COMPANY UPDATE 9 DEC 2015 Bharat Forge BUY INDUSTRY AUTOS CMP (as on 8 Dec 2015) Rs 827 Target Price 1,056 Nifty 7,702 Sensex 25,310 KEY STOCK DATA Bloomberg BHFC IN No. of Shares (mn) 233 MCap (Rs bn) / ($ mn) 193/2,885 6m avg traded value (Rs mn) 1,068 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,363/810 3M 6M 12M Absolute (%) (19.0) (28.3) (15.1) Relative (%) (19.0) (23.7) (5.1) SHAREHOLDING PATTERN (%) Promoters 46.74 FIs & Local MFs 13.87 FIIs 18.04 Public & Others 21.35 Source : BSE Navin Matta navin.matta@hdfcsec.com +912261717322 Sneha Prashant sneha.prashant@hdfcsec.com +912261717336 Cyclical headwinds persist but structural story intact At Bharat Forge s (BFL) analyst meet, the management highlighted the large opportunities in segments such as defence, railways, aerospace and PV. While acknowledging the nearterm cyclical headwinds (expect flat topline growth in FY16), especially in the US CV market, along with weakness in O&G and construction and mining segments, BFL remains hopeful of doubling its FY14 standalone revenues to Rs 70bn by FY18. While reaffirming its target of increasing its revenue mix from PVs to 15% by FY18 (3x of FY14), BFL alluded to new business opportunities in transmission component forgings in the segment. With requisite accreditations in the aerospace, BFL hopes to bag a major contract in the near future. The company believes that the Make in India initiative will provide huge import substitution opportunities. BFL believes it has put in place the building blocks for required capabilities and fungible capacities to participate in opportunities from large verticals such as defence, railways and aerospace. Despite nearterm demand headwinds in certain segments, we remain excited about the company s medium to longterm growth prospects. We believe BFL s stock price correction of 20%+ over the past three months provides an attractive entry point, as valuations at 19x FY17E stand below the past fiveyear average. We maintain BUY, with a TP of Rs 1,056 based on 22x Sept17E EPS. Key takeaways Thrust on PV segment: Having bagged orders from PV OEMs such as GM, Audi, Daimler and Chrysler, BFL appears confident of raising its PV revenue mix to 15% by FY18. Given the tepid outlook for the US/EU truck market, with 46% YoY decline over 2016/2017, BFL hopes to partially mitigate this impact through orders from recently added customers Paccar and DAF. The company is exploring opportunities in transmission component forgings, which is potentially 10x of BFL s current target market. New orders to drive industrial segment growth: BFL expects to bag a major order from one of its four aerospace customers. In the defence segment, it is participating in four artillery programmes of which it hopes 12 will be finalised in the next year. In the locomotive sector, besides orders from GE and Alstom for new locomotives, large servicerelated requirement exists. Financial Summary (Consolidated) Y/E March (Rsmn) FY14 FY15 FY16E FY17E FY18E Net Sales 67,158 76,247 74,810 85,146 96,886 EBITDA 10,302 