Bharat Forge (BHAFOR) 1090

Transcription

1 Result Update Rating matrix Rating : Hold Target : 1178 Target Period : 12 months Potential Upside : 8% What s Changed? Target Introduced at 1178 EPS FY16E Introduced at 43.3 EPS FY17E Introduced at 52.9 Rating Introduced at Hold Quarterly Performance ( Crore) Q3FY15 Q3FY14 YoY Q2FY15 QoQ Total Income 1, , EBITDA EBITDA (%) bps bps Reported PAT Key Financials Crore FY14 FY15E FY16E FY17E Net Sales 6,69 8,92 9,21 1,488 EBITDA 1,27 1,598 1,868 2,193 Net Profit ,1 1,232 EPS ( ) Valuation summary FY14 FY15E FY16E FY17E 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 (FY14) ( Crore) 27.4 Crore Cash and Investments (FY14) ( Crore) 311 Crore EV ( Crore) 8756 Crore 52 week H/L ( ) 172 /333 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 Nishant Vass nishant.vass@icicisecurities.com Trail of strong performances continues! February 4, 215 Bharat Forge (BHAFOR) 19 Bharat Forge (BFL) reported revenues of 1198 crore (up ~44% YoY), higher than estimates due to strong export revenue beat EBITDA margin was at 3.2% (~447 bps YoY jump), which was a surprise with gross margins expanding ~2 bps QoQ to ~61% Subsequently, PAT came ahead of estimates at crore on the back of a strong operative performance Undisputed leader in CV forgings to benefit as recovery kicks in! BFL is a leading global Tier-1.5 automotive forgings supplier, boasting top-5 global OEMs as customers. CV business is ~55-6% of the consolidated business & remains a key driver for overall growth. BFL saw strong growth in the US marker as class-8 truck demand has improved over last year, driven by pre-buying before emission norm changes. Stabilisation of the EU region would also aid growth in FY16E, FY17E. On the domestic side, BFL is a clean play on the recovery of domestic CV cycle recovery, as it commands > 6% market share in M&HCV components. Thus, BFL remains a strong play for economic recovery. Business diversification mantra, exports, machining paying dividends BFL broadened its revenue stream by entering new segments (non-auto) and global markets. The share of the auto business has declined from ~8% in FY7 to ~53% in FY15E while the share of India has reduced from ~6% to ~38% in standalone operations. Further, it has increased value addition by focusing on machined components, the contribution of which has increased>51%, boosting realisation & margins. Focus on new business verticals via Make in India to aid consistency In the recent past, the PV space focus has also increased and could be an important growth driver as in terms of opportunity globally it could be 3-4x of traditional CV business. The non-auto segment offers significant growth potential, as it is much larger than the auto segment. BFL is targeting ~6% of its standalone revenues from the non-auto segment, up from the current ~4%. Its partnerships with global players (Alstom, Areva, Elbit Systems David Brown) bear testimony to its globally cost competitive engineering /manufacturing capabilities. BFL is focusing on the defence opportunity (~ 4, crore FY13 imports) where it is looking at using its engineering capabilities to develop indigenous products (e.g. 155 mm artillery gun). Mild capital intensity, higher utilisations to aid margins & revenues In the last couple of years BFL had remained extremely tight on capital expenditure and working capital leading to a decline in D/E to.4x (1.5x FY11). However, the company is now comfortably placed and looks set to increase capacity and utilisation in the coming years as the management targets ~ 7, crore revenue by FY17E-18E. These factors, we believe, will keep both margins as well as revenue growths above industry trend. Scarcity premium of Tier- 1.5 supplier commands premium valuation! We believe BFL s business franchise is unique and provides investors a great opportunity to own one of the few India listed Global/Local Tier- 1.5 ancillary supplier. We believe on the financials front, strong EBITDA margins (~3% FY17E) performance will be coupled with strong RoCEs (~25% in FY17E). We, thus, value BFL on an SOTP basis with standalone business at 23x FY7E EPS of 11.4 and