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Bharat Forge: Strong bounce back in exports - Views on News from Equitymaster

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Bharat Forge: Strong bounce back in exports
Oct 25, 2010

Bharat Forge Ltd has announced its 2QFY11 results. While standalone revenues are higher by 69% YoY, profits rise by 154% YoY. Here is our analysis of the results

Performance summary
  • Standalone revenues rise by 69% YoY during 2QFY11. During the quarter, growth was led by both domestic (up 59% YoY) as well as export (up 87% YoY) markets.
  • Operating profits rise by a faster pace of 72% YoY during the quarter. This is on the back of a 0.4% YoY expansion in operating margins, which were in turn aided by lower employee and other expenses (as a percentage of sales) on a YoY basis.
  • Profits rise by 155% YoY on the back of a decent operating performance coupled with higher other income coupled with a not very sharp increase in interests and depreciation charges.
  • Consolidated total income rises by 56% YoY during 2QFY11. As compared to a loss of Rs 407 m last year, profits during the quarter ended September 2010 stood at about Rs 606 m.

Standalone financial snapshot
(Rs m)  2QFY10   2QFY11  Change  1HFY10   1HFY11  Change
Sales   4,266   7,187 68.5%    7,852    13,488 71.8%
Expenditure   3,252   5,446 67.5%   6,089    10,202 67.5%
Operating profit (EBDITA)   1,014   1,741 71.7%    1,763   3,286 86.4%
Operating profit margin (%) 23.8% 24.2%   22.5% 24.4%  
Other income   70   86 22.6%  122  187 53.7%
Interest 246 320 30.2% 499  619 24.0%
Depreciation 408 490 20.0% 793  958 20.9%
Exceptional income/(expense) (30) -   -100.0% (178)   -   -100.0%
Profit before tax 400   1,017 154.1%  415    1,896 357.1%
Tax 132 336 154.5%  137 620 353.2%
Profit after tax/(loss) 268 681 154.0% 278    1,276 359.1%
Net profit margin (%) 6.3% 9.5%   3.5% 9.5%  
No. of shares (m)         222.7   232.8  
Diluted earnings per share (Rs)*         11.4  
P/E ratio (x)*           33.5  
(*On a trailing 12-month basis)

What has driven performance in 2QFY11?
  • Bharat Forge (BFRG) reported a topline growth of 69% YoY during the quarter ended September 2010. Growth during the quarter was led by an 87% YoY increase in exports, while domestic revenues increased by 59% YoY. Exports stood at about 38% of revenues (34% last year), while domestic revenues contributed to the balance. As per the company, total shipments rose by 52% YoY to about 46,140 tonnes as against 30,269 tonnes last year. On a quarter on quarter basis i.e. in comparison with the quarter ended June 2010, shipments rose by 8% YoY. Revenues on a quarter on quarter basis rose by 14%.

    Coming to the geographical performance, BFRG saw the contribution from the European markets rise to 16% of revenues during the quarter (13% last year) with revenues in the region rising by 108% YoY. The US markets contributed to nearly the same amounts as last year, contributing to about 19% of the company's revenues. Income from this region rose by 57% YoY. As the management had indicated earlier, revenues from the US have remained strong on the back of the US companies currently in a re-stocking phase as compared to a de-stocking phase last year.

    As for overall volumes in the US markets, the same increased by 22% YoY, led by production of LCVs and M&HCVs. The story in Europe is quite different. While overall sales volumes declined by 13% YoY, sales volumes of light, medium and heavy commercial vehicles rose by 7%, 9% and 20% on a year on year basis this quarter. The decline in sales was led by a 15% YoY decline in passenger car sales.

    Cost break-up...
    (Rs m)  2QFY10   2QFY11  Change
    Raw materials   1,885 3,307 75.4%
    % sales 44.2% 46.0%  
    Staff cost 357 489 37.1%
    % sales 8.4% 6.8%  
    Manufacturing expenses 673             1,177 74.8%
    % sales 15.8% 16.4%  
    Other expenditure 336 473 40.6%
    % sales 7.9% 6.6%  

  • BFRG reported a strong performance at the operating level as its profits increased by 72% YoY as compared to a sales growth of 69% YoY. Margins during the quarter stood at 24.2% as compared to 23.8% during 2QFY10. While the company saw an increase in raw material and manufacturing expenses, other expenses and employee costs increased at a slower pace as compared to the revenue growth, thereby aiding in margin expansion.

  • BFRG's profits grew by 154% YoY during the quarter. In addition to a strong operating performance, a not so quick rise in interest and depreciation coupled with no exceptional item (as against an Rs 30 m exchange loss last year) helped in the profit growth. On adjusting for the same, profits are higher by 129% YoY.

  • As for the performance of the consolidated entity, revenues during the quarter are higher by 56% YoY. During the corresponding quarter last year, the company reported a loss of 407 m at the profit level. During the latest quarter, the net profit stood at Rs 606 m (a profit margin of 5.5%).

What to expect?
At the current price of Rs 380, the stock trades at a multiple of nearly 21 times our estimated FY12 earnings per share (ResearchPro subscribers, kindly click here.) Similar to the management's comments during the preceding quarter, BFRG's prospects remain strong on the back of the strong growth in the Indian CV segment. Factors such as the entry of global OEMS in India, coupled with BFRG aiming at increasing its market share will only aid the company maintain its growth momentum. As per the management, BFRG is aiming at increasing its focus on the passenger car segment in order to increase market share.

As for the recovery in international market is concerned, there are high expectations from the US markets. The company believes that since demand is nowhere close to what it was in 2006, when the market had peaked, recovery from the same will drive growth in times to come.

As for the non-auto business, the management expects momentum to continue on the back of a growing order pipeline. During the quarter ended September, the non-auto division contributed to nearly 38% of revenues as compared to 29% last year. The key reason behind the same has been higher utilisation and production levels.

While the company's future prospects may be strong, we believe the same is factored in the stock's price at the moment. We advise investors to be cautious on the stock at current levels.

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