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Bharat Forge: The forex fumble - Views on News from Equitymaster
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Bharat Forge: The forex fumble
Oct 27, 2008

Performance summary
  • Standalone sales grow 19% YoY for 2QFY09, courtesy a 30% YoY growth in exports.
  • Operating margins shrink 160 basis points as higher raw material costs take toll.
  • Bottomline suffers a decline of 83% YoY on the back of mark-to-market forex based losses. Growth in PBT, which excludes the impact of forex losses, comes in higher by 17% YoY.
  • On a consolidated basis, PAT has declined by 95% YoY in 2QFY09 on the back of a 29% YoY topline growth. PBT however has grown by a decent 8% YoY.

(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 5,481 6,545 19.4% 10,325 12,743 23.4%
Expenditure 4,249 5,178 21.9% 8,206 9,992 21.8%
Operating profit (EBDITA) 1,232 1,366 10.9% 2,119 2,750 29.8%
EBDITA margin (%) 22.5% 20.9%   20.5% 21.6%  
Other income 295 313 6.1% 620 610 -1.7%
Interest (net) 273 236 -13.7% 507 431 -14.9%
Depreciation 351 389 10.7% 680 766 12.7%
Profit before tax 903 1,055 16.8% 1,553 2,163 39.3%
Extraordinary income/(expense) 109 (875)   442 (1,569)  
Tax 334 67 -79.8% 669 216 -67.7%
Profit after tax/(loss) 678 113 -83.4% 1,326 378 -71.5%
Net profit margin (%) 12.4% 1.7%   12.8% 3.0%  
No. of shares (m) 222.7 222.7   222.7 222.7  
Diluted earnings per share (Rs)*         8.0  
Price to earnings ratio (x)*         11.0  
(* on trailing twelve months earnings)

What has driven performance in 2QFY09?
  • The decent growth of 19% YoY in the topline was led by exports that grew by 30% YoY. The fact that the rupee depreciated against the dollar also helped exports grow at a faster rate. Domestic sales on the other hand managed a 7% YoY growth and tracked the subdued scenario prevalent in the domestic markets. They were however aided to some extent by off take in the agricultural implements and the tractor market. It should also be noted that a good part of the topline growth could also be attributed to the increased realisations that the company has got on account of raw material price escalation contracts it has with virtually all its customers.

    cost break up
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Raw materials 2,548 3,210 26.0% 4,847 6,174 27.4%
    % sales 46.5% 49.1%   46.9% 48.4%  
    Staff cost 354 383 8.1% 691 766 10.8%
    % sales 6.5% 5.8%   6.7% 6.0%  
    Manufacturing expenses 934 1,101 17.9% 1,829 2,124 16.1%
    % sales 17.0% 16.8%   17.7% 16.7%  
    Other expenditure 414 485 17.2% 838 929 10.9%
    % sales 7.5% 7.4%   8.1% 7.3%  

  • Operating margins have come in lower by 160 basis points during the quarter. This was mainly due to a 26% jump in raw material costs as all the other cost heads have grown at a lower rate than the topline. It should be noted that despite passing on the raw material cost increases, EBITDA margins have come in lower due to the high denominator effect that tends to deflate operating margins.

  • On account of the sharp depreciation of the rupee against the dollar during the quarter, the company has suffered a ‘mark-to-market’ loss of Rs 875 m, as most of its standalone debt is foreign currency denominated. Owing to this, the bottomline of the company has suffered a decline of 83% on a YoY basis for the quarter under consideration. It is worth mentioning that during the corresponding quarter last year, the company had recorded a profit of Rs 109 m on account of ‘mark-to-market’ accounting. If one were to exclude the impact of the same and consider the PBT performance, then the company has shown an impressive growth of 17% YoY, thanks to the strong operating performance and reduction in interest outgo as also benign depreciation growth.

  • On the consolidated front, despite problems at the company’s US subsidiary, it has done well to record a topline growth of 29% and a PBT growth of 8% on a YoY basis. Including exceptional items, PAT has shown a huge decline of 95% YoY. Strong performance at the topline and the PBT level was owing to the traction witnessed in the company’s European subsidiaries where new products helped it penetrate new markets and grow volumes. Business from this region improved by 42% YoY.

What to expect?
At the current price of Rs 88, the stock is trading at a P/E of 3 times its FY11 standalone earnings. The strong performance during the current quarter speaks volumes about the company’s ability to grow despite a sluggish environment and is a testimony to its strategy of de-risking its business model, both geographically as well as segment wise. Its foray into the non-automotive space will ensure that the company not only continues to grow at a robust pace but also reduces its dependence on the auto sector. Although we might have to lower exports growth a bit, at current valuations, we still remain positive on the stock from a medium term perspective.

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