Bharat Forge (BHAFOR) 1214

Transcription

1 Result Update Rating matrix Rating : Hold Target : 1277 Target Period : 12 months Potential Upside : 5% What s Changed? Target Changed from 1178 to 1277 EPS FY16E Changed from 43.3 to 38. EPS FY17E Changed from 52.9 to 51.7 Rating Unchanged Quarterly Performance ( Crore) Q4FY15 Q4FY14 YoY Q3FY15 QoQ Total Income 1, , EBITDA EBITDA (%) bps bps PBT Key Financials Crore FY14 FY15E FY16E FY17E Net Sales 6,69 7,485 8,98 1,422 EBITDA 1,27 1,441 1,764 2,246 Net Profit ,24 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 Nishit Zota nishit.zota@icicisecurities.com Vidrum Mehta vidrum.mehta@icicisecurities.com Multiple levers to drive profitability! June 2, 215 Bharat Forge (BHAFOR) 1214 Bharat Forge (BFL) reported revenues of 1224 crore (up ~31% YoY), almost in line with estimates of 1234 crore. The revenue growth was driven by ~ 16% growth in domestic revenues & ~ 45% growth in export revenues. EBITDA margins at 29.4% in Q4FY15 (our estimate 29.7%) saw an improvement of 464 bps compared to Q4FY14. However, on a QoQ basis the margins declined by 85 bps mainly due to dip in share of non auto business Subsequently, PAT came at 23 crore against our estimates of 218 crore. Well poised to capitalise on the recovery in CV cycle 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. BFL expects the truck segment in the US market to remain strong till FY17. 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. BFL expects the domestic TIV to exhibit double digit growth in FY16. Thus, BFL remains a strong play for economic recovery. Focus on new business verticals via Make in India to drive growth In the recent past, the PV space focus has increased and could be an important growth driver as in terms of opportunity globally it could be 3-4x of traditional CV business. Its partnerships with global players (Alstom, Areva, Elbit Systems David Brown) bear testimony to its globally cost competitive engineering /manufacturing capabilities. The Alstom JV has begun operations & with a strong order book, the company expects to generate revenues of ~ 4 crore in the next 3-4 years. 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). BFL is also focussing on the aerospace industry, which is expected to ramp up in the next 2-3 years & become a $ 1 mn business. 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.7x (1.5x FY1). The company looks set to increase capacity and utilisation (currently, utilization for non-auto is at ~85%, while forging capacity utilization is at 74%) in the coming years as the management targets ~ 7, crore standalone revenue by FY18E. 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 (~3% in FY17E). We, thus, value BFL on an SOTP basis with standalone business at 25x FY7E EPS of 48.8 and other subsidiaries at 56/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) Q4FY15 Q4FY15E Q4FY14 YoY (Chg %) Q3FY15 QoQ (Chg %) Comments Total Operating Income 1,224 1, , Topline growth driven by ~45% YoY growth in export revenues & ~16% YoY growth in domestic revenues Raw Material Expenses Employee Expenses Manufacturing expenses EBITDA EBITDA Margin (%) bps bps QoQ decline in margins by 85 bps due to decline in share of non auto business Depreciation Interest Other Income PBT Tax Reported PAT Key Metrics Total Tonnage (MT) 56,679 54,737 48, , ASP ( /Kg) Inferred ASPs have been lower on account of adverse EUR:INR & product mix (higher mix of India business QoQ from 36% to 38%) Domestic revenues Domestic revenues growth on account of significant improvement in heavy truck volumes Export revenues Export growth led by 22% YoY growth in Europe exports & 68% YoY growth in US exports Change in estimates (Standalone) FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 5,492 5, ,597 6, Reduce revenue estimates for FY16E due to expected decline in Oil & Gas business lower than anticipated recovery in Indian MHCV EBITDA 1,67 1, ,943 2, EBITDA Margin (%) bps bps Product mix will remain in favour of non auto leading to buoyant margins PAT ,139 1, EPS ( ) Assumptions (Standalone) Current Earlier Comments ( crore) FY14 FY15E FY16E FY17E FY16E FY17E Domestic Reveues 1,457 1,69 2,12 2,63 2,46. 2,461. Domestic revenues are growing on the back of CV pick-up, domestic non-auto pickup Export revenues Americas ($ mn) America has led the growth in the export markets on both the automotive side as well as non-auto. Reduced estimates due to muted guidance on Oil & Gas business Europe (Euro mn) Europe has been sluggish and is expected to improve in FY16E/17E aided by stimulus Asia Pac ($ mn) USD/INR EUR/USD Tonnage sales (MT) 174,88 211,668 24, , , ,135 We expect increasing utilisations across both India and European facilities RM/Unit ( /MT) 78,589 82,199 81,956 88,764 82,241 89,61 ICICI Securities Ltd Retail Equity Research Page 2

3 Key conference call takeaways BFL has planned a capex of 1 crore over the next 3 years with a focus on machining & PV forging. For the European subsidiaries, the capex plan is restricted only to maintenance capex. The management is confident of achieving more orders from defence, energy, mining & railways under the Make in India theme. The current utilization levels for different segments are: Forging- 74%, Non-auto-85% & Machining-45% The increase in consolidated debt is attributable to Alstom JV & project debt for European operation. The JV is expected to generate revenues to the tune of ~ 4 crore in the next 3-4 years The management has guided for a muted Q1FY16 as compared to Q4FY15 primarily due to decline in the oil & gas business. The financial performance for the subsidiaries was flattish, with revenues of ~ 58 crore (flat QoQ) & EBITDA of 35.1 crore (up 2% QoQ). ICICI Securities Ltd Retail Equity Research Page 3

