Bharat Forge recently announced its full year performance. The concerted efforts by the company to improve productivity and tap global OEM auto manufacturers have yielded positive results in FY03. Going by the order book position, FY04 is expected to be yet another good year for the company.
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Net sales increased by 50% in FY03. As expected, the growth was primarily led by stellar performance of the company's export division (grew by 146% YoY and contributed to 40% of sales in FY03 as compared to 23% last year). By gaining control of Dana Corp's order book, BFRG has increased its client list during the fiscal (24 international customers). The robust export performance was also on account of commissioning of supply to China First Automotive Works in FY03. Exports to China surmounted to Rs 643 m (24% of total exports in FY03). The company has signed up a second customer in China for which supply is expected to commence in this fiscal. This should fuel growth further.
On the domestic market front, revival in commercial vehicle demand (CV) that started in the second half of FY02 continued in FY03. SIAM numbers suggest that total CV sales in FY03 grew by 30%, led by robustness in demand for medium and heavy CVs. Bharat Forge, a key supplier to major players like Telco and Ashok Leyland, has benefited immensely from the same. Domestic sales in FY03 increased by 15% over the previous year (60% of sales). However, we expect growth to taper down on the domestic front in light of slowdown in the economy. That said, the company has entered into a supply contract with Toyota for becoming a sourcing base for its transmission components both in India and overseas. With consolidation also expected to gain momentum on the domestic front, Bharat Forge is well poised to capitalise on any further growth opportunity.
Operating margins have also shown a marked improvement in FY03, which is on account of various counts. For one, the capacity utilisation that was languishing at less than 50% levels in FY02 for its steel forging division has improved. This combined with the rationalisation of workforce in the last two fiscals by more than 1,300 employees has had a positive impact on productivity. Besides, contribution from machined components that command a 5%-7% premium touched 49% in FY03 as compared to 44% in FY02. We expect operating margins to show marginal upward movement in FY04 led by increased productivity. However, one has also got to exercise caution given the rise in input costs, primarily steel related raw materials.
Interest expenses have reduced by 10% in FY03 as the company has retired debts to the tune of Rs 600 m. Despite more than doubling of tax provisioning, net profit has leapfrogged by almost three times. The company's performance is significantly higher than our expectations in FY03.
The stock currently trades at Rs 318 implying a P/E multiple of 14.8x FY03 earnings. As far as FY04 is concerned, the commencement of supply to the second Chinese auto major in 1HFY04 and acceleration in Renault order is expected to add to the export growth of the company. We continue to remain positive on the export revenues while exercising caution on the domestic front. The 15% rise in domestic revenues that one saw in FY03 is unlikely to sustain in the coming fiscal. But the transmission components supply contract with Toyota is likely to commence in 2004-05 and therefore should provide some stability to its domestic revenues. Though growth prospects are promising, valuations at the current juncture seem to be on the higher side for an auto ancillary company.
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