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Bharat Forge: The propellant shifts

Oct 22, 2003

Bharat Forge, one of the largest forging companies in the world, has reported robust results for 2QFY04. While the topline of the company has grown 40% YoY, the bottomline of the company has registered an impressive growth of 70%. However, operating margins have declined by 330 basis points due to higher input costs.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Net sales 1,451 2,034 40.2% 2,757 3,891 41.2%
Other Income 2 42 2010.0% 3 76 2209.1%
Expenditure 983 1,446 47.1% 1,897 2,757 45.3%
Operating Profit (EBDIT) 468 588 25.7% 860 1,134 31.9%
Operating Profit Margin (%) 32.2% 28.9%   31.2% 29.1%  
Interest 110 88 -20.4% 219 175 -19.9%
Depreciation 103 116 12.8% 205 227 11.0%
Profit before Tax 257 426 66.1% 440 808 83.8%
Tax 83 133 59.4% 143 251 76.2%
Profit after Tax/(Loss) 173 294 69.4% 297 557 87.4%
Net profit margin (%) 11.9% 14.4%   10.8% 14.3%  
No. of Shares (m) 37.7 37.7   37.7 37.7  
Diluted Earnings per share (Rs)* 18.4 31.1   15.8 29.5  
P/E Ratio (x)   16.5     17.4  
(* annualised)            

Unlike last year, where the growth in company’s topline was mainly contributed by exports, the growth propellants this time were sales in the domestic market. Sales in domestic markets increased by 66% and contributed 60% to the topline (50% in 2QFY03). For 1HFY04, domestic sales increased by 41.4% and contributed 41% to the topline. While the forging industry demand grew by 30%, Bharat Forge has managed to outperform in light of its costs leadership. It is currently ramping up its production to take care of increased domestic requirements.

Exports contribution…
(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Domestic 735 1,221 66.1% 1,837 2,598 41.4%
Exports 716 814 13.6% 1,160 1,610 38.8%
Exports % of sales 49.3% 40.0%   42.1% 41.4%  

While export contribution to the topline has come down to 40% in 2QFY04, it declined only marginally for 1HFY04 as compared to the previous year. However, going forward contribution from exports is likely to increase. The company has recently won a contract from Ford Motor Company and Daimler Chrysler for supply of components for their global passenger car programs. The company has also begun exports to Second Auto Works, China and as a result the company’s order book is looking pretty strong at the moment.

As far as the cost breakup is concerned, raw material cost for the company has increased mainly on account of the rise in steel prices globally. In the past three years, the company has been able to reduce its workforce by around 1,250 employees and this is reflected in lower staff cost as a percentage of sales (7% in 1HFY04 as compared to more than 8% in 1HFY03).

Cost break up…
(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Raw materials 463 771 66.7% 937 1,427 52.3%
% of sales 31.9% 37.9%   34.0% 36.7%  
Manufacturing expenses 277 381 37.3% 518 753 45.4%
% of sales 19.1% 18.7%   18.8% 19.3%  
Staff cost 119 139 16.4% 232 270 16.1%
% of sales 8.2% 6.8%   8.4% 6.9%  
Others 124 156 25.4% 210 307 46.7%
% of sales 8.6% 7.7%   7.6% 7.9%  
Total 983 1,446 47.1% 1,897 2,757 45.3%
% of sales 67.8% 71.1%   68.8% 70.9%  

The company has also reduced its debt burden by around Rs 900 m in the last two years and as a result it has managed to bring its interest cost down by around 20% in 1HFY04. We expect the company to retire debts to the tune of about Rs 500-600 m in FY04.

The stock is currently trading at Rs 514 implying a P/E multiple of 16.5x FY04E earnings. Valuation seems to be on the higher side when one considers that the company’s fortunes are linked to the auto industry. However, the company’s efforts at looking at other growth avenues such as the heavy machinery industry and also the contracts that it has won in recent times point to the fact that it is indeed in a strong position to meet the investors expectations.

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