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Bharat Forge: Finishes on a strong note - Views on News from Equitymaster

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Bharat Forge: Finishes on a strong note
May 26, 2015

Bharat Forge has announced its March 2015 quarter results. The company has reported a 31.5% YoY and 71% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone topline for the quarter grows 31.5% YoY, exports grow by a strong 45% YoY
  • Operating margins see a strong improvement, leading to a 56% YoY growth in operating profits
  • Bottomline grows by a robust 71% YoY on the back of strong operating performance and lower interest costs

Standalone performance snapshot
(Rs m) 4QFY14  4QFY15  Change FY14  FY15  Change
Sales 9,305 12,239 31.5% 33,993 45,481 33.8%
Expenditure 7,002 8,642 23.4% 25,356 32,181 26.9%
Operating profit (EBDITA) 2,303 3,597 56.2% 8,637 13,300 54.0%
Operating profit margin (%) 24.8% 29.4%   25.4% 29.2%  
Other income 326 200 -38.6% 1,147 933 -18.6%
Interest 349 224 -35.7% 1,496 1,118 -25.2%
Depreciation 598 497 -16.9% 2,453 2,505 2.1%
Profit before tax 1,683 3,076 82.8% 5,835 10,610 81.8%
Tax 616 1,049 70.3% 1,959 3,383 72.7%
Exceptional items 124 5 -96.0% 124 (36)  
Profit after tax/(loss) 1,190 2,032 70.8% 3,999 7,190 79.8%
Net profit margin (%) 12.8% 16.6%   11.8% 15.8%  
No. of shares (m)       232.9 232.9  
Diluted earnings per share (Rs)*         31.0  
P/E ratio (x)*         40.5  
*On a trailing 12-month basis and excluding extraordinary items

What has driven performance in FY15?
  • The company's sales were up an impressive 34% YoY during the year. This was largely due to the 47% growth in export revenues as domestic revenues were up by 16% YoY. Exports did strongly largely led by the North American market. The CV market in this region continued to be robust on the back of sustained levels of construction activity and improving economic scenario. Thus, the US grew 90% YoY during the year. Revenue growth from Europe, however, was muted at 8% YoY on account of stagnation in growth in the Eurozone economy. Demand was also impacted because of the introduction of Euro VI emission norms, which gave rise to price increases and technology related absorption issues.

  • Coming back to India, the CV sector showed improvement in market performance with volumes increasing, albeit on a smaller base. Lower diesel prices and strong freight rates acted as tailwinds for the boost in volumes from the sector. Bharat Forge benefitted from this led by ramp up of orders from new customers.

  • Operating profits grew by 54% YoY during the year led by the sharp fall in raw material and staff costs (as percentage of sales). Margins also improved by 3.8% to 29.2% during the year on the back of a favourable product mix and operating leverage.

  • PBT of the company came in higher by 82% YoY as besides higher operating profits, lower than proportionate increase in depreciation charges and reduction in interest costs helped matters.

  • At the bottomline level, profits came in higher by 80% YoY in tandem with the growth in PBT.
What to expect?
At the current price of Rs 1,257, the stock trades at 38.5 times our estimated FY17 earnings per share on a standalone basis. Going forward, Bharat Forge is seeing growth in both the commercial and passenger vehicles segment across its key markets. However, in the first quarter of FY16, the company expects growth to be a bit subdued as compared to 4QFY15 largely on account of lower than anticipated recovery in the Indian MHCV market and decline in the oil & gas business. However, post that growth is expected to pick up. The company is gearing itself to capitalise on the opportunities presented by the Modi government's 'Make in India' programme particularly in the rail, power, defense and aerospace sector. That said, despite good growth prospects, given that the stock of Bharat Forge is fairly valued at the current price, our view is that investors not buy it at current levels.

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