other subsidiaries at 54/share to arrive at a target price of We ascribe HOLD rating to the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis (Standalone) Q3FY15 Q3FY15E Q3FY14 YoY (Chg %) Q2FY15 QoQ (Chg %) Comments Total Operating Income 1,198 1, Topline growth has been stronger-than-expected due to continued positivity in US markets Raw Material Expenses Gross margins have been better than anticipated due to higher non-auto share in the business at ~47% Employee Expenses Manufacturing expenses Manufacturing expenses have been marginally higher than anticipated on the back of higher freight and export related expenses EBITDA EBITDA Margin (%) bps 172 bps Depreciation Interest Lowering working capital requirements have lead to reduction of interest expenses Other Income PBT Tax Reported PAT Key Metrics Total Tonnage (MT) 53,36 52,54 42, , ASP ( /Kg) Domestic revenues Inferred ASPs have been lower on account of higher industrial share, reduction of prices on the OEM side due to lead declines Export revenues Lead prices have fallen and are expected to remain at lower levels for immediate future Change in estimates (Standalone) FY16E FY17E ( Crore) Introduced Introduced Comments Revenue 5,492 6,597 We anticipate revenues will inch close to the management's stated target of 7, crore in FY17E-18E EBITDA 1,67 1,943 EBITDA Margin (%) Margins are expected to remain strong in FY16E but increase in domestic share, reducing machining in business could bring margins marginally down in FY17E PAT 93 1,139 EPS ( ) Assumptions (Standalone) Current Earlier Comments ( crore) FY14 FY15E FY16E FY17E FY16E FY17E Domestic Reveues 1,457 1,694 2,46 2,461 NA NA Domestic revenues are growing on the back of CV pick-up, domestic non-auto pickup Export revenues Americas ($ mn) NA NA America has led the growth in the export markets on both the automotive side as well as non-auto Europe (Euro mn) NA NA Europe has been sluggish and is expected to improve in FY16E/17E aided by stimulus Asia Pac ($ mn) NA NA Asia Pac has been impacted due to recent currency crisis in emerging markets USD/INR NA NA EUR/USD NA NA Tonnage sales (MT) 174,88 29, , ,135 NA NA We expect increasing utilisations across both India and European facilities RM/Unit ( /MT) 78,589 82,257 82,241 89,61 NA NA ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Performance in sweet spot as exports, domestic to improve Bharat Forge is one of the few listed Tier-1.5 manufacturers in India that focuses on supplying high-end engineered forgings products. It has a geographic presence across India and Europe with total tonnage capacity of ~58, MT. In terms of business segments, the CV segment remains a major revenue driver at ~6% while the other segments are PV, oil & gas, power, etc. In terms of non-auto share, the share of the business has risen to ~47% much ahead of targeted ~4%. We expect standalone revenues to grow at ~25% CAGR in FY14-17E and reach ~ 66 crore in FY17E while on a consolidated basis this is expected to grow in the same period at ~17% CAGR to 1,66 crore. Profitability has also been consistently improving on the back of a better product mix via non-auto share and increasing exports. PAT margins have risen to ~16% in FY15E. Going ahead, we expect an improvement from current levels, with standalone PAT growing at ~42% CAGR in FY14-17E and reaching ~ 114 crore in FY17E. Consolidated PAT is also expected to rise at ~35% CAGR in FY14-17E to 1,232 crore. Exhibit 1: Topline and bottom line trends (Standalone) 7 1,139 1, , ( crore) , , ,563 5,492 6, ( crore) FY13 FY14 FY15E FY16E FY17E Total Operating Income PAT - Source: Company press release, ICICIdirect.com Research We believe tonnage growth in BFL will remain strong on the back of both CV and non-auto growth. The recent setback in the oil & gas space would be mitigated by newer opportunities in the PV space. ASPs should also continue to rise as we see more enrichment in terms of product and engineering Exhibit 2: Standalone tonnage and ASP trends 3 25 (MT) 2 171, , , ,86 29,726 21, , ,95 272, , ( /MT) FY13 FY14 FY15E FY16E FY17E Tonnage ASP ICICI Securities Ltd Retail Equity Research Page 3

