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Bharat Forge: Slowdown takes toll - Views on News from Equitymaster

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Bharat Forge: Slowdown takes toll
Oct 31, 2012

Bharat Forge Ltd announced the second quarter results of financial year 2012-2013 (2QFY13). The company has reported a 5% YoY drop in revenues, while profits fell by 3% YoY. Here is our analysis of the results.

Performance summary
  • Standalone net sales fall by 5% YoY during the quarter on account of 16% YoY decline in domestic revenues.
  • Operating margins decline by 1.6% to 22.4% during the quarter due to higher manufacturing expenses and other expenditure (as a percentage of sales).
  • Led by the poor performance at the topline and operating level, net profits fall by 3% YoY.

Standalone performance snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Sales 9,100 8,676 -4.7% 17,677 18,040 2.1%
Expenditure 6,914 6,732 -2.6% 13,410 13,660 1.9%
Operating profit (EBDITA) 2,186 1,944 -11.1% 4,267 4,380 2.6%
Operating profit margin (%) 24.0% 22.4%   24.1% 24.3%  
Other income 241 257 6.3% 403 451 11.8%
Interest 376 289 -23.1% 688 837 21.6%
Depreciation 539 555 2.9% 1,056 1,120 6.1%
Profit before tax 1,512 1,356 -10.3% 2,927 2,874 -1.8%
Exceptional items - 106   - 106  
Tax 448 434 -3.2% 888 900 1.3%
Profit after tax/(loss) 1,064 1,028 -3.4% 2,038 2,080 2.0%
Net profit margin (%) 11.7% 11.8%   11.5% 11.5%  
No. of shares (m)       232.9 232.9  
Diluted earnings per share (Rs)*         18.3  
P/E ratio (x)*         14.8  
(*On a trailing 12-month basis and excluding extraordinary items)

What has driven performance in 2QFY13?
  • Bharat Forge's (BFRG) standalone revenues fell by 4.7% YoY during 2QFY13 on account of the 16.2% drop in domestic revenues. This was largely on account of sluggish automotive demand and a significant drop in sales to industrial sectors in India. The CV segment continued to witness a challenging environment as medium and heavy commercial vehicle (MHCV) demand fell sharply on account of slowdown in transportation demand from key sectors such as infrastructure, mining and construction. Export revenues recorded a marginal increase of 8.1% partially benefitting from better realisation on account of rupee depreciation.

    Cost break-up...
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Raw materials 4,116 3,783 -8.1% 7,966 7,829 -1.7%
    % sales 45.2% 43.6%   45.1% 43.4%  
    Staff cost 663 643 -3.0% 1,284 1,328 3.5%
    % sales 7.3% 7.4%   7.3% 7.4%  
    Manufacturing expenses 1,584 1,621 2.3% 3,057 3,342 9.3%
    % sales 17.4% 18.7%   17.3% 18.5%  
    Other expenditure 551 686 24.4% 1,102 1,161 5.3%
    % sales 6.1% 7.9%   6.2% 6.4%  
    Total 6,914 6,732   13,410 13,660  

  • BFRG's operating margins during the quarter contracted by 1.6% to 22.4% largely on account of higher manufacturing expenses and other expenditure (as percentage of sales). Other expenditure increased by 1.8% to 7.9% of sales, while manufacturing expenses rose by 1.3% to 18.7% of sales. This resulted in operating profits falling at a faster pace (down 11% YoY) as compared to the decline in sales.

  • BFRG's net profits fell by 3% YoY during the quarter. However, the company had an extraordinary income of Rs 106 m during the quarter. Thus, excluding this, decline in net profits was faster at 13% YoY.

What to expect?
At the current price of Rs 271, the stock trades at a multiple of nearly 9.1 times our estimated FY15 earnings per share. Going forward, Bharat Forge expects exports growth to be driven by the non-auto business, new product development and higher sales in the US. As for the non-auto business, the management expects momentum to continue on the back of a growing order pipeline. Growth in the near term could remain sluggish on account of macro headwinds. With demand further weakening all global OEMs are adjusting their production level to correct inventory leading to destocking across the pipeline. However, despite these near term concerns, on an overall basis, we believe that the company's future prospects are strong. We maintain our 'Buy' view on the stock.

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