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Bharat Forge: Export driven growth - Views on News from Equitymaster
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Bharat Forge: Export driven growth
Aug 10, 2012

Bharat Forge announced its results for the quarter ended June 2012 recently. The company reported a 9% YoY increase in revenues, while net profits increased by 8% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow by 9% YoY during the quarter led by a 31% YoY increase in exports. Domestic revenues decline by about 8% YoY during the quarter.
  • Operating profits increase rise at a faster rate of 13% YoY (as compared to the revenue growth) as margins expand by 0.8% YoY to 25.1%. The same is attributable to lower raw material and purchase costs (as a percentage of sales).
  • Profits rise by 8% YoY driven by a stable operating performance. Had it not been for the sharp increase in finance costs, the profit growth would have been higher. Standalone financial performance

(Rs m) 1QFY12 1QFY13 Change
Net sales 8,577 9,364 9.2%
Expenditure 6,495 7,013 8.0%
Operating profit (EBDITA) 2,081 2,351 13.0%
EBDITA margin (%) 24.3% 25.1%  
Other income 162 279 72.7%
Finance costs 312 547 75.6%
Depreciation 517 565 9.3%
Exceptional items - - -
Profit before tax 1,414 1,518 7.3%
Tax 440 466 5.9%
Profit after tax/(loss) 974 1,052 8.0%
Net profit margin (%) 11.4% 11.2%  
No. of shares (m)   233  
Diluted earnings per share (Rs)*   18.9  
Price to earnings ratio (x)*   16.5  
* On a trailing 12-month basis, adjusted for extraordinary items

What has driven performance in 1QFY13?
  • Bharat Forge's revenues increased by 9% YoY during the quarter ended June 2012. Forming nearly 53% of total revenues (47% during 1QFY12), export revenues led the growth in this quarter with a 31% YoY increase. Domestic revenues, on the other hand, declined by 8% YoY. As per the management, the decline in production of M&HCVs was the reason for the same. It is believed that the production of domestic M&HCVs declined by 21% YoY during the quarter ended June 2012. On a sequential basis i.e. in comparison to the quarter ended March 2012, production volumes declined by 38% YoY. Production of LCVs, on the other hand, rose by 9% YoY and declined by 9% on a QoQ basis.

  • Export revenues were driven by strong CV sales in the US, coupled with the rupee depreciation as well as focus on the non-auto business. Revenue of the latter increased by 16% YoY. Sales to the US drove the export revenue growth with the same increasing by 67% YoY, while revenues from the European and Asia Pacific regions increased by 6% YoY and 8% YoY respectively.

    Cost breakup...
    (Rs m) 1QFY12 1QFY13 Change
    Raw materials/ purchases 3,851 4,047 5.1%
    % sales 44.9% 43.2%  
    Staff cost 621 685 10.4%
    % sales 7.2% 7.3%  
    Manufacturing expenses 1,473 1,721 16.8%
    % sales 17.2% 18.4%  
    Other expenditure 551 560 1.6%
    % sales 6.4% 6.0%  
    Total expenditure 6,495 7,013 8.0%

  • Bharat Forge's operating profits rose at a faster pace of 13% YoY as margins expanded by 0.8% to 25.1%. The margin expansion was largely due to lower input costs (as a percentage of sales).

  • Bharat Forge's profits increased by 8% YoY led by a stable performance at the operating level. However, the 76% YoY increase in depreciation charges brought the profit growth lower as compared to the 13% YoY increase in operating profits.

What to expect?
At the current price of Rs 314, the stock trades at a multiple of nearly 11.9 times our estimated FY14 earnings per share. Going forward, Bharat Forge expects exports growth to be driven by the non-auto business, new product development and higher sales in the US. Growth in the domestic market in the near term could still remain sluggish on account of macro headwinds. However, the company expects to perform better than the underlying market. 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. We maintain our 'Buy' view on the stock.

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