4 We believe similar to recent years the share of the Americas in overall business will remain strong. However considering the India business will witness strong growth the share of India business is expected to remain flat over FY15E-17E Exhibit 3: Trends of regional share of business 1 8 (%) FY14 FY15E FY16E FY17E Americas Europe Asia Pac India Margins to remain strong as asset utilisation increases BFL has been one of the best operating efficiencies and value addition in the whole Indian forgings space. The content enrichment as well business mix change accounting to exports has led to sharp EBIDTA margins increase reflective in ASP jump from ~ 172,/MT to ~ 21,/ MT. Going ahead, as demand increases, and utilisation levels improve BFL would witness positive operating leverage benefits even as the domestic CV business grows faster. Going ahead, we build in standalone EBITDA margins of 3%, 29% in FY16E, FY17E respectively, on the back of better utilisation levels. At the consolidated level, we expect EBITDA margins to rise to ~2%, ~21% levels in FY16E, FY17E, respectively. Exhibit 4: Standalone EBITDA margin trends ( crore) ,341 1,67 1,943 FY13 FY14 FY15E FY16E FY17E EBITDA EBITDA margin (%) Source: Company press release, ICICIdirect.com Research *Estimates ICICI Securities Ltd Retail Equity Research Page 4

5 With believe raw material costs will be dependant on a combination of factors like value addition and basic raw material costs. On the other expenses front, we believe the increase should be more smoothened on the back of higher utilisation Exhibit 5: Standalone trends of cost analysis 9 85 ( /MT) 13,274 15, ,465 19,77 82,257 82,241 89,61 21, ( /MT) 78,931 78, FY13 FY14 FY15E FY16E FY17E Raw material / MT Other expenses/ MT Source: Company press release, ICICIdirect.com Research Return ratio profile to rise as margins/profitability improves The forgings business can be capital intensive business in case the strategy to growth is not managed in a specific manner. Achieving higher machining mix in quick time would always require much higher capex than vis-à-vis a refurbished pure forgings machine. Prudent strategy of managing capital allocation and working capital has led to BFL maintaining and improving its return ratios. Going ahead, we believe the performance will improve from current levels and expect RoE, RoCE to trend upwards and reach 23.9%, 26.9%, respectively, in FY17E. Exhibit 6: Standalone return ratio profile (%) FY13 FY14 FY15E FY16E FY17E RoCE RoE Source: Company press release, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 5

6 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 non-automotive segment since FY1 has led to strong benefits on both revenues quality as well as margins. The increasing contribution of the same has helped in de-risking the business from the vagaries of being just CV dependant. We believe BFL s business franchise is unique and provides investors a great opportunity to own one of the few India listed Global/Local Tier- 1.5 ancillary supplier. We believe, on the financials front, strong EBITDA margins (~3% in FY17E) performance will be coupled with strong RoCEs (~25% in FY17E). We, thus, value BFL on SOTP basis with standalone business at 23x FY7E EPS of 11.4 and other subsidiaries at 54/share to arrive at a target price of We ascribe HOLD rating on the stock. Exhibit 7: Valuation SOTP Valuation Standalone FY17 EPS 48.9 P/E multiple 23 Per share value ( ) 1,124 Subsidiaries EBITDA ( crore) FY17E 257 EV/EBITDA multiple 7 Enterprise Value 1,797 Net debt (FY15E) 529 Target subsidiaries market cap ( crore) 1,267 Per share value 54 Total per share value ( ) 1,178 Exhibit 8: Key metrics (Standalone) Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY15E FY16E FY17E Exhibit 9: Key metrics (Consolidated) Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY15E FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 6

