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Bharat Forge: Exports prove a drag - Views on News from Equitymaster
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Bharat Forge: Exports prove a drag
Oct 23, 2009

Performance summary
  • Topline suffers a fall of 37% YoY during the quarter led by a 56% fall in exports
  • Small expansion of 0.7% seen in operating margins as the company manages to bring down raw material costs
  • Higher interest and depreciation charges lead to 59% fall in PBT. However, if currency charges are taken into account, bottomline surges a strong 139% YoY as forex losses come down significantly during the quarter
  • Half yearly bottomline suffers a fall of 27% YoY on the back of a 40% decline in topline

(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 6,756 4,276 -36.7% 13,129 7,862 -40.1%
Expenditure 5,178 3,252 -37.2% 9,992 6,089 -39.1%
Operating profit (EBDITA) 1,577 1,024 -35.1% 3,137 1,773 -43.5%
EBDITA margin (%) 23.3% 24.0%   23.9% 22.6%  
Other income 102 60 -41.6% 223 112 -50.0%
Interest (net) 236 246 4.2% 431 499 15.8%
Depreciation 389 408 5.0% 766 793 3.4%
Profit before tax 1,055 430 -59.2% 2,163 593 -72.6%
Extraordinary income/(expense) (875) (30)   (1,569) (178)  
Tax 67 132 95.8% 216 137 -36.6%
Profit after tax/(loss) 113 268 138.5% 378 278 -26.5%
Net profit margin (%) 1.7% 6.3%   2.9% 3.5%  
No. of shares (m) 222.7 222.7   222.7 222.7  
Diluted earnings per share (Rs)*         4.2  
Price to earnings ratio (x)*         65.4  
* on trailing twelve months earnings

What has driven performance in 2QFY10?
  • The 37% drop in the company’s topline was brought about by a 17% fall in the company’s domestic operations and a 56% fall in the company’s exports. While the numbers look bad, it should be remembered that the same stood at 38% and 52% during the first quarter. Thus, the company seems to have made sizeable improvement in stemming the fall in domestic sales. Exports however continued to remain a concern as the automotive industry in the global markets continues to remain in the doldrums. Coming back to domestic operations, with the pickup seen in M&HCV sales, the company’s fortunes have also been on an uphill. Things are expected to improve further in the coming quarters.

  • On the margins front, with both raw materials costs and the manufacturing expenses forming a lower percentage of sales as compared to previous corresponding quarter, operating margins have come in higher by around 0.7%. Had it not been for the adverse movement in staff costs and other expenditure, things could have looked even better. The fall in raw material expenses could be a result of lower commodity prices.

  • Company’s PBT has come in lower by 59% YoY. As can be seen, this deterioration, as compared to the operating performance, was mainly on account of higher interest and depreciation charges. Although the company’s bottomline has come in higher by 139% over the previous quarter, it may not exactly be comparable as it includes forex charges levied under different accounting standards. The company’s tax charges have nearly doubled and this has put further pressure on the bottomline during the quarter.

What to expect?
At Rs 274, the stock is trading at a price to earnings multiple of 14x times our FY12 estimates. While the company has underperformed our estimates, the recovery which it recently witnessed would aid its growth going forward. Further, de-risking of its revenue model would also open up several opportunities for growth. Its strong focus on cost front would also benefit the company. Valuations however, seem to be bordering on the expensive side currently. We advise investors to practice caution.

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