Bharat Forge's (BFRG) reported a sharp rise in both turnover and profits for the second quarter ended September 2002. The company's export thrust has yielded rich dividend if the first half numbers are anything to go by.
Operating Profit (EBDIT)
Operating Profit Margin (%)
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Profit after Tax/(Loss)
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Turnover in 2QFY03 and 1HFY03 has increased by 48% and 39% respectively. One of the key growth drivers for the company is exports, which is apparent from the table below. Exports as a percentage of turnover has almost doubled in 1HFY03. In FY02, BFRG signed an agreement with Dana Corp. of US for supply of forgings. As per this agreement, the company has taken over order book position of Danas SpicerEurope Ltd’s operation in Kirkstall, UK for Rs 210 m. The orders are worth 40 million pounds that would be completed over six years (starting FY03). BFRG also won a five year contract for supply of forgings for a Chinese manufacturer in 1QFY03.
The export thrust...
Exports % of sales
But at the same time, despite the rise in commercial vehicle sales in the domestic market (the key consumer segment), BFRG has posted a slower growth in domestic turnover in 2QFY03. This we believe is primarily on account of downward pressure on prices as OEMs generally tend to squeeze supplier in times of difficult market conditions. However, operating margins have showed a sharp rise on the back of benefits from increased capacity utilisation and lower employee related expenditure. BFRG trimmed its workforce by more than 1,300 employees in the last two years. Despite lower other income and higher tax provisioning, net margins have also increased significantly, which is a commendable performance. Historically, net profit margins have ranged between 5%-9%.
The stock currently trades at Rs 174 implying a P/E multiple of 11x annualised 1HFY03 earnings. The first half performance of the company is above our expectations. But since there is not much positive growth driver in the domestic market, domestic sales will remain subdued for the remaining quarters. The fortunes of the auto ancillary sector are closely linked to those of the auto sector, which limits the company's growth prospects. However, BFRG has been focusing on boosting exports to reduce cyclicality in business. This initiative bodes well in the long-run.
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