BUY Target Price: Rs 1,218

Transcription

1 New growth avenues Interaction with Bharat Forge (BFL) top management and tour of its technical centre suggests strong growth opportunities in new areas like defense, aerospace, and auto transmission. BFL has been very ambitious with product development in these segments as the market size is huge and there is a lack of competent Indian suppliers. We believe such high value added products will help BFL maintain its 28-3% margins and improve asset turns from current ~1.5x. Medium term revenue outlook is strong in US Class-8 trucks, PV exports and non-auto. Further, upcoming BS6 emission norms can aid a sharp increase in content. While we lower FY18/19 earnings by 11%/6% (INR appreciation and uncertainties on India trucks), we believe this is the last leg of downgrades. Maintain BUY as we roll forward to FY19 with TP of Rs 1,218 (vs. 1,79 previously) at 14x EV/EBITDA (1+SD of the 1-year avg). 3 MAY 217 Company Update BUY Target Price: Rs 1,218 CMP : Rs 1,78 Potential Upside : 13% MARKET DATA No. of Shares : 233 mn Free Float : 54% Market Cap : Rs 251 bn 52-week High / Low : Rs 1,19 / Rs 687 Avg. Daily vol. (6mth) : 894,251 shares Bloomberg Code : BHFC IB Equity Promoters Holding : 46% FII / DII : 18% / 16% Key takeaways from management meeting and visit to its tech centre From 'Make to Print' to collaborative development partner: BFL has successfully graduated from 'make to print' jobs to being a development partner with customers. This has been driven by heavy investment in newer technologies and R&D facilities (employing 12 engineers). This has also helped them reduce prototype development and testing period. OEMs are focusing more on electronics at their own plants and therefore looking to outsource metal work. With many suppliers globally under financial stress, companies with strong R&D capabilities will see market share gains Higher focus on transmission products: BFL has significantly increased capabilities in transmission products as it gears up for the BS6 emission norms in India PVs and CVs (where the entire powertrain will have to be upgraded). Based on its experience of Euro 6 globally, it sees scope for sharp increase in content supplied (as high as 3x in PVs and 2x in CVs) going into BS6 norms by 22 in India. (Continued on page 2 ) Financial summary (Consolidated) Sales (Rs mn) 75,51 58,313 7,268 86,176 Adj PAT (Rs mn) 6,58 5,568 7,91 1,85 Con. EPS* (Rs) EPS (Rs) Key drivers FY17E FY18E FY19E Parent revenue growth (12.1) Parent EBITDA margin Consol EBITDA margin Change YOY (%) (8.6) (15.4) P/E (x) RoE (%) RoCE (%) EV/E (x) DPS (Rs) Source: *Consensus broker estimates, Company, Axis Capital Price performance 14 Sensex Bharat Forge Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 1

2 3 MAY 217 Company Update ( Continued from page 1) Component light weighting (WAVE) program: The company has taken several steps to reduce component weight to help OEMs meet stricter emission norms and fuel efficiency norms. It has done so by optimizing the entire forging process - from raw material to end testing and validation Defense is a huge opportunity: BFL is actively bidding for 4 different artillery programmes (are at different levels of test and negotiation phase) which can see procurement of ~4k guns over the next 15 years (a potential ~US$1 bn opportunity). Supplied by Kalyani Strategic Systems Ltd. (KSSL; a 51% subsidiary of BFL), management is confident of winning orders which will significantly increase its revenue share from defense Aerospace: Currently the import content for aerospace in India is anywhere between 5-95%. BFL has also entered into JVs with SAAB, Rafael & IAI (Israel Aircraft Industry) which will boost its presence in the field of air defense. In some JVs, BFL will not supply technology, but have 25-3% share for manufacturing. Revenue diversification: Foray into new segments (defense, aerospace, power generation and locomotive segments) will drive growth over the next 5-7 years and also help BFL reduce its exposure to cyclical segments. Asset turns can improve as it plans to leverage on existing manufacturing facilities for most new segments Capex to remain under control: Management highlighted its focus on keeping a lean balance sheet. Presently, at 65% utilization, there is minimal forging capex to be done. Gross debt to EBITDA is at 1.8x, while on a net basis it is on course to become net debt free next year Exhibit 1: Geographical split of standalone revenues Europe 17% Asia Pacific 3% Exhibit 2: Product-wise split of standalone revenues PVs 9% India 42% Non-auto 37% CV 54% USA 38% 2

3 3 MAY 217 Company Update Exhibit 3: Geographical split of consolidated revenues USA 23% Asia Pacific 2% Europe 39% Exhibit 4: Product-wise split of consolidated revenues PVs 16% CV 48% Non-auto 36% India 36% Exhibit 5: Standalone revenue and growth Exhibit 6: Standalone revenue break up Standalone revenues (Rs bn) % growth (RHS) 5 (%) (1) (2) (3) 1% 8% 6% 4% 2% % Domestic Exports Exhibit 7: Standalone EBITDA and EBITDA margin Exhibit 8: Subsidiary EBITDA and EBITDA margin (Rs bn) EBITDA EBITDA margin (RHS) (%) Subsidiary revenues (Rs bn) EBITDA margin (RHS) 1 (%)

