Bharat Forge Q1 results: Forging ahead PhillipCapital (India) Pvt. Ltd. AUTOMOBILES: Quarterly Update 31 July 2014

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1 Bharat Forge Q1 results: Forging ahead PhillipCapital (India) Pvt. Ltd. AUTOMOBILES: Quarterly Update 31 July 2014 Bharat Forge reported an adjusted PAT of Rs1.45bn (+25% Y o Y) which was 17% ahead of our estimates. With economic revival across the global and a likely improvement in the domestic M&HCV market, we believe BHFC will continue to witness a consistent earnings upgrade. The company s focus on expanding its product portfolio across new sectors and superior execution provides requisite growth and earnings visibility. We upgrade our earnings and target price whilst maintaining a BUY. All round improvement in revenues. Standalone revenues for Q4FY14 reported a revenue growth of 25% (3.5% ahead of our estimates). The American geography has reported the strongest growth of over 78% on a Y o Y basis (off a low base), driven by both CV and non auto business. Revenue growth was led by ~19% and 4% Y o Y tonnage and realization growth respectively. EBITDA margins surprise likely to be sustainable. The reported EBITDA margins at 29% were 389bps higher Q o Q. Management believes that current quarter margins are sustainable given improving operating leverage and greater traction of high margin new non auto business. With operating leverage and mix benefits yet to be fully played out, we believe our EBITDA margins estimate of ~28%/28.3% in FY15/FY16 remain conservative with potential for further upside. Management outlook and concall takeaways Machined products contribution was ~50% in 1Q which helped margins. New non auto (heavy forging) revenue was Rs2.2bn in the quarter. Overall capacity utilization was 66% in Q1 with Baramati (heavy forging) plant utilization at ~70%. Machining capacity utilization was ~75% in 1Q. Non auto business (~46% of revenue) will be driven by strong visibility in Oil and Gas, railways and marine orders from the US. Company expects share of non auto business to increase further. Heavy forging share in non auto business has gone up to 52% in 1Q. US/Europe CV business is looking strong in forthcoming quarters and expects demand revival in the 2HFY15 in the Indian CV business. Company expects passenger car business (~8% in Q1) to double in the next couple of years as new product introductions will be high. Company has enough capacities for the next two years and will instead focus on de bottlenecking exercise to improve capacities. Company will not directly participate in defence sector. However, company may do forging work for the order secured by the group company engaged in defence sector. Upgrade earnings, Maintain BUY. Bharat forge remains a key the beneficiary of the recovery in the domestic and global economies. The company s expanding product portfolio along with its improving balance sheet provides comfort. We raise our estimates for FY15/16 by 11% and 7% respectively. We value the stock at Rs745 implying a P/E multiple of 20XFY16E. Our targeted valuations are in the mid range of the company s early recovery cycle phase. Maintain BUY. BUY BHFC IN CMP RS 720 TARGET RS 745 (+4%) Company Data O/S SHARES (MN) : 233 MARKET CAP (RSBN) : 168 MARKET CAP (USDBN) : WK HI/LO (RS) : 732 / 186 LIQUIDITY 3M (USDMN) : 9.4 FACE VALUE (RS) : 2 Share Holding Pattern, % PROMOTERS : 46.7 FII / NRI : 16.3 FI / MF : 14.5 NON PROMOTER CORP. HOLDINGS : 8.4 PUBLIC & OTHERS : 14.1 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 10 Apr 11 Apr 12 Apr 13 Apr 14 Bharat Forge BSE Sensex Source: Bloomberg, Phillip Capital Research Other Key Ratios Rs mn FY14E FY15E FY16E Net Sales 66,435 69,505 82,183 EBITDA 10,271 12,329 15,950 Net Profit 4,179 6,060 8,651 EPS, Rs PER, X EV/EBIDTA, x EV/Net Sales, x ROE, % Debt/Equity, % Source: PhillipCapital India Research Est Priya Ranjan ( ) pranjan@phillipcapital.in Dhawal Doshi ( ) ddoshi@phillipcapital.in Please refer to Disclosures and Disclaimers at the end of the Research Report.

