Q4FY17 RESULT UPDATE RETAIL EQUITY RESEARCH Bharat Forge Ltd Automobile Auto Ancillaries BSE CODE:500493 NSE CODE: BHARATFORG Bloomberg CODE: BHFC :IN SENSEX: 31,028 Buy Rating as per Large cap 12months investment period CMP Rs1132 TARGET Rs1252 RETURN 11% 29 th May, 2017 Better revenue visibility for long term Bharat Forge Ltd (BFL) is a leading player in the forgings industry. The company is serving several sectors including automobile, power, oil and gas, rail & marine, aerospace, construction, mining etc. Q4FY17 standalone revenue grew by 11%YoY due to recovery in the US oil & gas sector and partial recovery in the US class 8 heavy truck segments. Domestic revenue grew by 11%YoY and Export business grew by 12%YoY due to better products and geographical mix. EBITDA margin declined by 180bpsYoY but rose by 81bpsQoQ due to control on other expenses and employee cost The orders from Boeing and new defence JV with AM General will provide higher revenue visibility in non auto sector during FY18. We expect BFL to register 15% revenue CAGR over FY17-19E on account healthy demand for US - CV and revival in the energy sector. We expect BFL to trade at a premium valuation given its strong earnings outlook thus, we upgrade our rating from Hold to Buy with a revised target price of Rs1252 (28x FY19 EPS). Healthy Exports growth with recovery in Oil &gas sector Q4FY17 revenue grew by 11%YoY, largely due to the recovery in the US shell gas production and partial recovery in the US class 8 heavy truck segments. Domestic revenue grew by 11%YoY and export sales grew by 12%YoY. BFL s average realisation per tonne rose by 5.7%YoY, due to better product mix, higher non auto business and better export realisation amid favourable currency. The overall volume rose by 5.3%YoY to 55,159 tonnes during the quarter. The EBITDA margins declined by 180bpsYoY but rose by 81bpsQoQ due to control on other expenses and employee cost. Favourable product mix to continue We expect the recovery in the energy sector and traction from the US HCV sales to continue. We believe domestic CV business to face some turbulence over near term due to the left over impact of the demonetisation. BFL s order from Boeing for developing and manufacturing 777x titanium forgings will start reflecting in its revenue from FY19E. Further, NTPC JV in power sector will be another focus area in FY18. The long term growth outlook remains robust on the backdrop of improved revenue visibility. We expect 15% revenue CAGR over FY17-19E led by pick in domestic CV market by H2FY18 and de-risking the utilization in Non auto sector.the management expects the incremental revenue from new business/products to grow from current 5% of sales to 15% in next 2-3 years. Margin to remain resilient We believe BFL has shown resilient in margin despite decline in high profitable non auto business and global CV export is commendable. Continuous cost rationalisation and positive automotive demand and ramp up of passenger vehicle business will add colours to margin. We expect consolidated EBITDA margin to improve by 200bps over FY17-19E. Valuations At CMP, BFL is trading at P/E of 32x/25x on FY18E/FY19E EPS respectively. Derisking the utilization in non auto segment and ramp up of PV sales will offset some near term headwinds. Company also expects to be