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Bharat Forge: Not a good quarter - Views on News from Equitymaster
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Bharat Forge: Not a good quarter
Jul 24, 2009

Performance summary
  • Topline reports a drop of 44% YoY led by decline in both, the domestic and export fronts.
  • However, on a sequential basis, some improvement is seen.
  • On the operating margin front, the company witnesses a decline of 3.6% YoY, mainly due to higher staff costs as a percent of sales.
  • Excluding the exchange loss, the net profit declines by 84% YoY led by a 52% YoY fall in the operating profits and lower other income.


Financial picture
Rs m) 1QFY09 1QFY10 Change
Net sales 6,374 3,586 -43.7%
Expenditure 4,814 2,838 -41.1%
Operating profit (EBDITA) 1,560 749 -52.0%
EBDITA margin (%) 24.5% 20.9%  
Other income 121 52 -57.2%
Interest (net) 195 254 29.7%
Depreciation 377 384 1.8%
Profit before tax 1,108 163 -85.3%
Extraordinary gain/(loss) (693) (149)  
Tax 149 5 -96.7%
Profit after tax/(loss) 266 10 -96.4%
Net profit margin (%) 4.2% 0.3%  
No. of shares (m) 222.7 222.7  
Diluted earnings per share (Rs)   3.5  
Price to earnings ratio (x)   51.9  
*12 months trailing earning

What has driven performance in 1QFY10?
  • Bharat Forge reported a 44% YoY decline in standalone sales led by a 52% YoY decline in exports. The domestic sales saw a drop of 38% YoY. Lower offtake and significant curtailment in demand by clients led to the lower volume. The tonnage volume reported a drop of 52% YoY. Being a global player with close to 80% of its revenues coming from the automotive industry, both within and outside India, the company was affected by this unprecedented downturn. While Indian operations saw a utilization of just 35%, global operations had utilization levels of 25% to 30%.

  • On a consolidated basis, the revenues declined by 54% YoY. The company reported loses at the PBT and PAT levels. The performance was hurt by the US and European markets. The subsidiaries’ tonnage fell by more than half. Bharat Forge is restructuring its subsidiaries. It is also rationalizing the manpower costs and expects the subsidiaries to breakeven at PBIT levels during CY10.

  • On a sequential basis, the topline did improve to report a 23% QoQ growth. Recovery witnessed in the economy and auto sales led to the higher topline on a QoQ basis. The tonnage also improved from 18,000 MT in March quarter to 22,000 in the June quarter. The non- auto segment continues to gain traction and its share to the total revenues has improved to 32% during 1QFY10 from 28% during FY09. It wants to focus on the marine, railways, locomotive and power segment. Further, it had signed 4 JVs with power companies and plans to make some investments in these JVs next year. The company aims to take non- automotive contribution to 40% by FY12 on a consolidated basis.

    Cost break-up…
    (Rs m) 1QFY09 1QFY10 Change
    Raw materials 2,963 1,626 -45.1%
    % sales 46.5% 45.3%  
    Staff cost 383 359 -6.3%
    % sales 6.0% 10.0%  
    Other expenditure 1,467 852 -41.9%
    % sales 23.0% 23.8%  

  • The operating profit margins declined from 25% to 21% during the quarter. While the input prices declined by 45% YoY due to lower metal prices, higher staff and other expenses as a percent of sales led to the contraction in margins. However, on a sequential basis, the margins have improved from 14.6%. The company is reducing its working capital requirement and is focusing on reducing its costs.

  • Excluding the exchange loss (due to change in accounting method), the bottomline tanked by 84% YoY during 1QFY10. Decline in operating profits coupled with lower other income and higher interest costs led to the fall.

What to expect?
At Rs 181, the stock is trading at a price to earnings multiple of 9.5 times our FY12 estimates. While the company has underperformed our estimates, the recovery which is recently witnessed would aid its growth going forward. Further, de-risking of its revenue model would also open up several opportunities of growth. Its strong focus on cost front would also benefit the company. We are positive on the stock.

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