Bharat Forge (BHAFOR) 1120

Transcription

1 Result Update Rating matrix Rating : Buy Target : 135 Target Period : 12 months Potential Upside : 15% What s Changed? Target Changed from 13 to 135 EPS FY18E Changed from 4.1 to 39.8 EPS FY19E Unchanged Rating Unchanged Quarterly Performance ( Crore) Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) Total Income 1, , EBITDA EBITDA (%) bps bps Reported PAT Key Financials Crore FY16 FY17E FY18E FY19E Net Sales 7,647 6,396 8,92 9,271 EBITDA 1,421 1,251 1,833 2,167 Net Profit ,19 EPS ( ) Valuation summary FY16 FY17E FY18E FY19E Core P/E (x) Target P/E (x) EV/EBITDA (x) P/BV (x) RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) Crore Total Debt (FY17) ( Crore) 159.7Crore Cash and Investments (FY17) ( Crore) Crore EV ( Crore) crore 52 week H/L ( ) 1221 / 765 Equity capital ( crore) 46.6 Crore Face value ( ) 2 Price performance (%) 1M 3M 6M 12M Mahindra CIE Automotive Ltd Motherson Sumi Systems Ltd Bharat Forge Ltd Research Analyst Nishit Zota nishit.zota@icicisecurities.com Vidrum Mehta vidrum.mehta@icicisecurities.com Cranking up with new products... August 14, 217 Bharat Forge (BHAFOR) 112 Bharat Forge (BFL) reported its Q1FY18 numbers, which were above our estimates on the topline & bottomline front but below estimates on the margin front. Revenues came in at 121 crore, up 32.8% YoY, 6.7% QoQ against our estimate of 181 crore. Domestic revenues came in at 56.2 crore (up 5% YoY, flat QoQ), against our estimate of 53 crore. Export revenues increased 64.6% YoY, 12.4% QoQ to 671 crore against our estimate of 567 crore Revenue growth was driven by industrial business (domestic + global), which grew 8% YoY. The company s M&HCV revenue was down 7% YoY (vs. ~45% decline in M&HCV production) but BFL clocked highest quarterly domestic industrial revenues of 25 crore. In export market, truck revenues were up 19% YoY while industrial revenues more than doubled to crore Reported EBITDA margins came in at 27.8%, up 73 bps YoY, down 67 bps QoQ, vs. our estimated 28.4%. Margins were below estimates due to higher than estimated other expense to sales & lower than estimated export share (higher margin business) in total revenues Consequently, reported PAT came in at crore (up 43.4% YoY, down 15.6% QoQ) vs. our expectation of crore. PAT was higher than estimates on account of higher than estimated revenues and lower than estimated depreciation The company has secured a maiden order from Ministry of Defence worth 21.6 crore, which will be executed over the next two years The Board has approved issue of bonus shares in the ratio of 1:1 Growth momentum in export revenues to continue BFL had witnessed a sharp decline in America s revenues in the last two years, declining from 1741 crore in FY15 to 19 crore in FY17E with its share in total standalone revenues reducing from ~39% to 29% (steep decline in revenues from North America class & oil & gas business). However, in the past few months, there has been a significant improvement in Class 8 net order data, which will get reflected in BFL s numbers in upcoming quarters. The North America oil & gas industry has shown a revival with oil & gas revenues at ~ 16 crore in Q1FY18 vs. ~ 15 crore in Q3FY17 vs. ~ 85 crore in Q3FY17 & ~ 65 crore in H1FY17. Given that BFL expects its market share in oil & gas industry to increase with high technology products, management expects a quarterly run-rate of ~ 15 crore in FY18E, implying significant growth. We expect standalone revenue growth at ~19% CAGR to 5475 crore in FY18E. Diversification to aid growth Increasing focus on new verticals like railways, aerospace, defence, mining & renewables is already getting reflected in quarterly numbers. The total industrial business grew 8% YoY in Q1FY18. The management expects the quarterly railway revenue to increase to ~ 25-3 crore (FY crore). The company expects the domestic industrial revenues to grow at ~15-18% in FY18E and expects revenues from each of these verticals to touch $1 million (mn) by 22. Strong earning growth demands premium valuations We remain upbeat on the long term growth potential of the company, which remains the largest forgings company in the world, with strong engineering capabilities. Thus, we value BFL on an SOTP basis with standalone business at 28x FY19E EPS of 45.3 and other subsidiaries at 15/share to arrive at a target price of 135. We ascribe a BUY recommendation to the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis (Standalone) Q1FY18 Q1FY18E Q1FY17 YoY (%) Q4FY17 QoQ (%) Comments Total Operating Income 1,21 1, , Topline beat estimates on account of higher than estimated growth in domestic & America's revenue Raw Material Expenses Employee Expenses Manufacturing expenses Other expenses came higher due to crore forex related expense & increased machining related expense EBITDA EBITDA Margin (%) bps bps Margins were marginally below our estimates on account of higher than estimated other expense to sales Depreciation Interest Other Income PBT Tax Reported PAT Higher than estimates on account of higher than estimated revenue & lower than estimated depreciation Key Metrics Total Tonnage (MT) 55,1 5,8 49, , ASP ( /Kg) Domestic revenues Growth in domestic revenues was driven by growth in industrial business Export revenues Beat on export revenues is attributable to doubling of America's revenue Change in estimates (Standalone) FY18E FY19E ( Crore) Old New % Change Old New % Change Comments Revenue 4,712 4, ,475 5, Expect 22% CAGR in standalone revenues on the back of ~15.5% CAGR in domestic business & ~28.2% CAGR in export revenues EBITDA 1,439 1, ,724 1, EBITDA Margin (%) bps bps Broadly maintain margin estimates PAT , 1, EPS ( ) Assumptions (Standalone) Current New Earlier Comments ( crore) FY16 FY17E FY18E FY19E FY18E FY19E Domestic Reveues 1,752 1,84 2,67 2,456 2,113. 2,531. Domestic revenues estimates reduced to reflect subdued performance in Q1FY18 Export revenues Americas ($ mn) America has led the growth in the export markets on both the automotive side as well as non-auto. Increased estimates due to upbeat outlook on Class 8 trucks & Oil & Gas business Europe (Euro mn) Management has maintained a robust outlook on Europe CV market Asia Pac ($ mn) USD/INR EUR/USD Tonnage sales (MT) 29, ,558 27, ,3 23,79 21,279 We expect increasing utilisations across both India and European facilities RM/Unit ( /MT) 72,816 66,844 81,834 93,588 8,697 92,41 ICICI Securities Ltd Retail Equity Research Page 2

