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Bharat Forge: Continues to see good times
Jul 26, 2010

Bharat Forge Ltd has announced its 1QFY11 results. While standalone revenues are higher by 76% YoY, profits surge by over 6 times. Here is our analysis of the results

Performance summary
  • Standalone revenues rise by 76% YoY, due to low base effect and strong growth in Indian auto industry in recent times.
  • Operating profits rise by a faster pace of 112% YoY on the back of a 4.3% YoY expansion in operating margins. Barring manufacturing sales, all other cost heads decrease (as a percentage of sales) on a YoY basis. Operating margins stood at 25.2% during the quarter ended June 2010.
  • Higher other income, a benign increase in interest and depreciation costs and a lower extraordinary leads to profits to surge by over 60 times.
  • Consolidated total income rises by 66% YoY during 1QFY11. As compared to a loss of Rs 461 m last year, profits during the quarter ended June 2010 stood at about Rs 621 m.


Standalone financial snapshot
(Rs m) 1QFY10 1QFY11 Change
Sales 3,586 6,301 75.7%
Expenditure 2,838 4,714 66.1%
Operating profit (EBDITA) 749 1,587 111.9%
Operating profit margin (%) 20.9% 25.2%  
Other income 52 101 95.8%
Interest 254 299 18.1%
Depreciation 384 468 21.9%
Extraordinary income/(expense) (149) (42) -71.5%
Profit before tax 15 879 5960.7%
Tax 5 285 5706.1%
Profit after tax/(loss) 10 594 6090.6%
Net profit margin (%) 0.3% 9.4%  
No. of shares (m) 222.7 232.8  
Diluted earnings per share (Rs)*   9.7  
P/E ratio (x)*   34.1  
(*On a trailing 12-month basis)

What has driven performance in 1QFY11?
  • Bharat Forge (BFRG) reported a standalone revenue increase of 76% YoY. Growth during the quarter was led by an 84% YoY increase in domestic revenues, while exports grew by 64% YoY. As per the management, BFRG has been able to grow at a much faster pace as compared to the industry on account of it gaining market share. Plus, increased utilisation levels have helped the company increase its output as well. Utilisation levels in India stand at about 65% to 70% in its auto business. On a quarter on quarter basis, revenues are higher by 9%. Domestic revenues increased by 16% QoQ, while export revenues grew by 6% QoQ. The company has been able to report a QoQ increase despite a 12% QoQ decrease in domestic medium and heavy commercial vehicle (M&HCV) volumes. As for the company’s non-auto business, it also reported a strong growth. Utilisation levels for this business stand at about 30% to 35% as compared to 20% last year. The non-auto business contributed to nearly 33% of revenues as compared to 28% last year. Coming to the geographical performance, the company reported a strong growth in the US market, where its revenues increased by 94% YoY. As per the management, the US companies are currently in a re-stocking phase as compared to a de-stocking phase last year. Revenues from the US contributed to about 19% of revenues (17% last year), while India contributed about 63% (revenues from Indian market increased by a strong 84% YoY).
    Cost break-up...
    (Rs m) 1QFY10 1QFY11 Change
    Raw materials 1,626 2,806 72.5%
    % sales 45.3% 44.5%  
    Staff cost 359 457 27.1%
    % sales 10.0% 7.2%  
    Manufacturing expenses 553 1,048 89.6%
    % sales 15.4% 16.6%  
    Other expenditure 299 404 34.8%
    % sales 8.3% 6.4%  

    What to expect?
    At the current price of Rs 330, the stock trades at a multiple of nearly 22 times our estimated FY12 earnings per share (ResearchPro subscribers, kindly click here). During the conference call yesterday, the company’s management sounded very optimistic and confident of BFRG’s future prospects. With the auto industry in India as well in the global markets doing well or picking up, the demand for the company’s products are likely to rise. For instance, the demand for components from the US (heavy vehicle market) is expected to rise by 30 to 40% this year. And next year, the management expects it to rise by 60%. The rationale for the same is that the demand is nowhere close to what it was in 2006, when the market had peaked. As for Europe, the management expects this year to remain flat (on the back of the over economic scenario in the region). A double digit growth is envisaged for the next year.

    As for the non-auto business, the management expects utilisation from new non-auto facilities to increase going forward driven by stable volumes, new orders wins & commencement of production on other programs.

    All said and done, while the prospects of the company seem to be strong from here on, we believe the same are already factored in the current valuations. We reckon investors not to enter the stock at current levels.

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