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Bharat Forge: Exports pack a punch - Views on News from Equitymaster
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Bharat Forge: Exports pack a punch
May 30, 2012

Bharat Forge Ltd announced the fourth quarter results of financial year 2011-2012 (4QFY12). The company has reported a 19% YoY increase in revenues, while profits fell by 45% YoY. Here is our analysis of the results.

Performance summary
  • Standalone net sales up by 19% YoY during the quarter led by a healthy 28% YoY growth in exports.
  • Operating margins expand by 1.7% YoY to 25.7% during the quarter due to lower raw material and staff costs and other expenditure (as a percentage of sales).
  • Profits fall by 45% YoY largely due to the exceptional expense of Rs 704 m. Excluding this, growth in net profits stands at 25% YoY.

Standalone performance snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 8,213 9,772 19.0% 29,470 36,860 25.1%
Expenditure 6,239 7,262 16.4% 22,274 27,692 24.3%
Operating profit (EBDITA) 1,974 2,510 27.2% 7,196 9,168 27.4%
Operating profit margin (%) 24.0% 25.7%   24.4% 24.9%  
Other income 162 145 -10.9% 424 661 55.8%
Interest 294 344 17.1% 1,214 1,505 23.9%
Depreciation 478 535 11.9% 1,933 2,149 11.2%
Profit before tax 1,364 1,775 30.2% 4,474 6,175 38.0%
Exceptional items - (704)   - (704)  
Tax 357 519 45.5% 1,365 1,850 35.5%
Profit after tax/(loss) 1,007 551 -45.2% 3,108 3,621 16.5%
Net profit margin (%) 12.3% 5.6%   10.5% 9.8%  
No. of shares (m)       232.9 232.9  
Diluted earnings per share (Rs)*         20.5  
P/E ratio (x)*         15.3  
(*On a trailing 12-month basis)

What has driven performance in FY12?
  • Bharat Forge (BFRG) reported a topline growth of 25% YoY during FY12. Growth during the year was led by a 42% YoY increase in exports, while domestic revenues increased by a decent 13% YoY. Exports contributed to about 47% of revenues during the year, while domestic markets contributed to the balance. Volumes grew by 17% YoY during the year on the back of robust demand from the North American and European heavy truck market and strong off-take from new non-automotive facilities. Realisations improved driven by better product mix and increased value addition. Coming to the geographical breakup of revenues, while details of the Indian markets are mentioned above, revenues from Europe and the US grew by 45% YoY and 41% YoY respectively and contributed to about 21% and 22% of revenues respectively.

    Cost break-up...
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Raw materials 3,653 4,243 16.2% 13,303 16,334 22.8%
    % sales 44.5% 43.4%   45.1% 44.3%  
    Staff cost 599 634 5.8% 2,105 2,543 20.8%
    % sales 7.3% 6.5%   7.1% 6.9%  
    Manufacturing expenses 1,386 1,753 26.5% 4,919 6,448 31.1%
    % sales 16.9% 17.9%   16.7% 17.5%  
    Other expenditure 601 632 5.2% 1,947 2,367 21.6%
    % sales 7.3% 6.5%   6.6% 6.4%  
    Total 6,239 7,262   22,274 27,692  

  • BFRG's operating margins during the year expanded by 0.5% to 24.9% largely on account of lower raw material and staff costs (as percentage of sales). This resulted in operating profits growing at a higher pace (up 27% YoY) as compared to the growth in sales.

  • BFRG's net profits grew by 16.5% YoY during the year. However, this lower growth was on account of the exceptional item of Rs 704 m incurred by the company during the fourth quarter and the full year. This is with respect to Bharat Forge America (BFA). Because of the uncertain future outlook, substantial erosion of net worth of BFA and the possibility of the company not begin able to recover its investment in BFA, the company created a provision of Rs 704 m. This is towards diminution in the carrying cost of its investment. Thus, excluding this extraordinary charge, growth in net profits was robust at 39% YoY led by healthy growth in operating profits and higher other income.

What to expect?
At the current price of Rs 314, the stock trades at a multiple of nearly 11.9 times our estimated FY14 earnings per share. Going forward, Bharat Forge expects exports growth to be driven by the non-auto business, new product development and higher sales in the US. Growth in the domestic market in the near term could still remain sluggish on account of macro headwinds. However, the company expects to perform better than the underlying market. As for the non-auto business, the management expects momentum to continue on the back of a growing order pipeline. On an overall basis, we believe that the company's future prospects are strong. We maintain our positive view on the stock from a long term perspective.

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