3 Key conference call takeaways America s revenues (34% of standalone revenues) doubled to crore mainly on account of growth across segments like aerospace, rail, passenger vehicle, commercial vehicle & oil & gas. Of the total, oil & gas revenue was at ~ 16 crore & US CV revenues was at ~ 15 crore. The company will maintain the oil & gas revenue quarterly run rate of ~ 15 crore In the oil & gas business, the company has a significant presence in shale fracking (its product is consumable and has a shelf life). The company is developing new products in this segment. The management believes that until oil prices are trading under $7-75, shale is the only segment that will fill the demand-supply gap The company secured order from Ministry of Defence to supply to 15 Dual Detection Equipment. The order worth 21.6 crore will be concluded in two years. Revenue from this order will accrue to Bharat Forge but other orders in future will go to its JV Kalyani Strategic System The capex guidance for the fiscal is 3-35 crore The tax rate came higher in Q1FY18 on account of a reduction in investment allowance & allowance reduced in on R&D from 2% to 15% The growth from America s CV business was 18-19% YoY. The growth guidance for Class 8 industry in CY17E is 1-12% Domestic industrial revenue was at 25 crore. The management expects ~15-18% growth in this segment The machining mix for the quarter was at ~47-49% The company is developing CV driveline products. The management believes that the opportunity in this segment is bigger than engine forged/machined products. The company has achieved long term net debt free position, before the scheduled period ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Performance in sweet spot as export growth revives Bharat Forge is one of the few listed Tier-1.5 manufacturers in India focusing on supplying high-end engineered forgings products. The company has a geographic presence across India & Europe with total tonnage capacity of ~58, MT. In terms of business segments, CV segment remains a major revenue driver at ~5% while other segments are PV, oil & gas, power, railways, etc. In terms of non-auto share, share of the business has risen to ~45% much ahead of the targeted ~4%. We expect standalone revenues to grow at ~22.2% CAGR in FY17-19E and reach ~ 577 crore in FY19E. On a consolidated basis, revenues are expected to grow in the same period at ~2.4% CAGR to 9271 crore. Going ahead, we expect standalone PAT to grow at ~24.4% CAGR in FY17-19E to 156 crore. Consolidated PAT is also expected to rise at ~26.1% CAGR in FY17-19E to 119 crore. Exhibit 1: Topline, bottomline trends 1 1,19 1,2 ( crore) , , , ,92 9,271 1, ( crore) FY15 FY16 FY17E FY18E FY19E Total Operating Income PAT Source: Company press release, ICICIdirect.com Research Exhibit 2: Standalone tonnage, ASP trends ,88 211,668 29, ,558 27, ,3 264, (MT) ,86 28,376 2, , , ( /MT) FY14 FY15 FY16 FY17E FY18E FY19E Tonnage ASP ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 3: Trends of regional share of business 1 8 (%) FY15 FY16 FY17E FY18E FY19E Americas Europe Asia Pac India Margins to remain strong with value addition BFL is one of the best in terms of operating efficiency and value addition in the whole Indian forgings space. The content enrichment as well business mix change accounting for exports have led to a sharp EBIDTA margin increase reflective in ASP jump from ~ 167,/MT in FY12 to ~ 2,854/MT in FY16. Going ahead, as demand increases and utilisation levels improve, we build in standalone EBITDA margins of 31.5% for FY19E. ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 4: Consolidated EBITDA margin trends ( crore) ,441 1,421 1,251 1,833 2,167 FY15 FY16 FY17E FY18E FY19E EBITDA EBITDA margin (%) Source: Company press release, ICICIdirect.com Research *Estimates Exhibit 5: Standalone trends of cost analysis ( /MT) ,63 23,522 15,471 2,587 22,14 93,588 81,834 17,697 82,199 78,589 72,816 66,844 FY14 FY15 FY16 FY17E FY18E FY19E Raw material / MT Other expenses/ MT ( /MT) Source: Company press release, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6