7 Company snapshot 1,4 1,2 Target Price: , 8 ( ) Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 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 Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Kalyani Group 31-Dec Sundaram Trading & Investment Pvt. Ltd. 31-Dec KSL Holding Pvt. Ltd. 31-Dec Ajinkya Investment & Trading Company Pvt. Ltd. 31-Dec Reliance Capital Asset Management Ltd. 31-Dec UTI Asset Management Co. Ltd. 31-Dec Life Insurance Corporation of India 31-Dec ICICI Prudential Asset Management Co. Ltd. 31-Dec J.P. Morgan Asset Management (Hong Kong) Ltd. 31-Dec Gagandeep Credit Capital Pvt. Ltd. 31-Dec Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares PGGM Vermogensbeheer B.V. 7.38m.56m J.P. Morgan Asset Management (Hong Kong) Ltd m -.78m UTI Asset Management Co. Ltd. 6.9m.49m Jupiter Asset Management Ltd m -.6m Hermes Investment Management Ltd. 4.98m.48m Baillie Gifford & Co m -.54m Birla Sun Life Asset Management Company Ltd. 4.22m.46m Axis Asset Management Company Limited -2.31m -.45m DSP BlackRock Investment Managers Pvt. Ltd. 2.97m.28m BlackRock Asset Management North Asia Limited -2.12m -.4m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary (Consolidated) Profit and loss statement Crore (Year-end March) FY14 FY15E FY16E FY17E Total operating Income Growth (%) Raw Material Expenses 3,224 3,688 4,134 4,629 Employee Expenses ,11 Other expenses 1,675 1,97 2,392 2,737 Total Operating Expenditure 5,689 6,625 7,493 8,467 EBITDA Growth (%) Depreciation Interest Other Income PBT 729 1,199 1,522 1,829 Others Total Tax PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY14 FY15E FY16E FY17E Profit after Tax ,1 1,232 Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities ,783 1,48 (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Sec. premium Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY14 FY15E FY16E FY17E Liabilities Equity Capital Reserve and Surplus 2,637 3,183 3,99 4,87 Total Shareholders funds 2,683 3,23 4,36 4,917 Total Debt 2,7 1,87 1,87 1,87 Deferred Tax Liability Minority Interest / Others Total Liabilities Assets Gross Block 5,389 5,639 6,169 6,669 Less: Acc Depreciation 2,86 3,18 3,523 3,895 Net Block 2,528 2,459 2,646 2,774 Capital WIP Total Fixed Assets 3,111 3,41 3,229 3,356 Investments ,57 Inventory 1,39 1,663 1,412 1,975 Debtors 866 1,82 1,257 1,46 Loans and Advances Other Current Assets Cash Total Current Assets 3,354 3,787 4,79 5,64 Creditors 1,55 1,292 1,471 1,675 Provisions Other Current Liabilities 1,288 1,196 1,448 1,563 Total Current Liabilities 2,644 2,856 3,337 3,715 Net Current Assets ,372 1,925 Other non-current assets Application of Funds Key ratios (Year-end March) FY14 FY15E FY16E FY17E 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 8

9 ICICIdirect.com coverage universe (Auto & Auto Ancillary) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E Amara Raja (AMARAJ) Hold 15, Apollo Tyre (APOTYR) Buy 12, Ashok Leyland (ASHLEY) Hold 18, Bajaj Auto (BAAUTO) 2,349 2,833 Buy 67, Balkrishna Ind. (BALIND) Buy 6, Bharat Forge (BHAFOR) 1,9 1,178 Hold 25, Bosch (MICO) 24,975 18,5 Hold 78, Eicher Motors (EICMOT)` 16,562 15, Hold 44, Escorts (ESCORT)* Sell 1, Exide Industries (EXIIND)* Buy 16, Hero Mototcorp (HERHON) 2,833 3,78 Hold 56, JK Tyre & Ind (JKIND) Buy 2, M&M (MAHMAH) 1,241 1,457 Buy 73, Mahindra CIE (MAHAUT) Buy 7, Maruti Suzuki (MARUTI) 3,669 4, Hold 11, Motherson (MOTSUM) Buy 39, Tata Motors (TELCO) Hold 179, Wabco India (WABTVS) 5,282 6, Buy 1, ICICI Securities Ltd Retail Equity Research Page 9

10 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 1

11 ANALYST CERTIFICATION We /I, Nishant Vass, MBA (Finance) Research Analyst, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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