost break-up...
      Standalone Consolidated
    (Rs m) FY09 FY10 Change FY09 FY10 Change
    Raw materials 9,805 8,224 -16.1% 24,068 16,327 -32.2%
    % sales 47.6% 44.3%   50.4% 49.1%  
    Staff cost 1,392 1,436 3.2% 7,092 5,239 -26.1%
    % sales 6.8% 7.7%   14.9% 15.7%  
    Manufacturing expenses 3,377 3,161 -6.4% 7,724 5,903 -23.6%
    % sales 16.4% 17.0%   16.2% 17.7%  
    Other expenditure 1,552 1,374 -11.5% 3,291 2,423 -26.4%
    % sales 7.5% 7.4%   6.9% 7.3%  

  • On the costs front, standalone margins underwent expansion while those of the consolidated entity suffered a small decline. On account of the lower overall volumes, fixed costs like staff salaries and other manufacturing expenses fell at a lower rate than the revenues and thus, led to a small margin fall on a consolidated basis.

  • At the net profit level, the consolidated entity has had to book a loss of Rs 634 m. This is a result of lower operating profits as well as inflexible interest and depreciation charges. Besides, onetime restructuring expenses also took its toll on the performance of the company. As far as standalone net profit is concerned, it has gone up by 23% during the year. However, if one excludes the extraordinary items, the same has fallen by 21% YoY.

  • Post the financial year end, the company redeemed FCCBs of US$ 131 m (approx. Rs 6 bn). Subsequently, the company also completed its fund raising program through a unique triple barrel simultaneous offering of equity, warrants and debt with a total issue size of Rs 6.3 bn.

What to expect?
At the current price of Rs 263, the stock trades at a multiple of nearly 16 times our estimated FY12 earnings per share (For ResearchPro subscribers, View our current opinion on the stock). While the company has underperformed our FY10 estimates, we believe it is on track to achieving or may be even exceeding our FY12 projections. However, current valuations seem to be more or less factoring in the same, leaving what we believe is little upside from a medium term perspective. We will update our report on the company shortly.

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