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Bharat Forge: Our key assumptions - Views on News from Equitymaster
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Bharat Forge: Our key assumptions
Aug 30, 2005

Bharat Forge (BFRG) is the second largest forging company in the world with an installed capacity of 130,000 tonnes in FY05. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world (Source: Company). BFRG manufactures a wide range of critical components for passenger cars, commercial vehicles and diesel engines. It is also on a major capacity expansion phase (expected to be completed in FY06), which would increase its passenger car crankshaft capacity to approximately 650,000 numbers per year and increase its forging capacity to 240,000 tonnes. Further, it is also expanding its capacity of front axle beams to 1 m units. We have recently updated our research report on Bharat Forge. Based on the performance of the industry, the company and interactions with the management, we have incorporated the following key assumptions for next three years:

Domestic growth:† The domestic revenues of the company grew by 37% YoY and 41% YoY in FY04 and FY05 respectively, on account of low base and also an upsurge in the demand of vehicles. Being an auto ancillary, the performance of the company hinges with that of the auto industry (particularly the commercial vehicles). The demand for commercial vehicles (CV) grew by 37%YoY and 26% YoY in FY04 and FY05 respectively. Going forward, as we expect the commercial vehicles and passenger car demand to grow by 6% to 7% CAGR and 10% to 11% CAGR respectively, we do not expect the company to repeat its past performance. However, given its brand equity and technical prowess we expect the company to outperform the auto industry growth. We expect the domestic revenues to grow by 14% CAGR in next three years.

International business:† We believe that the international business of the company will be the real growth driver for a number of reasons, which we have already stated in the report. To summarize the same, the reasons will be global outsourcing boom, group synergies (with the acquisition of CDP, Aluminiumtecnik and Federal Forge), access to passenger car market and rising up the value chain. We expect the exports to grow by 37% CAGR over next three years.

Realisations:† With the managementís continuous thrust on manufacturing value-add products for the OEMs and Tier I suppliers, we expect the average realisation of the company to improve further. Our belief stems from the fact that, the management aims to associate BFRG with OEMs right from the inception stage of the vehicle life cycle.

Raw material expenses:† Raw material accounts for around 60% the operating expenses. While we expect the prices of steel (a key component) to soften in the next two to three years, we have factored in a marginal increase in the input costs (as a % of sales) for FY06. For FY07 and FY08, we have factored in a marginal decline of 1% and 0.5% (as a percentage of sales) respectively. To that extent there exists an upside to our projection in case of a faster deceleration in the input costs.

Subsidiaries:† We have factored in a 20% growth (per annum) in the topline of the subsidiaries while maintaining the net profit margins. Having said that, we feel that economies of scale and the complimentary production facilities will ultimately result in improvement of margins. To that extent we have not factored in the potential upside.

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