debt free by FY18. However we marginally upgrade our revenue estimate for FY18/FY19 by 4.1%/3.6 respectively by factoring export revenue growth. We value BFL at 28x (12% premium to its 3 yrs historical avg.) FY19E EPS and upgrade our rating from Hold to Buy with a revised target price of Rs1252. Company Data Market Cap (cr) Enterprise Value (cr) Rs26,357 Rs28,875 Outstanding Shares (cr) 23.3 Free Float 53% Dividend Yield 0.9% 52 week high Rs1,175 52 week low Rs687 6m average volume (cr) 0.1 Beta 1.03 Face value Rs2 Shareholding % Q2FY17 Q3FY17 Q4FY17 Promoters 46.7 45.8 45.8 FII s 7.9 11.7 15.2 MFs/Insti 13.9 14.9 13.9 Public 31.5 27.6 25.1 Total 100.0 100.0 100.0 Price Performance 3mth 6mth 1 Year Absolute Return -1.3% 16.3% 40.6% Absolute Sensex 6.1% 16.0% 15.9% Relative Return -7.0% 0.3% 21.2% *over or under performance to benchmark index 1600 1100 600 100 BFL Sensex Rebased May-16 Aug-16 Nov-16 Feb-17 May-17 Consolidated (Rs.cr) FY17A FY18E FY19E Sales 6,396 7,375 8,515 Growth (%) (6.1) 15.3 15.5 EBITDA 1,251 1,534 1,839 Margin (%) 19.6 20.8 21.6 PAT Adj 569 818 1,041 Growth (%) (3.6) 43.7 27.3 Adj.EPS 24.4 35.1 44.7 Growth (%) (3.6) 43.7 27.3 P/E 46.3 32.2 25.3 P/B 5.9 5.1 4.3 EV/EBITDA 23.0 18.6 15.4 ROE (%) 13.6 16.9 18.4 D/E 0.9 0.5 0.4 Saji John Analyst
Quarterly Financials Profit & Loss Account (Rs cr) Q4FY17 Q4FY16 YoY Growth % Q3FY17 QoQ Growth % Sales 1,126 1,011 11.3 944 19.3 EBITDA 320 305 12.9 261 22.8 EBITDA margins 28.4 30.2-180bps 27.6 80bps Depreciation 74 75 0 74 0 EBIT 246 231 6.5 188 31.5 Interest 19 24-23.9 18 1.4 Other Income 22 29-23.9 21 6.9 Exceptional Items 38 0 - - - PBT 287 235 22.1 189 51.8 Tax* 80 70 14.4 61 31.6 Share of profit from Associate 0 0-0 - Reported PAT 208 166 25.3 129 61.3 Adjustments -38 3 - - - Adj PAT 169 166 2.4 129 31.8 No. of shares (cr) 23.4 23.4-23.4 - EPS (Rs) 7.3 7.1 2.4 5.5 31.8 Change in estimates Old estimates New estimates Change % Year / Rs cr FY18E FY19E FY18E FY19E FY18E FY19E Revenue 7,280 8,182 7,375 8,515 1.0 4.1 EBITDA 1,427 1,638 1,534 1,839 7.4 12.3 Margins (%) 19.6 20.0 20.8 21.7 +120bps +170bps PAT 832 1,005 818 1,041 0 3.6 EPS 35.7 43.2 35.1 44.7 0 3.6 Standalone Segment Revenue (Rs cr) Q4FY17 Q4FY16 YoY Growth % Q3FY17 QoQ Growth % Segments Domestic 562 506 11.1 481 16.8 Export 597 533 12.0 485 23.1 Total Segmental Revenue (Gross) 1,159 1,039 11.5 966 19.9
Consolidated Financials Profit & Loss Account Sales 7,625 6,809 6,396 7,375 8,515 % change 13.5-10.7-6.1 15.3 15.5 EBITDA 1,441 1,408 1,251 1,534 1,839 % change 39.9-2.3-11.2 22.6 19.9 Depreciation 362 453 452 433 472 EBIT 1,078 955 799 1,101 1,367 Interest 136 140 100 93 91 Other Income 137 78 119 144 170 PBT 1,122 887 947 1,152 1,446 % change 53.3-20.9 6.7 21.7 25.6 Tax 359 305 249 334 405 Tax Rate (%) 3 3 3 3 3 Reported PAT 767 585 698 818 1,041 Adj* 43-5 128 0 0 Adj PAT 724 590 569 818 1,041 % change 83.3-18.5-3.6 43.7 27.3 No. of shares (mn) 23.3 23.3 23.3 23.3 23.3 Adj EPS (Rs) 31.1 25.3 24.4 35.1 44.7 % change 83.3-18.5-3.6 43.7 27.3 DPS (Rs) 9.0 6.9 4.0 4.6 4.6 Cash flow Net inc. + Depn. 1,485 1,340 1,399 1,585 1,918 Non-cash adj. -347-178 -149-241 -314 Changes in W.C -627 2 40-282 -196 C.F.O 511 1,164 1,290 1,062 1,409 Capital exp. -539-1,372-355 -398-406 Change in inv. 342 538-154 -550-63 Other invest.cf 48 0 0 0 0 C.F - investing -149-833 -509-948 -468 Issue of equity - - - - - Issue/repay debt 339 185-110 -160-260 Dividends paid -210-160 -93-107 -107 Other finance.cf -155-140 -100-93 -91 C.F - Financing -25-116 -303-360 -457 Chg. in cash 347 215 478-246 483 Closing cash 587 897 1,376 1,130 1,613 Balance Sheet Cash 682 897 1,376 1,130 1,613 Accounts Receivable 853 1,402 1,341 1,515 1,750 Inventories 1,034 997 1,075 1,146 1,330 Other Cur. Assets 880 472 841 1,010 1,120 Investments 1,297 289 972 1,108 1,316 Gross Fixed Assets 5,561 6,919 7,269 7,669 8,069 Net Fixed Assets 2,560 3,468 3,366 3,333 3,261 CWIP 859 566 40 460 323 Intangible Assets 15 29 34 32 37 Def. Tax (Net) -164-184 -184-184 -184 Other Assets 0 0 0 0 0 Total Assets 8,016 7,936 8,861 9,551 10,565 Current Liabilities 1,911 1,388 1,797 1,909 2,216 Provisions 299 166 185 212 245 Debt Funds 2,365 2,518 2,408 2,248 1,988 Other Liabilities -2-4 -4-4 -4 Equity Capital 47 47 47 47 47 Reserves & Surplus 3,398 3,822 4,427 5,139 6,073 Shareholder s Fund 3,444 3,869 4,474 5,185 6,120 Total Liabilities 8,016 7,936 8,861 9,551 10,565 BVPS (Rs) 147 165 191 221 261 Ratios Y.E March FY15A FY16A FY17A FY18E FY19E Profitab. & Return EBITDA margin (%) 18.9 20.7 19.6 20.8 21.6 EBIT margin (%) 14.1 14.0 12.5 14.9 16.1 Net profit mgn.(%) 9.5 8.7 8.9 11.1 12.2 ROE (%) 23.6 16.1 13.6 16.9 18.4 ROCE (%) 9.2 6.9 6.6 8.5 10.5 W.C & Liquidity Receivables (days) 41.2 60.4 78.3 70.7 70.0 Inventory (days) 49.6 54.4 59.1 55.0 53.1 Payables (days) 102.1 88.4 90.9 91.7 88.4 Current ratio (x) 1.9 2.5 2.4 2.3 2.4 Quick ratio (x) 0.7 1.7 1.5 1.4 1.5 Turnover &Levg. Gross asset T.O (x) 1.4 1.1 0.9 1.0 1.1 Total asset T.O (x) 1.0 0.9 0.8 0.8 0.8 Int. covge. ratio (x) 8.0 6.8 8.0 11.8 15.0 Adj. debt/equity (x) 1.0 0.9 0.7 0.4 0.3 Valuation ratios EV/Sales (x) 3.4 3.8 4.1 3.5 3.0 EV/EBITDA (x) 18.1 18.6 20.9 16.9 14.0 P/E (x) 32.7 40.1 41.6 29.0 22.8 P/BV (x) 6.9 6.1 5.3 4.6 3.9
Recommendation Summary (last 3 years) Dates Rating Target 2000 1500 1000 500 0 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 6-Apr -15 Accumulate 1480 22-Jan-16 Buy 974 26-May-16 Accumulate 830 9-August-16 Buy 960 11 November 16 Hold 936 9 th February 17 Hold 1080 29 th May 17 Buy 1252 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Mid Cap and Small Cap; Buy - Upside is 10% or more. Buy - Upside is 15% or more. Hold - Upside or downside is less than 10%. Accumulate* - Upside between 10% - 15%. Reduce - Downside is 10% or more. Hold - Absolute returns between 0% - 10%. Reduce/Sell - Absolute returns less than 0%. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. * For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. General Disclosures and Disclaimers CERTIFICATION I, Saji John, author of this Report, hereby certify that all the views expressed in this research report reflect our personal views about any or all of the subject issuer or securities. This report has been prepared by the Research Team of Geojit Financial Services Limited, hereinafter referred to as Geojit. COMPANY OVERVIEW Geojit Financial Services Limited (hereinafter Geojit), a publically listed company, is engaged in services of retail broking, depository services, portfolio management and marketing investment products including mutual funds, insurance and properties. 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