14,408 15,458 17,998 21,205 APAT 4,185 7,208 8,076 9,952 12,332 Diluted EPS (Rs) 18.1 31.1 34.8 42.9 53.1 P/E (x) 45.7 26.6 23.8 19.3 15.6 EV / EBITDA (x) 20.0 14.3 13.2 11.0 8.9 RoE (%) 17.1 23.6 21.7 22.7 23.5 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Volume growth impacted by slowdown in export markets Sale in Americas adversely impacted by slowdown in class 8 truck sales and weakness in O&G and construction and mining segments Domestic sales recovering with strong CV sales and improving demand in select industrial segments Cyclical Headwinds Weighting On Volume Growth Tonnage sales ('000 MT) % YoY RHS 60.0 35.0 30.0 55.0 25.0 20.0 50.0 15.0 45.0 10.0 5.0 40.0 0.0 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 Auto Segment Mix On The Rise Dom Auto (incl misc) Dom Indl Exports Auto Exports Indl 100% 20 16 80% 27 30 30 29 24 21 India Share Rising in Standalone Regional Mix 100% 80% 60% 40% 20% 0% 6 4 3 3 2 3 4 3 25 19 19 20 18 18 16 17 26 31 33 43 45 44 39 39 40 41 43 3QFY14 India Americas Europe Asia Pac 4QFY14 1QFY15 38 41 40 39 37 2QFY15 3QFY15 4QFY15 1QFY16 BFL Standalone FY15 Revenue Mix By Segment Others, 8% 2QFY16 BFL expects its standalone revenue mix from PV segment to rise to 15% over next 1.5 years 60% 40% 20% 0% 36 38 29 31 31 33 35 36 20 17 15 13 13 13 16 15 23 29 29 26 26 29 25 27 Industrial, 43% CV, 42% 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 PV, 7% Page 2
Growth Deceleration In US Class 8 Truck US Class 8 Net Order Intake Falling Sharply CV sales in the US slowing down as companies are looking to correct inventory levels. As per BFL, the current inventory levels are at 3.5 month Net order intake for class 8 trucks indicate further slowdown in 2016 BFL expects the US CV sales to decline by 6%/3% in 2016/2017 US Class 8 sales % YoY (RHS) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Oct13 Jan14 Apr14 Jul14 Oct14 Jan15 Apr15 Jul15 Oct15 Source: Bloomberg, HDFC sec Inst Research 30% 25% 20% 15% 10% 5% 0% 5% 10% 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Net order intake (units) Oct13 Jan14 Apr14 Jul14 Oct14 Source: Bloomberg, HDFC sec Inst Research Truck utilisation % (RHS) 100 Jan15 Apr15 Jul15 Oct15 99 98 97 96 95 94 EU Heavy Duty Truck Sales Also Moderating Steady Growth In Domestic MHCV Volumes BFL hopes to mitigate weak market demand by improving wallet share and adding new customers in the CV segment 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Oct13 EU HCV Jan14 Apr14 Jul14 Oct14 Jan15 % YoY (RHS) Apr15 Jul15 Oct15 150% 130% 110% 90% 70% 50% 30% 10% 10% 30% 50% 35.0 30.0 25.0 20.0 15.0 10.0 5.0 Oct13 MHCV sales (in '000) Jan14 Apr14 Jul14 Oct14 Jan15 % 3MMA (RHS) 50% 25% 0% 25% 50% Apr15 Jul15 Oct15 Source: Bloomberg, HDFC sec Inst Research Source: Bloomberg, HDFC sec Inst Research Page 3