4 Financial summary (Consolidated) Profit &loss (Rs mn) Net sales 75,51 58,313 7,268 86,176 Other operating income 965 1,76 1,237 1,423 Total operating income 76,465 59,389 71,55 87,599 Cost of goods sold (26,17) (19,331) (23,36) (29,13) Gross profit 5,448 4,58 48,145 58,496 Gross margin (%) Total operating expenses (36,235) (27,677) (32,32) (38,359) EBITDA 14,213 12,381 15,825 2,136 EBITDA margin (%) Depreciation (4,187) (4,588) (4,849) (5,11) EBIT 1,26 7,793 1,976 15,26 Net interest (1,43) (1,226) (1,2) (1,176) Other income 1,336 1,545 1,663 1,798 Profit before tax 9,958 8,113 11,439 15,648 Total taxation (3,48) (2,568) (3,557) (4,813) Tax rate (%) Profit after tax 6,55 5,545 7,882 1,835 Minorities Profit/ Loss associate co(s) Adjusted net profit 6,58 5,568 7,91 1,85 Adj. PAT margin (%) Net non-recurring items (8) Reported net profit 6,5 5,568 7,91 1,85 Balance sheet (Rs mn) Paid-up capital Reserves & surplus 35,292 38,681 43,857 51,438 Net worth 35,758 39,147 44,323 51,94 Borrowing 26,999 23,457 23,42 22,648 Other non-current liabilities 1,831 1,831 1,831 1,831 Total liabilities 64,551 64,374 69,117 76,289 Gross fixed assets 67,479 71,479 75,479 79,479 Less: Depreciation (34,884) (39,472) (44,321) (49,431) Net fixed assets 32,595 32,7 31,158 3,48 Add: Capital WIP 8,586 8,586 8,586 8,586 Total fixed assets 41,181 4,593 39,744 38,634 Total Investment 8,38 9,2 1,73 12,694 Inventory 11,826 8,827 1,63 12,995 Debtors 11,485 8,69 1,359 12,7 Cash & bank 4,755 6,511 8,385 12,333 Loans & advances 6,88 7,568 8,325 9,158 Current liabilities 24,929 22,583 25,434 29,299 Net current assets 15,332 14,779 18,669 24,961 Other non-current assets Total assets 64,551 64,374 69,117 76,289 Cash flow (Rs mn) 3 MAY 217 Company Update Profit before tax 9,958 8,113 11,439 15,648 Depreciation & Amortisation 4,187 4,588 4,849 5,11 Chg in working capital 4,298 2,31 (2,17) (2,344) Cash flow from operations 16,498 12,123 1,251 12,979 Capital expenditure (11,33) (4,) (4,) (4,) Cash flow from investing (12,25) (3,419) (4,38) (4,193) Equity raised/ (repaid) Debt raised/ (repaid) 1,533 (3,542) (415) (393) Dividend paid Cash flow from financing (2,63) (6,947) (4,34) (4,838) Net chg in cash 2,41 1,756 1,874 3,947 Key ratios OPERATIONAL FDEPS (Rs) CEPS (Rs) DPS (Rs) Dividend payout ratio (%) GROWTH Net sales (%).9 (22.8) EBITDA (%) (1.4) (12.9) Adj net profit (%) (8.6) (15.4) FDEPS (%) (8.6) (15.4) PERFORMANCE RoE (%) RoCE (%) EFFICIENCY Asset turnover (x) Sales/ total assets (x) Working capital/ sales (x) Receivable days Inventory days Payable days FINANCIAL STABILITY Total debt/ equity (x) Net debt/ equity (x) Current ratio (x) Interest cover (x) VALUATION PE (x) EV/ EBITDA (x) EV/ Net sales (x) PB (x) Dividend yield (%) Free cash flow yield (%)

5 3 MAY 217 Company Update Disclosures: The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 214 (herein after referred to as the Regulations). 1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH297. ASL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial products. ASL is a subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India s largest private sector bank and has its various subsidiaries engaged in businesses of Asset management, NBFC, Merchant Banking, Trusteeship, Venture Capital, Stock Broking, the details in respect of which are available on 2. ASL is registered with the Securities & Exchange Board of India (SEBI) for its stock broking & Depository participant business activities and with the Association of Mutual Funds of India (AMFI) for distribution of financial products and also registered with IRDA as a corporate agent for insurance business activity. 3. ASL has no material adverse disciplinary history as on the date of publication of this report. 4. I/We, authors (Research team) and the name/s subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my/our views about the subject issuer(s) or securities. I/We also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. I/we or my/our relative or ASL does not have any financial interest in the subject company. Also I/we or my/our relative or ASL or its Associates may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Since associates of ASL are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. I/we or my/our relative or ASL or its associates do not have any material conflict of interest. I/we have not served as director, officer or employee in the subject company. Research Team Sr. No Name Designation 1 Bunty Chawla Research Analyst bunty.chawla@axissecurities.in 2 Kiran Gawle Associate kiran.gawle@axissecurities.in 5. ASL or its associates has not received any compensation from the subject company in the past twelve months. ASL or its Research Analysts has not been engaged in market making activity for the subject company. 6. In the last 12-month period ending on the last day of the month immediately preceding the date of publication of this research report, ASL or any of its associates may have: i. Received compensation for investment banking, merchant banking or stock broking services or for any other services from the subject company of this research report and / or; ii. Managed or co-managed public offering of the securities from the subject company of this research report and / or; iii. Received compensation for products or services other than investment banking, merchant banking or stock broking services from the subject company of this research report; ASL or any of its associates have not received compensation or other benefits from the subject company of this research report or any other third-party in connection with this report Term& Conditions: This report has been prepared by ASL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ASL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ASL will not treat recipients as customers by virtue of their receiving this report. 5

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