2 5 February 2014 / INDIA EQUITY RESEARCH / BHARAT FORGE QUARTERLY UDPATE Q1FY15 Volume Analysis Year to March Q1FY15 Q1FY14 % change Q4FY14 % change PC Comments Shipment Tonnage (tonnes) 49,123 41, , Broadly in line Realisation (INR) 204, , , Sequential growth on account of product/geographical mix Export sales (%) Q1FY15 Financial analysis Year to March Q1FY15 Q1FY14 % change Q4FY14 % change PC Comments Revenues (gross) 10,047 8, , Less: excise Revenues (net) 9,643 7, , Other operating income (11.2) Total revenues 9,881 7, , % ahead of expectation Raw material 3,591 3, ,853 (6.8) Staff costs Annual increment Manufacturing Expenses 1,849 1, , Jump due to cost incurred for non booked sales Other expenses Total expenditure 7,048 5, , EBIDTA 2,833 1, , % ahead of expectation Interest (10.7) 349 (9.2) Decline reflects lower debt levels Depreciation Other income (31.7) 326 (25.8) PBT 2,101 1, , Tax Adjusted net profit 1, , % ahead of expectations Extraordinary exp/(inc) (100.0) Impairment charges by subsidiaries Net profit 1, , Q1FY15 margin analysis (as % of net revenues) Year to March Q1FY15 Q1FY14 % change Q4FY14 % change PC Comments Raw material (506.7) Includes 200bps lower cost in the quarter due to inventory shift Staff costs (152.1) Manufacturing Expenses Other expenses EBIDTA (2.3) bps above estimates Adjusted net profit Tax rate (562.5) 150bp lower than expected Source: Company, PhillipCapital India Research 2 of 6

3 5 February 2014 / INDIA EQUITY RESEARCH / BHARAT FORGE QUARTERLY UDPATE Financials Income Statement Y/E Mar, Rs mn FY13 FY14E FY15E FY16E Net sales 56,343 66,435 69,505 82,183 Growth, % Other income ,038 Total income 57,022 67,161 70,387 83,220 Raw material expenses 26,072 24,613 24,247 28,611 Employee expenses 8,013 7,901 8,127 9,451 Other Operating expenses 15,243 24,377 25,684 29,208 EBITDA (Core) 7,694 10,271 12,329 15,950 Growth, % (22.8) Margin, % Depreciation 3,360 3,579 3,806 4,119 EBIT 4,334 6,693 8,523 11,831 Growth, % (37.6) Margin, % Interest paid 1,908 1,692 1,422 1,304 Other Non Operating Income ,164 Non recurring Items Pre tax profit 3,385 6,020 8,536 12,185 Tax provided 1,728 2,100 2,475 3,534 Profit after tax 1,658 3,920 6,060 8,651 Others (Minorities, Associates) Net Profit 2,110 3,948 6,060 8,651 Growth, % (44.8) Net Profit (adjusted) 2,278 4,179 6,060 8,651 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY13 FY14E FY15E FY16E Cash & bank 5,553 1,526 3,249 4,236 Marketable securities at cost 3,874 4,174 4,474 4,774 Debtors 6,114 7,210 7,543 8,919 Inventory 11,320 10,686 10,528 12,423 Loans & advances 7,119 8,394 8,782 10,384 Other current assets 4,705 5,548 5,804 6,863 Total current assets 38,686 37,539 40,380 47,598 Investments Gross fixed assets 56,472 62,925 66,483 70,641 Less: Depreciation 27,374 30,973 34,779 38,898 Add: Capital WIP 6,324 2,000 1,800 1,800 Net fixed assets 35,423 33,952 33,504 33,543 Total assets 74,394 71,976 74,570 82,026 Current liabilities 28,400 23,300 21,207 22,876 Provisions 2,133 2,820 3,129 3,893 Total current liabilities 30,533 26,120 24,336 26,768 Non current liabilities 19,655 18,044 17,992 16,540 Total liabilities 50,188 44,164 42,328 43,309 Paid up capital Reserves & surplus 22,098 25,494 29,923 36,399 Shareholders equity 24,206 27,631 32,060 38,536 Total equity & liabilities 74,394 71,795 74,388 81,845 Cash Flow Y/E Mar, Rs mn FY13 FY14E FY15E FY16E Pre tax profit 3,385 6,020 8,536 12,185 Depreciation 3,360 3,579 3,806 4,119 Chg in working capital 2,142 4, ,043 Total tax paid 1,382 2,100 2,475 3,534 Cash flow from operating activities 7,576 3,094 8,965 8,728 Capital expenditure 7,088 2,108 3,358 4,158 Chg in investments Chg in marketable securities Cash flow from investing activities 2,102 2,608 3,858 4,658 Free cash flow 5, ,107 4,070 Debt raised/(repaid) 237 4,904 2,025 1,452 Dividend (incl. tax) ,359 1,631 Cash flow from financing activities 3,513 5,501 3,384 3,083 Net chg in cash 1,960 5,015 1, Valuation Ratios & Per Share Data FY13 FY14E FY15E FY16E Per Share data EPS (INR) Growth, % (44.8) Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Inventory days Fixed capital/sales (x) Receivable days Payable days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Total debt/equity (%) Net debt/equity (%) Valuation PER (x) PEG (x) y o y growth (1.6) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Source: Company, PhillipCapital India Research Estimates 3 of 6