4 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, railways 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 ~2% CAGR in FY15-17E and reach ~ 652 crore in FY17E while on a consolidated basis this is expected to grow in the same period at ~18% CAGR to 1,592 crore. Profitability has also been consistently improving on the back of a better product mix via non-auto share and increasing exports. Standalone PAT margins have risen to ~16% in FY15E. Going ahead, we expect an improvement from current levels, with standalone PAT growing at ~26% CAGR in FY15-17E and reaching ~ 1137 crore in FY17E. Consolidated PAT is also expected to rise at ~25% CAGR in FY15-17E to 1,24 crore. Exhibit 1: Topline and bottom line trends (Standalone) 7 1,137 1, , ( crore) , , ,548 5,249 6, ( crore) FY13 FY14 FY15E FY16E FY17E Total Operating Income PAT - Source: Company press release, ICICIdirect.com Research Exhibit 2: Standalone tonnage and ASP trends 3 274, ,668 24, (MT) , ,88 179, ,86 28, ,53 231, ( /MT) FY13 FY14 FY15E FY16E FY17E Tonnage ASP ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 3: Trends of regional share of business (%) 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 ~ 167,/MT in FY12 to ~ 28,/ MT in FY15E. 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%, 31% 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) ,33 1,57 2,17 FY13 FY14 FY15E FY16E FY17E EBITDA EBITDA margin (%) Source: Company press release, ICICIdirect.com Research *Estimates ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 5: Standalone trends of cost analysis 9 88, ,697 2,644 22,4 2 ( /MT) 8 13,274 15,471 78,931 78,589 82,199 81, ( /MT) 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 24.4%, 29.7%, 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 6

7 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 (~3% in FY17E). We, thus, value BFL on SOTP basis with standalone business at 25x FY7E EPS of 48.8 and other subsidiaries at 56/share to arrive at a target price of We ascribe HOLD rating on the stock. Exhibit 7: Valuation SOTP Valuation Standalone FY17 EPS 48.8 P/E multiple 25 Per share value ( ) 1,22 Subsidiaries EBITDA ( crore) FY17E 229 EV/EBITDA multiple 7 Enterprise Value 1,66 Net debt (FY15E) 292 Target subsidiaries market cap ( crore) 1,314 Per share value 56 Total per share value ( ) 1,277 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 7

8 Company snapshot 1,6 1,4 Target Price: ,2 1, 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-Mar Life Insurance Corporation of India 31-Dec ICICI Prudential Asset Management Co. Ltd. 31-Mar 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 %) Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Franklin Advisers, Inc m 1.79m ICICI Prudential Asset Management Co. Ltd. -2.2m -.98m PGGM Vermogensbeheer B.V. 4.99m.56m J.P. Morgan Asset Management (Hong Kong) Ltd m -.78m Hermes Investment Management Ltd. 4.98m.48m Axis Asset Management Company Limited -6.74m -.45m Capital Investment Trust Corporation 4.1m.27m Reliance Capital Asset Management Ltd m -.39m DSP BlackRock Investment Managers Pvt. Ltd. 2.97m.25m Jupiter Asset Management Ltd m -.3m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary (Consolidated) Profit and loss statement Crore (Year-end March) FY14 FY15E FY16E FY17E Total operating Income Growth (%) Raw Material Expenses 3,224 3,381 4,62 4,563 Employee Expenses ,73 Other expenses 1,675 1,898 2,46 2,71 Total Operating Expenditure 5,689 6,184 7,363 8,346 EBITDA Growth (%) Depreciation Interest Other Income PBT 729 1,122 1,34 1,788 Others Total Tax PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY14 FY15E FY16E FY17E Profit after Tax ,24 Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions , CF from operating activities ,561 1,89 (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 3,248 3,829 4,681 Total Shareholders funds 2,683 3,294 3,876 4,728 Total Debt 2,7 2,365 1,765 1,265 Deferred Tax Liability Minority Interest / Others Total Liabilities Assets Gross Block 5,389 6,43 6,473 6,973 Less: Acc Depreciation 2,86 3,192 3,555 3,945 Net Block 2,528 2,851 2,918 3,28 Capital WIP Total Fixed Assets 3,111 3,433 3,5 3,61 Investments Inventory 1, ,422 1,136 Debtors ,158 Loans and Advances Other Current Assets Cash Total Current Assets 3,354 3,59 4,229 4,22 Creditors 1,55 1,2 1,224 1,42 Provisions Other Current Liabilities 1, , Total Current Liabilities 2,644 1,95 3,3 2,742 Net Current Assets 71 1,685 1,226 1,479 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 9

10 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 Apollo Tyre (APOTYR) Buy Ashok Leyland (ASHLEY) Hold Bajaj Auto (BAAUTO) Buy Balkrishna Ind. (BALIND) Hold Bharat Forge (BHAFOR) Hold Bosch (MICO) Hold Eicher Motors (EICMOT) Hold Escorts (ESCORT) Hold Exide Industries (EXIIND) Buy Hero Mototcorp (HERHON) Hold JK Tyre & Ind (JKIND) Buy M&M (MAHMAH) Buy Mahindra CIE (MAHAUT) Buy Maruti Suzuki (MARUTI) Buy Motherson (MOTSUM) Hold Wabco India (WABTVS) Buy S ource: Company, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 1

11 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 11

12 ANALYST CERTIFICATION We /I, Nishit Zota, MBA & Vidrum Mehta, MBA 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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