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Bharat Forge’s acquisition: Our view - Views on News from Equitymaster
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Bharat Forge’s acquisition: Our view
Sep 23, 2005

Recently, Bharat Forge announced the acquisition of a Swedish company called Imarta Kilsta together with its 100% subsidiary, Scottish Stamping. In this article, we shall analyse the acquisition and how the company is likely to benefit. About the acquired company: Imatra Forging Group is the largest manufacturer of front axle beams and the second largest crankshafts producer in Europe. It has manufacturing facilities at two locations i.e. Karlskoga, Sweden and Ayr, Scotland. Imatra Kilsta and Scottish Stampings. are profitable companies, having total forging capacity of 100,000 tonnes per annum across two plants and had an annual turnover of over 1 bn Swedish Kroners (US$ 132 million or around 30% of the consolidated FY05) in 2004 and a staff complement of close to 600 employees. The company is a leading supplier to global passenger car and commercial vehicle manufacturers like Volvo, Scania, MAN, SAAB, DAF and IVECO.

The deal: Bharat Forge has acquired 100% ownership interest in the Swedish company through an all cash deal. The exact size of the deal is not known. The acquisition is routed through an SPV (in which Bharat Forge has a 100% stake). Hence, the revenue of the Swedish company will not directly flow into the books of Bharat Forge but will be reflected in the consolidated results of the group as a whole.

Benefit to Bharat Forge: This acquisition, along with the previous ones viz. CDP and Aluminiumtechnik of Germany and Federal Forge in US, almost completes the execution of the Bharat Forge’s ‘dual shore capability strategy’ i.e. to have production capacity in atleast two different locations. With the acquisition, the company has dual shore capability for all of its core products like crankshafts, beams, knuckles and pistons. To further elaborate, the company will carry out basic operations at the plant located in the low cost manufacturing location and perform only the most essential part of the manufacturing at the other locations. This will enable the group as a whole to improve on the margins.

Secondly, the acquisition will not only add new customers to its already existing marquee list but also will strengthen its ties with existing customers (by being able to service locally in different regions). Given the company’s technical prowess, low cost capability coupled with increasing cost pressures on the global original equipment manufacturers (OEMs), the possibility of increase in the revenue cannot be ruled out.

Concerns: On the standalone basis, we do not foresee any major concern. However, the performance of the company as a group in terms of operating margins may not keep pace with that of the stand-alone performance due to lower margins of the foreign operations (see table below).

(Rs m) Bharat Forge* CDP** Aluminiumtechnik**
Net Revenues 12191 7792 2002
Net Profit 1617 394 81
Net Margins 13.3% 5.1% 4.0%
* FY05   ** CY04

What to expect?
At Rs 320, the stock, trading at price to earnings ratio of 13 times our consolidated FY08 estimated earnings, is adequately valued. Having said that, we have not factored in the expected benefits for the consolidated entity on account of its recent acquisitions i.e. Federal Forge and Imarta. To this extent, we feel that there is an upside to our projections. Moreover, as the global auto-component sourcing boom is expected to gather further steam, niche players like Bharat Forge are likely to benefit the most. Hence, we recommend a hold on the stock with a long-term perspective.

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