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Bharat Forge: Poised for higher growth

Dec 15, 2003

Bharat Forge, one of the largest forging companies in the world, was in the news recently on account of the company's acquisition of a German forging company, Carl Den Peddinghaus GmbH. In this article, let us have a look at what this acquisition means for the company and also consider the other plans of the company.Let us have a look at the profile of the company that Bharat Forge acquired:

Carl Den Peddinghaus GmbH (CDP), a blue chip German manufacturing company, is one of the largest forging companies in the world and had recorded sales of Euro 116 m for the year ended December 31, 2002. The company is a major supplier of critical chassis components and has such prestigious automakers as BMW, Volkswagen, Audi, Daimler Chrysler and Volvo as its clients.

The acquisition of CDP fits perfectly into Bharat Forge's long-term strategy of diversifying its geographical footprints. As can be seen in the above graph, in FY02, the US markets accounted for close to 70% of the company's total export earnings, thus making it vulnerable to adverse events of the US markets. However, in FY03, the contribution reduced to under 50% on account of the company bagging a five year contract for supplying engine components to a Chinese automobile OEM and this resulted in the Chinese market contributing 23% to the company's total exports.

In the same period, the contribution from the European markets has remained almost stagnant. However, post the current acquisition, the scenario is likely to change and along with the US and China, the European markets are also likely to contribute significantly to the company's exports.

Also, Bharat Forge was exposed to the risk of being over-dependent on a single overseas segment, the US heavy truck manufacturing industry. The company realised this and tried to venture in the other segments of the automobile industry such as passenger cars and utility vehicles. This effort of the company has borne fruit as global car makers like Ford and Daimler Chrysler have recently chosen the company as a supplier of components for their global passenger car programs. Therefore, on account of these multi year contracts, the company has not only reduced its dependence on one segment, it also stands to benefit from the high growth potential of the passenger car industry.

The debt to equity ratio of the company has also come down from 2.2 in FY02 to 1.3 in FY03. However, we believe that the ratio is likely to go up as the company has decided to raise long-term funds to the tune of Rs 3.5 bn. Nothing concrete can be commented upon about the fund raising exercise as yet, as the company is yet to decide on the structure for the same.

The stock currently trades at Rs 725, implying a P/E of 24.5x its annualised 1HFY04 earnings. Post the acquisition, the company has become the second largest forging company in the world and has given it an access to the lucrative European markets. Further, the growth in the domestic markets is also likely to be strong on account of good macroeconomic indicators. Thus, we are of the view that the going forward, the company should be able to justify its current valuations.

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