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Bharat Forge: Growth pangs! - Views on News from Equitymaster

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Bharat Forge: Growth pangs!

Jul 31, 2006

Performance Summary
Bharat Forge, world’s second largest forging company has reported a subdued set a numbers for 1QFY07. While the topline and operating profits have grown at a decent pace of 16% and 15% YoY respectively, it is the 5% growth in bottomline that has been disappointing. An extraordinary loss to the tune of Rs 45 m has stunted the bottomline growth, which would have otherwise been in line with topline and operating profit growth.

Financial performance: Standalone snapshot
(Rs m) 1QFY06 1QFY07 Change
Net sales 3,635 4,206 15.7%
Expenditure 2,750 3,188 15.9%
Operating profit (EBDITA) 885 1,017 14.9%
EBDITA margin (%) 24.4% 24.2%  
Other income 112 233 108.2%
Interest (net) (112) (176) 57.4%
Depreciation 149 229 53.2%
Profit before tax 736 845 14.9%
Extraordinary income/(expense) - (45)  
Tax 247 285 15.6%
Profit after tax/(loss) 489 515 5.3%
Net profit margin (%) 13.5% 12.2%  
No. of shares (m) 43.2 222.7  
Diluted earnings per share (Rs)* 8.8 9.3  
Price to earnings ratio (x)**   30.3  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Bharat Forge (BFRG) is the second largest forging company in the world with an installed capacity of 200,000 tonnes in FY06, which will increase to 340,000 tonnes in FY07. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world. BFRG manufactures a wide range of critical components for passenger cars, commercial vehicles and diesel engines. On the domestic front, the company's clientele includes Tata Motors, Ashok Leyland, Eicher, M&M, Toyota and Maruti Udyog. On the international front, the list consists of Volvo, Caterpillar, Toyota, Renault and Daimler Chrysler, to name a few. In the last two years, the company has expanded its presence geographically through acquisitions (in FY04, it acquired two German companies and in 1QFY06, Federal Forge of US was acquired). With CDP and Aluminiumtechnik in its kitty, it has gained a strong foothold in Europe

What has driven performance in 1QFY07?
Domestic sales drive the topline: Domestic sales grew by 20% and since it contributed 60% to the total sales of the company in this quarter (58% in 1QFY06), a bulk of the growth in topline was a result of improved domestic sales. The company is a supplier to leading automotive OEMs and since the domestic automotive industry grew by 20% YoY in 1QFY07, Bharat Forge’s domestic sales also grew in line with the industry sales. On the exports front, they were higher by 10% on a YoY basis. Going forward, once the new capacity comes on stream in October 2006, exports are likely to grow at a faster clip from the current levels. As far as the capacity ramp-up is concerned, the crankshaft capacity will increase from 513,000 units per annum (UPA) in June 2006 to 650,000.

Cost break-up…
(Rs m) 1QFY06 1QFY07 Change
Raw materials 1,639 1,864 13.8%
% sales 45.1% 44.3%  
Staff cost 231 242 4.9%
% sales 6.4% 5.8%  
Manufacturing expenses 580 723 24.7%
% sales 16.0% 17.2%  
Other expenditure 301 356 18.6%
% sales 8.3% 8.5%  

Not much damage at the operating level: Operating margins have fallen marginally and have shrunk by 20 basis points as compared to 1QFY06. While raw material cost and staff cost have fallen as a percentage of sales, manufacturing as well as other expenses has put pressure on margins. During 4QFY06, only 2/3rd of the total incremental capacity was operational and with this capacity expected to be fully operational few months down the line, margins might expand from the current levels.

Higher interest costs and depreciation offset by other income: The interest costs rose by nearly 57% (company recently tapped the bond markets) and depreciation was also higher by the same margin. It should be noted that the company has executed most of its new capacity addition and this has resulted into a higher depreciation charge as compared to 1QFY06. Other income has more than doubled for the company and this has helped it offset the higher outgo in the form of interest and depreciation charges.

Consolidated financials
(Rs m) 1QFY06 1QFY07 Change
Net sales 6,381 9,878 54.8%
Expenditure 5,145 8,287 61.1%
Operating profit (EBDITA) 1,237 1,591 28.6%
EBDITA margin (%) 19.4% 16.1%  
Other income 113 237 109.1%
Interest (net) (138) (219) 59.3%
Depreciation 254 422 66.0%
Profit before tax 958 1,186 23.8%
Extraordinary income/(expense) - (45)  
Tax 327 405 24.0%
Profit after tax/(loss) 631 736 16.6%
Net profit margin (%) 9.9% 7.5%  
No. of shares (m) 43.2 222.7  
Diluted earnings per share (Rs)* 11.3 13.2  
Price to earnings ratio (x)**   24.5  
(* annualised, ** on trailing twelve months earnings)

What to expect?
At the current price of Rs 299, the stock is trading at a price to earnings multiple of 12 times our estimated FY08 earnings. With most of the capacity expansion plan and restructuring completed, we believe the company is nicely poised to reach the next level of growth. We remain positive on the stock from a long-term standpoint.

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