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Bharat Forge: Look beyond the exceptional - Views on News from Equitymaster

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Bharat Forge: Look beyond the exceptional

Jul 31, 2008

Performance summary
  • Standalone sales grow 28% YoY for 1QFY09, courtesy a 33% YoY growth in exports.
  • Operating margins expand 410 basis points despite raw material cost pressures
  • Bottomline suffers a decline of 59% on the back of mark-to-market forex based losses. Excluding the same, bottomline growth stands at an impressive 205% YoY.
  • On a consolidated basis, PAT has declined by 49% YoY in 1QFY09 on the back of a 24% YoY topline growth. Excluding exceptional items, PAT jumps an impressive 134% YoY

(Rs m) 1QFY08 1QFY09 Change
Net sales 4,969 6,374 28.3%
Expenditure 3,956 4,814 21.7%
Operating profit (EBDITA) 1,012 1,560 54.1%
EBDITA margin (%) 20.4% 24.5%  
Other income 200 121 -39.6%
Interest (net) 234 195 -16.4%
Depreciation 329 377 14.7%
Profit before tax 650 1,108 70.5%
Extraordinary income/(expense) 333 (693)  
Tax 335 149 -55.6%
Profit after tax/(loss) 648 266 -59.0%
Net profit margin (%) 13.0% 4.2%  
No. of shares (m) 222.7 222.7  
Diluted earnings per share (Rs)*   10.6  
Price to earnings ratio (x)*   24.2  
(* on trailing twelve months earnings)

What has driven performance in 1QFY09?
  • The impressive growth of 28% YoY in the topline was led by both domestic sales as well as exports with the latter performing a shade better and growing at 33% YoY. The fact that the rupee depreciated against the dollar also helped exports grow at a faster rate. Excluding the impact of the same, growth in exports still stood at an impressive 26% YoY. Domestic sales on the other hand managed a 24% YoY growth. Courtesy the company’s strategy of tapping new product segments and exploring new geographies, the topline growth has come in robust in both the domestic as well as exports markets despite tight industry conditions. It should also be noted that a good part of the topline growth could also be attributed to the increased realisations that the company has got on account of raw material price escalation contracts it has with virtually all its customers. Nevertheless, the growth from volumes alone has stood at 19% YoY, a number that is by no means unimpressive under the circumstances.

    cost break up
    (Rs m) 1QFY08 1QFY09 Change
    Raw materials 2,299 2,963 28.9%
    % sales 46.3% 46.5%  
    Staff cost 337 383 13.6%
    % sales 6.8% 6.0%  
    Manufacturing expenses 896 1,023 14.2%
    % sales 18.0% 16.0%  
    Other expenditure 425 445 4.7%
    % sales 8.5% 7.0%  

  • The company’s efforts at cost reduction have borne fruit during the quarter as operating margins have jumped by a strong 410 basis points as compared to the same quarter last year. Although raw material costs have jumped dramatically, raw material costs as a percentage of sales have gone higher by only 20 basis points thanks to pass through policy that the company has in place. Boost to the margins though have come from manufacturing and other expenses as they have come down significantly as a percentage of sales.

  • On account of the sharp depreciation of the rupee against the dollar during the quarter, the company has suffered a ‘mark-to-market’ loss of Rs 693 m, as nearly 90% of its standalone debt is foreign currency denominated. Owing to this, the bottomline of the company has suffered a decline of 59% on a YoY basis for the quarter under consideration. It is worth mentioning that during the corresponding quarter last year, the company had recorded a profit of Rs 333 m on account of ‘mark-to-market’ accounting. If one were to exclude the impact of the same and consider the PBT performance, then the company has shown an impressive growth of 71% YoY, thanks to the strong operating performance and reduction in interest outgo as also benign depreciation growth.

  • On the consolidated front, despite problems at the company’s US subsidiary, it has done well to record a topline growth of 23% and a PBT growth of 50% on a YoY basis. Including exceptional items, PAT has shown a decline of 49% YoY. Strong performance at the topline and the PBT level was owing to the traction witnessed in the company’s European subsidiaries where new products helped it penetrate new markets and grow volumes.

What to expect?
At the current price of Rs 255, the stock is trading at a P/E of 8 times its FY11 standalone earnings. The strong performance during the current quarter speaks volumes about the company’s ability to grow despite a sluggish environment and is a testimony to its strategy of de-risking its business model, both geographically as well as segment wise. Its foray into the non-automotive space will ensure that the company not only continues to grow at a robust pace but also reduces its dependence on the auto sector. At current valuations, we remain positive on the stock from a medium term perspective.

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Feb 18, 2019 (Close)


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