7 Return ratio profile to rise as margins/profitability improves The forgings business can be a capital intensive one if the growth strategy is not managed in a specific manner. Achieving higher machining mix quickly would always require much higher capex compared to a refurbished pure forgings machine. A prudent strategy of managing capital allocation and working capital has led BFL to maintain and improve its return ratios. Going ahead, we believe the performance will improve from current levels and expect standalone RoE, RoCE to trend upwards and reach 21.2, 26.9%, respectively, in FY19E. Exhibit 6: Standalone return ratio profile (%) FY15 FY16 FY17E FY18E FY19E RoCE RoE Source: Company press release, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Outlook and valuation We remain positive on the long-term business franchise of BFL, which remains the largest forgings company in the world, with engineering capabilities as strong as the best in the world. The increased focus on the non-automotive segment since FY1 has led to significant benefits in both revenue quality as well as margins. The increasing contribution of the same has helped de-risk the business from the vagaries of being just CV dependant. We remain upbeat on the long term growth potential of the company. Thus, we value BFL on an SOTP basis with standalone business at 28x FY19E EPS of 45.3 and other subsidiaries at 78/share to arrive at a target price of 135. We have a BUY rating on the stock. Exhibit 7: Valuation SOTP Valuation Standalone FY19 EPS 45.3 P/E multiple 28 Per share value ( ) 1,272 Subsidiaries EBITDA ( crore) FY19E 347 EV/EBITDA multiple 6 Enterprise Value 2,84 Net debt (FY19E) 274 Target subsidiaries market cap ( crore) 1,81 Per share value 78 Total per share value ( ) 1,35 Exhibit 8: Key metrics (Consolidated) Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY16 7, FY17E 6, FY18E 8, FY19E 9, ICICI Securities Ltd Retail Equity Research Page 8

