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Bharat Forge: Forges a strong start

Aug 10, 2011

Bharat Forge Ltd. announced the first quarter results of financial year 2011-2012 (1QFY12). The company has reported a 36% YoY increase in revenues, while profits grew by 64% YoY. Here is our analysis of the results.

Performance summary
  • Standalone net sales up by 36% YoY during the quarter led by a robust 67% YoY growth in exports.
  • Operating margins contract marginally by 0.2% YoY to 24.3% during the quarter due to higher raw material costs and manufacturing expenses (as a percentage of sales).
  • Profits rise by 64% YoY led by higher other income coupled with a relatively benign increase in interest and depreciation costs.

Standalone performance snapshot
(Rs m) 1QFY11 1QFY12 Change
Sales 6,301 8,577 36.1%
Expenditure 4,756 6,493 36.5%
Operating profit (EBDITA) 1,545 2,084 34.9%
Operating profit margin (%) 24.5% 24.3%  
Other income 101 147 45.2%
Interest 299 300 0.3%
Depreciation 468 517 10.4%
Exceptional income/(expense) - -  
Profit before tax 879 1,414 60.9%
Tax 285 440 54.7%
Profit after tax/(loss) 594 974 63.9%
Net profit margin (%) 9.4% 11.4%  
No. of shares (m) 232.9 232.9  
Diluted earnings per share (Rs)*   15.0  
P/E ratio (x)*   19.3  
(*On a trailing 12-month basis)

What has driven performance in 1QFY12?
  • Bharat Forge (BFRG) reported a topline growth of 36% YoY during 1QFY12. Growth during the year was led by a 67% YoY increase in exports, while domestic revenues increased by 19% YoY. Exports contributed to about 44% of revenues, while domestic markets contributed to the balance. As per the company, total shipments rose by 24% YoY to about 52,959 tonnes during the quarter. This was on back of strong demand from the US and European CV market. Growth in the domestic market was relatively slower as the industry is facing several headwinds in the form of high fuel prices, persistently high inflation and hard interest rate regime. Coming to the geographical breakup of revenues, while details of the Indian markets are mentioned above, revenues from Europe and the US grew by 108% YoY and 32% YoY respectively and contributed to about 24% and 18% of revenues respectively.

    Cost break-up...
    (Rs m) 1QFY11 1QFY12 Change
    Raw materials 2,806 3,851 37.2%
    % sales 44.5% 44.9%  
    Staff cost 457 591 29.4%
    % sales 7.2% 6.9%  
    Manufacturing expenses 1,048 1,473 40.6%
    % sales 16.6% 17.2%  
    Other expenditure 446 578 29.6%
    % sales 7.1% 6.7%  
    Total 4,756 6,493  

  • BFRG's operating margins during the quarter contracted marginally by 0.2% to 24.3% largely on account of higher raw material costs and manufacturing expenses (as percentage of sales). This resulted in operating profits growing at a slightly lower pace (up 35% YoY) as compared to the growth in sales.

  • BFRG's profits grew by 64% YoY during the quarter. In addition to a healthy growth in operating profits, higher other income and a relatively benign increase in interest and depreciation costs helped in boosting profits during the quarter.

What to expect?
At the current price of Rs 286, the stock trades at a multiple of nearly 11 times our estimated FY14 earnings per share. Bharat Forge's management expects exports to do well on the back of strong growth forecasted for the North American CV markets and continuation of the demand pick-up in Europe. As far as the Indian market is concerned, the management believes that the Indian auto market will grow steadily in the long run and this region will remain the company's key area of focus.

While BFRG seems to be well placed on the back of it gaining market share and business from many new entrants in the auto space, we believe that over the medium term many factors such as high interest rates, high input costs and high fuel costs will tend to slow down the auto demand. This is especially considering the strong volumes recorded by the industry over the past two years. As for the non-auto business, the management expects momentum to continue on the back of a growing order pipeline. On an overall basis, we believe that the company's future prospects are strong. With the price having come down in recent times, at the current levels, the stock is attractively priced from a long term perspective.

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