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Bharat Forge: Export gears performance

Oct 21, 2002

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.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net sales 982 1,451 47.7% 1,983 2,757 39.0%
Other Income 20 2 - 42 3 -
Expenditure 742 983 32.6% 1,498 1,897 26.6%
Operating Profit (EBDIT) 241 468 94.4% 485 860 77.3%
Operating Profit Margin (%) 24.5% 32.3%   24.5% 31.2%  
Interest 111 110 -0.5% 236 219 -7.2%
Depreciation 90 103 13.7% 191 205 7.1%
Profit before Tax 59 257 334.0% 99 440 342.0%
Tax 34 83 147.5% 34 143 323.1%
Profit after Tax/(Loss) 25 174 580.4% 66 297 351.7%
Net profit margin (%) 2.6% 12.0%   3.3% 10.8%  
No. of Shares (m) 37.7 37.7   37.7 37.7  
Diluted Earnings per share* 2.7 18.4   3.5 15.8  
P/E Ratio (x)         11.0  
(* annualised)            

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...
(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Domestic 712 735 3.3% 1,510 1,596 5.7%
Exports 271 716 164.7% 473 1,160 145.6%
Exports % of sales 27.5% 49.3%   23.8% 42.1%  

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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