9 (%) ( ) Recommended history versus consensus 1,4 1,2 1, Oct-15 Jan-16 Mar-16 May-16 Aug-16 Oct-16 Jan-17 Mar-17 Jun Aug-17. Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Mar-1 Ramp up of locomotive crankshaft, marine and oil & gas facility Jul-1 Inaugurates its ring rolling facility in Baramati Jul-11 Domestic M&HCV business continues to grow to new highs in terms of volumes Apr-12 Bharat Forge Alstom bags orders for two 66 MW super critical turbine generators Oct-12 David Brown Bharat Forge JV opens its facility in India in Hosur Feb-13 Bharat Forge Alstom bags orders for three supercritical from NTPC, Forms JV with Elbit systems for artillery systems Jan-14 Bharat Forge divest stake in China JV Mar-14 Bharat Forge Aluminitechnik receives 25 mn contract Oct-14 Bharat Forge posts a stellar set of Q2 results on the back of strong growth in export markets Jan-15 BFL German subsidiary Bharat Forge GmbH, acquired 1% stake of Mecanique Generale Langroise (MGL) which would focus on Oil & Gas space Feb-15 BFL to supply titanium forgings to Boeing which would be used in the wings ofnext-generation 737 and 737 MAX Jul-15 BFL aims to double standalone revenue to 7 crore in four years Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Kalyani Group 3-Jun Sundaram Trading & Investment Pvt. Ltd. 3-Jun KSL Holding Pvt. Ltd. 3-Jun Life Insurance Corporation of India 3-Jun Ajinkya Investment & Trading Co., Pvt. Ltd. 3-Jun Norges Bank Investment Management (NBIM) 3-Jun UTI Asset Management Co. Ltd. 3-Jun The Vanguard Group, Inc. 3-Jun Franklin Advisers, Inc. 3-Jun BlackRock Institutional Trust Company, N.A. 31-Jul Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares J.P. Morgan Asset Management (Hong Kong) Ltd M +2.44M Reliance Nippon Life Asset Management Limited M -3.99M Birla Sun Life Asset Management Company Ltd M +.26M Life Insurance Corporation of India -1.31M -.61M Invesco Hong Kong Limited +3.86M +.23M Lyxor Asset Management -6.73M -.37M L&T Investment Management Limited +2.7M +.16M Amansa Capital Pte Ltd M -.29M Neuberger Berman, LLC +1.94M +.11M Carnegie Fonder AB -4.73M -.28M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 9

10 Financial summary (Consolidated) Profit and loss statement Crore (Year-end March) FY16 FY17E FY18E FY19E Total operating Income Growth (%) Raw Material Expenses 3,352 2,438 3,399 4,79 Employee Expenses ,133 1,298 Other expenses 1,927 1,776 1,727 1,727 Total Operating Expenditure 6,225 5,145 6,258 7,14 EBITDA Growth (%) Depreciation Interest Other Income PBT ,344 1,67 Others Total Tax PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY16 FY17E FY18E FY19E Profit after Tax ,19 Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities 1, ,2 1,675 (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities -1, Issue/(Buy back) of Equity Inc/(dec) in loan funds 8-1, Dividend paid & dividend tax ,423-1,41 Inc/(dec) in Sec. premium Others -8 1, CF from financing activities ,423-1,41 Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY16 FY17E FY18E FY19E Liabilities Equity Capital Reserve and Surplus 3,522 4,8 5,178 5,174 Total Shareholders funds 3,568 4,126 5,224 5,221 Total Debt 2,518 1, Deferred Tax Liability Minority Interest / Others Total Liabilities Assets Gross Block 7,17 7,277 7,398 7,648 Less: Acc Depreciation 3,537 3,989 4,561 5,216 Net Block 3,48 3,288 2,838 2,433 Capital WIP Total Fixed Assets 4,63 3,688 3,366 2,961 Investments 859 1,234 1,234 1,234 Inventory 1,183 1,75 1,219 1,397 Debtors 1,146 1,341 1,197 1,372 Loans and Advances Other Current Assets Cash Total Current Assets 3,714 3,397 3,737 4,25 Creditors 1, ,219 1,397 Provisions Other Current Liabilities 1,18 2,36 1,321 1,513 Total Current Liabilities 2,551 3,26 2,617 2,999 Net Current Assets 1, ,119 1,26 Other non-current assets Application of Funds Key ratios (Year-end March) FY16 FY17E FY18E FY19E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios EBITDA Margin (%) PBT / Net sales (%) PAT Margin (%) Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 1

11 ICICIdirect.com coverage universe (Auto & Auto Ancillary) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E Amara Raja (AMARAJ) Hold Apollo Tyre (APOTYR) Buy Ashok Leyland (ASHLEY) Buy Bajaj Auto (BAAUTO) Hold Balkrishna Ind. (BALIND) Buy Bharat Forge (BHAFOR) Buy Bosch (MICO) Buy Eicher Motors (EICMOT) Buy Exide Industries (EXIIND) Buy Hero Moto (HERHON) Buy JK Tyre & Ind (JKIND) Buy M&M (MAHMAH) Buy Mahindra CIE (MAHAUT) Buy Maruti Suzuki (MARUTI) Buy Motherson (MOTSUM) Hold Tata Motors (TELCO) Buy Wabco India (WABTVS) Buy ICICI Securities Ltd Retail Equity Research Page 11

12 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 12

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