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Bharat Forge: A highly forgettable year - Views on News from Equitymaster
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Bharat Forge: A highly forgettable year
May 30, 2013

Bharat Forge Ltd announced the fourth quarter results of financial year 2012-2013 (4QFY13). The company has reported a 31% YoY drop in revenues, while profits plunged 60% YoY (excluding extraordinary items). Here is our analysis of the results.

Performance summary
  • Standalone net sales fall by 31% YoY during the quarter on account of slowdown across all segments and geographies.
  • Operating margins decline by 4.6% to 21% during the quarter due to higher manufacturing expenses, staff costs and other expenditure (as a percentage of sales).
  • Led by the poor performance at the topline and operating level, net profits fall by 60% YoY (excluding the extraordinary loss in 4QFY12).

Standalone performance snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Sales 9,772 6,747 -31.0% 36,860  31,512 -14.5%
Expenditure 7,273 5,329 -26.7% 27,707 24,357 -12.1%
Operating profit (EBDITA) 2,499 1,418 -43.3% 9,153 7,156 -21.8%
Operating profit margin (%) 25.6% 21.0%   24.8% 22.7%  
Other income 155 205 32.2% 676 916 35.6%
Interest 344 334 -3.1% 1,505 1,534 1.9%
Depreciation  535  545 1.9% 2,149 2,239 4.2%
Profit before tax 1,775  744 -58.1% 6,175 4,299 -30.4%
Exceptional items  (704) -    (704) 106  
Tax  519  243 -53.2% 1,850 1,349 -27.1%
Profit after tax/(loss) 551  501 -9.1% 3,621 3,056 -15.6%
Net profit margin (%) 5.6% 7.4%   9.8% 9.7%  
No. of shares (m)       232.9 232.9  
Diluted earnings per share (Rs)*         12.7  
P/E ratio (x)*         17.4  
(*On a trailing 12-month basis and
excluding extraordinary items)

What has driven performance in FY13?
  • Bharat Forge's (BFRG) standalone revenues fell by 14.5% YoY during FY13 on account of slowdown across all segments and geographies. Besides the sharp drop in demand both in the domestic and export markets, the company also faced problems of inventory destocking at the OEM level. Bharat Forge had to undertake manufacturing cuts to reduce inventories and match production levels with demand. While revenues from India declined by 20% YoY, those from Europe and Asia Pacific plunged 24.5% YoY and 28% YoY respectively. The company in particular was impacted by the poor performance of the MHCV industry. In the domestic auto industry, the MHCV sector witnessed a decline of 28% YoY on the back of continued weak economic activity and softening of freight rates.

    Cost break-up...
    (Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
    Raw materials 4,243 2,838 -33.1% 16,334 13,572 -16.9%
    % sales 43.4% 42.1%   44.3% 43.1%  
    Staff cost 635 613 -3.6% 2,550 2,574 1.0%
    % sales 6.5% 9.1%   6.9% 8.2%  
    Manufacturing expenses 1,753 1,286 -26.6% 6,448 5,953 -7.7%
    % sales 17.9% 19.1%   17.5% 18.9%  
    Other expenditure 641 592 -7.6% 2,375 2,258 -4.9%
    % sales 6.6% 8.8%   6.4% 7.2%  
    Total 7,273 5,329   27,707 24,357  

  • BFRG's operating margins declined by 2.1% to 22.7% in FY13 largely on account of higher manufacturing expenses, staff costs and other expenditure (as percentage of sales). Staff costs increased by 1.3% to 8.2% of sales, while manufacturing expenses rose by 1.4% to 18.9% of sales. This resulted in operating profits falling at a faster pace (down 22% YoY) as compared to the decline in sales.

  • Poor performance at both the topline and the operating profit level led to the 16% YoY drop in BFRG's net profits during the year. Having said that, if one excludes the extraordinary items during both the periods, net profits plunged 32% YoY. A substantial increase in other income and lower tax expenses did not do much in arresting this fall.

What to expect?

At the current price of Rs 238, the stock trades at a multiple of nearly 10.7 times our estimated FY15 earnings per share. FY13 was a challenging year for the Indian auto industry and Bharat Forge was adversely impacted too not only in the domestic market but also in the export markets. According to the company, based on the past 2-3 month market data, the demand environment seems to have bottomed out and there are initial green shoots of demand recovery from certain pockets based on an uptick in order intake of European OEMs. However, an element of uncertainty still remains. In the longer term, exports growth is expected to be driven by the non-auto business and new product development. Despite the near term headwinds, with valuations being attractive at the current levels, we maintain our 'Buy' view on the stock.

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