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Bharat Forge: Interest costs play spoilsport
Oct 28, 2013

Bharat Forge Ltd announced the second quarter results of financial year 2013-2014 (2QFY14). The company has reported a 3% YoY drop in revenues, while profits have fallen by 6% YoY. Here is our analysis of the results.

Performance summary
  • Standalone net sales fall by 3% YoY during the quarter on account of slowdown across all segments and geographies.
  • Operating margins improve by 3.3% to 26.4% in 2QFY14 as a result of which operating profits grow by 11% YoY.
  • Excluding the extraordinary income in 2QFY13, net profits grow at a slower rate of 4.5% during the quarter on account of a substantial rise in interest costs.

Standalone performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Sales 8,676 8,451 -2.6% 18,040 16,367 -9.3%
Expenditure 6,675 6,223 -6.8% 13,726 12,178 -11.3%
Operating profit (EBDITA) 2,001 2,228 11.4% 4,314 4,189 -2.9%
Operating profit margin (%) 23.1% 26.4%   23.9% 25.6%  
Other income 200 213 6.6% 517 567 9.8%
Interest 289 394 36.0% 837 748 -10.6%
Depreciation 555 628 13.2% 1,120 1,238 10.6%
Profit before tax 1,356 1,420 4.7% 2,874 2,770 -3.6%
Exceptional items 106 -   106 -  
Tax 434 456 5.0% 900 900 0.0%
Profit after tax/(loss) 1,028 964 -6.2% 2,080 1,870 -10.1%
Net profit margin (%) 11.8% 11.4%   11.5% 11.4%  
No. of shares (m)       232.9 232.9  
Diluted earnings per share (Rs)*         12.7  
P/E ratio (x)*         22.1  
(*On a trailing 12-month basis and excluding extraordinary items)

What has driven performance in 2QFY14?
  • Bharat Forge's (BFRG) standalone revenues fell by 3% YoY during 2QFY14 on account of slowdown across all segments and geographies. As far as the domestic market is concerned, the company was impacted by the tough market conditions for the Indian auto industry. Volume growth of passenger vehicles was flat, while MHCV volumes fell substantially on account of lack of freight demand and slackening economic growth. Thus, revenues from India declined by 7% YoY. Having said that, the performance in the domestic market was slightly better on a sequential basis as revenues were down 4%. Exports did better during the quarter as growth in revenues was flat. While revenues from the Americas declined by 32% YoY, Europe did very well to record healthy growth of 69% YoY. This was on account of a low base effect and ramp up in new businesses. In addition to this, in Europe, Bharat Forge has exposure to the high end passenger car market, a segment which is doing quite well.

    Cost break-up...
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Raw materials 3,783 3,437 -9.1% 7,829 6,689 -14.6%
    % sales 43.6% 40.7%   43.4% 40.9%  
    Staff cost 645 695 7.8% 1,332 1,402 5.3%
    % sales 7.4% 8.2%   7.4% 8.6%  
    Manufacturing expenses 1,621 1,420 -12.4% 3,342 2,805 -16.1%
    % sales 18.7% 16.8%   18.5% 17.1%  
    Other expenditure 628 672 7.0% 1,223 1,282 4.8%
    % sales 7.2% 7.9%   6.8% 7.8%  
    Total 6,675 6,223 -6.8% 13,726 12,178 -11.3%

  • BFRG's operating margins improved by 3.3% to 26.4% in 2QFY14 led by a fall in raw material costs and manufacturing expenses (as percentage of sales). Better exports also did its part in bolstering margins. As a result, even though sales declined during the quarter, operating profits grew by 11% YoY.

  • Excluding the extraordinary income in 2QFY13, net profits grew at a slower rate of 4.5% during the quarter on account of a substantial rise in interest costs. There was a rise in debt as the company took on an ECB of US$ 20 m on its books, plus there was an increase in the value of debt on account of depreciation of the rupee. For the first half of the fiscal, fall in sales and net profits stood at 9% YoY and 10% YoY respectively.
What to expect?
At the current price of Rs 280, the stock trades at a multiple of nearly 12.7 times our estimated FY16 earnings per share. Although market conditions continue to remain tough and the management maintains that the outlook remains hazy, the company's performance on a sequential basis was much better especially when one looks at the export markets which grew by 17% QoQ. The company on its part has won several businesses in both the CV and the industrial segment and revenues from these are expected to come on stream in the coming quarters. At current price levels, we recommend that investors Hold on to the stock.

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