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Bharat Forge: Fuelled by strong exports - Views on News from Equitymaster

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Bharat Forge: Fuelled by strong exports

Nov 10, 2011

Bharat Forge Ltd announced the second quarter results of financial year 2011-2012 (2QFY12). The company has reported a 27% YoY increase in revenues, while profits grew by 56% YoY. Here is our analysis of the results.

Performance summary
  • Standalone net sales up by 27% YoY during the quarter led by a robust 58% YoY growth in exports.
  • Operating margins contract by 0.5% YoY to 23.7% during the quarter due to higher staff costs and manufacturing expenses (as a percentage of sales).
  • Profits rise by 56% YoY led by higher other income, benign increase in depreciation charges and reduction in interest costs.

Standalone performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 7,187 9,100 26.6% 13,488 17,677 31.1%
Expenditure 5,446 6,946 27.6% 10,202 13,439 31.7%
Operating profit (EBDITA) 1,741 2,154 23.7% 3,286 4,238 29.0%
Operating profit margin (%) 24.2% 23.7%   24.4% 24.0%  
Other income 86 207 141.1% 187 354 89.2%
Interest 320 310 -3.2% 619 610 -1.5%
Depreciation 490 539 10.0% 958 1,056 10.2%
Profit before tax 1,017 1,512 48.6% 1,896 2,927 54.3%
Tax 336 448 33.4% 620 888 43.2%
Profit after tax/(loss) 681 1,064 56.1% 1,276 2,038 59.8%
Net profit margin (%) 9.5% 11.7%   9.5% 11.5%  
No. of shares (m)       232.9 232.9  
Diluted earnings per share (Rs)*         15.0  
P/E ratio (x)*         18.9  
(*On a trailing 12-month basis)

What has driven performance in 2QFY12?
  • Bharat Forge (BFRG) reported a topline growth of 27% YoY during 2QFY12. Growth during the quarter was led by a 58% YoY increase in exports, while domestic revenues increased by a lukewarm 8% YoY. Exports contributed to about 47% of revenues during the quarter, while domestic markets contributed to the balance. As per the company, total shipments rose by 16.5% YoY to about 53,740 tonnes during the quarter. This was led by strong demand from the US and European CV market on the back of need to replace aging fleet with fuel efficient models. Growth in the domestic market was relatively slower as the industry is facing several headwinds in the form of high fuel prices, persistently high inflation and hard interest rate regime. Coming to the geographical breakup of revenues, while details of the Indian markets are mentioned above, revenues from Europe and the US grew by 75% YoY and 25% YoY respectively and contributed to about 23% and 21% of revenues respectively.

    Cost break-upů
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Raw materials 3,307 4,116 24.5% 6,113 7,966 30.3%
    % sales 46.0% 45.2%   45.3% 45.1%  
    Staff cost 489 633 29.4% 946 1,224 29.4%
    % sales 6.8% 7.0%   7.0% 6.9%  
    Manufacturing expenses 1,177 1,584 34.6% 2,224 3,057 37.5%
    % sales 16.4% 17.4%   16.5% 17.3%  
    Other expenditure 473 613 29.7% 919 1,191 29.7%
    % sales 6.6% 6.7%   6.8% 6.7%  
    Total 5,446 6,946   10,202 13,439  

  • BFRG's operating margins during the quarter contracted by 0.5% to 23.7% largely on account of higher staff costs and manufacturing expenses (as percentage of sales). This resulted in operating profits growing at a slightly lower pace (up 24% YoY) as compared to the growth in sales.

  • BFRG's profits grew by 56% YoY during the quarter. In addition to a healthy growth in operating profits, higher other income, relatively benign increase in depreciation charges and reduction in interest costs helped in boosting profits during the quarter.

What to expect?
At the current price of Rs 283, the stock trades at a multiple of nearly 10.7 times our estimated FY14 earnings per share. Bharat Forge's management expects exports to do well on the back of strong growth forecasted for the North American CV markets and continuation of the demand pick-up in Europe. As far as the Indian market is concerned, the management believes that the Indian auto market will grow steadily in the long run and this region will remain the company's key area of focus.

While BFRG seems to be well placed on the back of it gaining market share and business from many new entrants in the auto space, we believe that over the medium term many factors such as high interest rates, high input costs and high fuel costs will tend to slow down the auto demand. As for the non-auto business, the management expects momentum to continue on the back of a growing order pipeline. On an overall basis, we believe that the company's future prospects are strong. We maintain our positive view on the stock from a long term perspective.

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