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Bharat Forge: Weakness across segments - Views on News from Equitymaster

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Bharat Forge: Weakness across segments
Aug 26, 2013

Bharat Forge Ltd announced the first quarter results of financial year 2013-2014 (1QFY14). The company has reported a 15.5% YoY drop in revenues, while profits plunged 14% YoY. Here is our analysis of the results.

Performance summary
  • Standalone net sales fall by 15.5% YoY during the quarter on account of slowdown across all segments and geographies.
  • Operating margins remain stable as a result of which the fall in operating profits is in tandem with the decline in sales.
  • Led by the poor performance at the topline and operating level, net profits fall by 14% YoY.

Standalone performance snapshot
(Rs m) 1QFY13 1QFY14 Change
Sales 9,364 7,916 -15.5%
Expenditure 7,050  5,955 -15.5%
Operating profit (EBDITA) 2,314 1,961 -15.2%
Operating profit margin (%) 24.7% 24.8%  
Other income 317 354 11.8%
Interest 547 354 -35.3%
Depreciation 565 611 8.1%
Profit before tax  1,518 1,350 -11.1%
Tax 466 444 -4.7%
Profit after tax/(loss) 1,052 906 -13.9%
Net profit margin (%) 11.2% 11.4%  
No. of shares (m) 232.9 232.9  
Diluted earnings per share (Rs)*   12.7  
P/E ratio (x)*   17.4  
(*On a trailing 12-month basis and excluding extraordinary items)

What has driven performance in 1QFY14?
  • Bharat Forge's (BFRG) standalone revenues fell by 15.5% YoY during 1QFY14 on account of slowdown across all segments and geographies. As far as the domestic market is concerned, the company was impacted by the tough market conditions for the India auto industry. There was a drop in volumes of passenger vehicles while that of MHCVs also fell on account of lack of freight demand and slackening economic growth. Thus, revenues from India declined by 10% YoY. Revenues from the Americas and Europe plunged 26% YoY and 14% YoY respectively.

    Cost break-up
    (Rs m) 1QFY13 1QFY14 Change
    Raw materials 4,047 3,252 -19.6%
      % sales 43.2% 41.1%  
    Staff cost 687 707 2.9%
      % sales 7.3% 8.9%  
    Manufacturing expenses 1,721 1,385 -19.5%
      % sales 18.4% 17.5%  
    Other expenditure 596 611 2.5%
      % sales 6.4% 7.7%  
    Total 7,050 5,955  

  • BFRG's operating margins remained stable at 24.8% in 1QFY14 as a fall in raw material costs was offset by higher staff costs and other expenditure (as percentage of sales). As a result, the 15% YoY fall in operating profits was in tandem with the decline in sales.

  • Poor performance at both the topline and the operating profit level led to the 14% YoY drop in BFRG's net profits during the quarter. A substantial fall in interest costs and lower tax expenses did not do much in arresting this fall.

What to expect?
At the current price of Rs 228, the stock trades at a multiple of nearly 10.3 times our estimated FY16 earnings per share. FY13 was a challenging quarter for the Indian auto industry and Bharat Forge was adversely impacted too not only in the domestic market but also in the export markets. Although market conditions continue to remain tough, the company's performance on a sequential basis was much better as revenues from the domestic and export markets grew by 7% QoQ and 28% QoQ respectively. Having said that, in the near term the management does not expect the outlook for the auto sector to be promising since a slew of OEMs are planning to take production cuts in order to align with the sluggish demand environment. In the longer term, exports growth is expected to be driven by the non-auto business and new product development. Despite the near term headwinds, since valuations remain attractive at the current levels, we maintain our ‘Buy' view on the stock.

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