4 31 July 2014 / INDIA EQUITY RESEARCH / BHARAT FORGE QUARTERLY UPDATE Recommendation Chart B (TP 580) B (TP 415) /1/2014 2/12/2014 3/27/2014 5/15/2014 6/26/2014 Source: PhillipCapital India Research 4 of 6

5 31 July 2014 / INDIA EQUITY RESEARCH / BHARAT FORGE QUARTERLY UPDATE Management Vineet Bhatnagar (Managing Director) Jignesh Shah (Head Equity Derivatives) (91 22) (91 22) Research Automobiles Engineering, Capital Goods Pharma Dhawal Doshi (9122) Ankur Sharma (9122) Surya Patra (9122) Priya Ranjan (9122) Hrishikesh Bhagat (9122) Retail, Real Estate Banking, NBFCs Infrastructure & IT Services Abhishek Ranganathan, CFA (9122) Manish Agarwalla (9122) Vibhor Singhal (9122) Neha Garg (9122) Sachit Motwani, CFA, FRM (9122) Varun Vijayan (9122) Paresh Jain (9122) Technicals Midcap Subodh Gupta, CMT (9122) Consumer, Media, Telecom Vikram Suryavanshi (9122) Naveen Kulkarni, CFA, FRM (9122) Production Manager Vivekanand Subbaraman (9122) Metals Ganesh Deorukhkar (9122) Manish Pushkar, CFA (9122) Dhawal Doshi (9122) Database Manager Cement Oil&Gas, Agri Inputs Vishal Randive (9122) Vaibhav Agarwal (9122) Gauri Anand (9122) Economics Deepak Pareek (9122) Sr. Manager Equities Support Rosie Ferns (9122) Anjali Verma (9122) Sales & Distribution Corporate Communications Kinshuk Bharti Tiwari (9122) Sales Trader Zarine Damania (9122) Ashvin Patil (9122) Dilesh Doshi (9122) Shubhangi Agrawal (9122) Suniil Pandit (9122) Kishor Binwal (9122) Sidharth Agrawal (9122) Execution Dipesh Sohani (9122) Mayur Shah (9122) SINGAPORE Phillip Securities Pte Ltd 250 North Bridge Road, #06 00 Raffles City Tower, Singapore Tel : (65) Fax: (65) JAPAN Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66) Fax: (66) UNITED STATES Phillip Futures Inc. 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel (1) Fax: (1) Contact Information (Regional Member Companies) MALAYSIA Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (60) Fax (60) INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia Tel (62) Fax: (62) FRANCE King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33) Fax : (33) AUSTRALIA PhillipCapital Australia Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia Tel: (61) Fax: (61) INDIA PhillipCapital (India) Private Limited No. 1, C Block, 2 nd Floor, Modern Center, Jacob Circle, K. K. Marg, Mahalaxmi Mumbai Tel: (9122) Fax: (9122) HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai Tel (86) Fax: (86) UNITED KINGDOM King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) of 6

6 31 July 2014 / INDIA EQUITY RESEARCH / BHARAT FORGE QUARTERLY UPDATE Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. 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