BFL: One Year Forward P/E Chart BFL: One Year Forward EV/EBITDA Chart P/E Avg P/E +1 SD 1 SD Ev/Ebitda Avg EV/EBITDA 40.0 35.0 25.0 +1 SD 1 SD 30.0 20.0 25.0 20.0 15.0 15.0 10.0 10.0 5.0 5.0 Nov10 Mar11 Jul11 Nov11 Mar12 Jul12 Nov12 Mar13 Jul13 Nov13 Mar14 Jul14 Nov14 Mar15 Jul15 Nov15 Nov10 Mar11 Jul11 Nov11 Mar12 Jul12 Nov12 Mar13 Jul13 Nov13 Mar14 Jul14 Nov14 Mar15 Jul15 Nov15 Source: Bloomberg, Company HDFC sec Inst Research Source: Bloomberg, Company HDFC sec Inst Research Assumptions: BFL s Revenue Split Rs bn FY15 FY16E FY17E FY18E Domestic CV 6.3 7.5 8.6 9.6 % YoY 25% 18% 15% 12% Exports CV 12.9 14.3 15.3 16.1 % YoY 19% 11% 7% 6% Domestic PV 2.1 2.3 2.5 2.8 % YoY 5% 7% 12% 12% Exports PV 1.0 1.9 3.6 6.1 % YoY 161% 82% 88% 71% Domestic Industrial 6.2 6.7 7.7 9.1 % YoY 11% 8% 14% 18% Exports Industrial 13.2 10.7 12.0 13.9 % YoY 83% 19% 12% 16% Subsidiaries/JVs 30.8 27.5 31.5 34.7 % YoY 7.2% 11% 14% 10% Source: HDFC sec Inst Research Page 4
Peer Valuations CMP (Rs/sh) Mcap (Rs bn) TP Rating Adj EPS (Rs/sh) P/E (x) EV/EBITDA (x) RoE (%) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Balkrishna Industries 649 63 766 BUY 51.5 57.2 52.1 12.6 11.3 12.5 7.8 6.8 6.3 23.8 21.7 16.5 Bharat Forge 827 193 1,056 BUY 31.1 34.8 42.9 26.6 23.8 19.3 14.3 13.2 11.0 23.6 21.7 22.7 Exide Industries 140 119 159 NEU 6.4 7.1 8.3 21.8 19.6 16.8 12.9 11.3 9.6 14.0 14.3 15.1 Ramkrishna Forgings 529 15 684 BUY 24.5 25.3 36.0 21.6 20.9 14.7 17.6 11.4 8.6 20.4 16.4 19.8 Page 5
Income Statement (Consolidated) (Rs mn) FY14 FY15 FY16E FY17E FY18E Net Sales 67,158 76,247 74,810 85,146 96,886 Growth (%) 30.0 13.5 (1.9) 13.8 13.8 Material Expenses 32,238 33,811 31,982 36,682 41,735 Employee Expenses 7,888 9,051 8,522 9,556 10,498 Other Operating Expenses 16,731 18,977 18,848 20,910 23,448 EBIDTA 10,302 14,408 15,458 17,998 21,205 EBIDTA (%) 15.3 18.9 20.7 21.1 21.9 EBIDTA Growth (%) 30.1 39.9 7.3 16.4 17.8 Other Income 1,247 1,368 1,499 1,802 2,016 Depreciation 3,571 3,624 3,952 4,178 4,336 EBIT 7,977 12,151 13,005 15,622 18,885 Interest 1,692 1,356 1,246 1,122 921 PBT 6,285 10,795 11,759 14,500 17,964 Tax 2,100 3,587 3,683 4,548 5,632 Adj PAT 4,185 7,208 8,076 9,952 12,332 APAT Growth (%) 58.5 72.2 12.0 23.2 23.9 EO items (net of tax) (772) (387) Reported PAT 4,957 7,595 8,076 9,952 12,332 Minority Interest 28 30 30 30 30 APAT (post MI) 4,214 7,238 8,106 9,981 12,362 Reported PAT (post MI) 4,985 7,625 8,106 9,981 12,362 Adj EPS 18.1 31.1 34.8 42.9 53.1 Adj EPS Growth (%) 57.2 71.8 12.0 23.1 23.8 Balance Sheet (Consolidated) (Rs mn) FY14 FY15 FY16E FY17E FY18E SOURCES OF FUNDS Share Capital 466 466 466 466 466 Reserves 26,367 33,976 39,846 47,313 56,881 Total Shareholders Funds 26,832 34,442 40,312 47,779 57,347 Minority Interest 170 (20) (50) (79) (109) Longterm Debt 21,727 22,147 21,621 17,861 14,692 Shortterm Debt 3,886 3,317 817 817 817 Total Debt 25,613 25,464 22,439 18,679 15,509 Deferred Taxes 1,645 1,638 2,397 3,316 4,439 Longterm Provisions & Others TOTAL SOURCES OF FUNDS 54,260 61,523 65,098 69,694 77,186 APPLICATION OF FUNDS Net Block 25,340 26,287 26,334 27,463 27,127 CWIP 5,827 8,586 8,816 7,509 7,509 Investments, LT Loans & Adv 8,012 4,955 6,055 7,155 8,255 Inventories 10,386 10,339 12,298 13,997 15,926 Debtors 8,660 8,535 9,633 10,964 12,476 Cash & Equivalents 4,227 6,820 4,705 7,091 12,333 ST Loans & Advances, Others 12,893 16,817 17,367 17,917 18,467 Total Current Assets 36,166 42,511 44,003 49,969 59,202 Creditors 18,199 17,829 17,074 19,316 21,771 Other Current Liabilities & Provisions 2,886 2,987 3,037 3,087 3,137 Total Current Liabilities 21,085 20,816 20,110 22,403 24,908 Net Current Assets 15,081 21,695 23,892 27,566 34,294 Misc Expenses & Others TOTAL APPLICATION OF FUNDS 54,260 61,523 65,098 69,694 77,186 Page 6
Cash Flow (Consolidated) (Rs mn) FY14 FY15 FY16E FY17E FY18E Reported PAT 4,985 7,625 8,106 9,981 12,362 Nonoperating & EO items (772) (387) PAT from Operations 4,214 7,238 8,106 9,981 12,362 Interest expenses 1,692 1,356 1,246 1,122 921 Depreciation 3,571 3,624 3,952 4,178 4,336 Working Capital Change (2,593) (4,021) (4,312) (1,287) (1,487) Other Operating Items (664) 1,886 730 889 1,093 OPERATING CASH FLOW ( a ) 6,219 10,083 9,722 14,883 17,225 Capex 684 (7,330) (4,230) (4,000) (4,000) Free cash flow (FCF) 6,904 2,753 5,492 10,883 13,225 Investments (3,852) 3,057 (1,100) (1,100) (1,100) INVESTING CASH FLOW ( b ) (3,168) (4,273) (5,330) (5,100) (5,100) Debt Issuance (2,232) (149) (3,025) (3,760) (3,169) Interest expenses (1,692) (1,356) (1,246) (1,122) (921) FCFE 4,672 2,604 2,466 7,123 10,056 Share capital Issuance Dividend (1,226) (2,099) (2,235) (2,515) (2,794) FINANCING CASH FLOW ( c ) (5,149) (3,604) (6,507) (7,397) (6,884) NET CASH FLOW (a+b+c) (2,098) 2,206 (2,115) 2,386 5,241 Nonoperating and EO items 772 387 Closing Cash & Equivalents 4,227 6,820 4,705 7,091 12,333 Key Ratios (Consolidated) FY14 FY15 FY16E FY17E FY18E PROFITABILITY (%) GPM 52.0 55.7 57.2 56.9 56.9 EBITDA Margin 15.3 18.9 20.7 21.1 21.9 APAT Margin 6.2 9.5 10.8 11.7 12.7 RoE 17.1 23.6 21.7 22.7 23.5 RoIC 10.6 15.6 15.0 17.1 20.4 RoCE 10.1 14.1 14.1 15.9 17.7 EFFICIENCY Tax Rate (%) 33.4 33.2 31.3 31.4 31.4 Asset Turnover (x) 1.2 1.2 1.1 1.2 1.3 Inventory (days) 56 49 60 60 60 Debtors (days) 47 41 47 47 47 Payables (days) 99 85 83 83 82 Cash Conversion Cycle (days) 5 5 24 24 25 Debt/EBITDA (x) 2.5 1.8 1.5 1.0 0.7 Net D/E 0.5 0.4 0.3 0.1 (0.1) Interest Coverage 4.7 9.0 10.4 13.9 20.5 PER SHARE DATA EPS (Rs/sh) 18.1 31.1 34.8 42.9 53.1 CEPS (Rs/sh) 33.4 46.7 51.8 60.8 71.7 DPS (Rs/sh) 4.5 7.5 8.0 9.0 10.0 BV (Rs/sh) 115.2 147.9 173.1 205.2 246.3 VALUATION P/E 45.7 26.6 23.8 19.3 15.6 P/BV 7.2 5.6 4.8 4.0 3.4 EV/EBITDA 20.0 14.3 13.2 11.0 8.9 OCF/EV (%) 3.0 4.9 4.7 7.5 9.2 FCF/EV (%) 3.3 1.3 2.7 5.5 7.0 FCFE/mkt cap (%) 2.4 1.4 1.3 3.7 5.2 Dividend Yield (%) 0.5 0.9 1.0 1.1 1.2 Page 7
RECOMMENDATION HISTORY Bharat Forge 1,500 1,400 1,300 1,200 1,100 TP Date CMP Reco Target 21Jul15 1,112 BUY 1,306 3Aug15 1,165 BUY 1,310 9Oct15 931 BUY 1,153 29Oct15 814 BUY 1,056 9Dec15 828 BUY 1,056 1,000 900 800 700 Dec14 Jan15 Feb15 Mar15 Apr15 May15 Jun15 Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver ()10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than ()10% returns over the next 12 month period Page 8
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