COMPANY UPDATE RETAIL EQUITY RESEARCH Bharat Forge Ltd Automobile Auto Ancillaries BSE CODE:500493 NSE CODE: BHARATFORG Bloomberg CODE: BHFC:IN SENSEX: 36,077 Buy Rating as per Large cap 12months investment period CMP Rs.507 TARGET Rs.579 RETURN 14% 28 th December, 2018 Strong 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. BFL s new valued added order s received on aluminum forging is on track from the new AP plant. Further implementation of BS-6 emission norms will witness an increase in content for domestic trucks and cars. Q2FY19 standalone revenue grew by 34%YoY due to 19%YoY growth in the tonnage volume and superior product mix. Both Export & domestic revenue grew by 32%YoY & 34%YoY due to strong US truck & domestic CV sales and double digit growth in key verticals. Despite a sharp increase in input cost, EBITDA margin (-200bps) stood at 28.3% in line with the guidelines, as operating leverage benefits kicked in. We remain upbeat on the stock considering strong export & 15% from the new products development. We expect 15% revenue CAGR over FY18-20E and value BFL at 22x on FY20E EPS with a revised target price of Rs579. Healthy demand for export and domestic CV BFL s Q2FY19 revenue grew by robust 34%YoY, largely due to better traction from the US class 8 heavy truck segments trading at all time high and strong domestic sales. Export and domestic sales grew by 32% & 34%YoY. The overall volume rose by 20%YoY to 68,815 tonnes during the quarter. BFL s average realization per tonnes rose by 25%YoY due to superior product mix and geographical mix. The industrial segment recorded highest quarterly revenues driven by commencement of supplies catering to defense sector and continued growth in the Agri- segment. EBITDA grew by 24.6%YoY and Adj. PAT grew lower by 25%YoY due to foreign exchange fluctuation Newer initiatives to spur long term growth We believe domestic CV business to remain robust on the back of a) BS-6 emission norm change to be effective from 1st April 2020 b) Scrap page policy c) Pick up in the infrastructure development. With surging US economy and increased freight demand in Europe, the US Class 8 market and European truck market is expected to stay robust. We expect the incremental revenue from new business/products to grow from current 5% of sales to 15% in next 2-3 years. Although, the elevated diesel price and increase in funding cost coupled with the recent revision in axle load norms may impact sentiment in short term. We expect BFL to register 15% revenue CAGR over FY18-20E Green Field Expansion Preparing for future Given its robust business outlook, BFL has undertaken an expansion plan of its forging and machinery capacity at Baramati by investing Rs400cr. The management expects its green field expansion of aluminium forging for light weighting technology (LWT) in AP to be fully operational by 1QFY20. As part of its focus on enhancing its presence in the LWT globally, BFL has planned to set up Aluminium forging facility in Tennessee, USA at a cost of $55mn fully focused on new generation vehicle. The current utilization stands at 85%. Valuations We expect the earning to grow by 20% CAGR over FY18-20E on the back of robust growth outlook for India and US economy. However we lower our PAT estimate by 12%/9% for FY19/FY20 respectively, due to lower contribution from overseas subsidiaries & higher tax than expected. We value BFL at 22x on FY20E EPS with a revised target price of Rs.579 and maintain our rating as Buy. Company Data Market Cap (cr) Enterprise Value (cr) Rs.23,605 Rs.26,317 Outstanding Shares (cr) 46.6 Free Float 54% Dividend Yield 0.7% 52 week high Rs.798 52 week low Rs.488 6m average volume (cr) 0.1 Beta 0.89 Face value Rs2 Shareholding % Q4FY18 Q1FY19 Q2FY19 Promoters 45.8 45.8 45.8 FII s 21.4 20.2 20.2 MFs/Insti 12.7 12.9 12.2 Public 20.1 21.1 21.8 Total 100.0 100.0 100.0 Price Performance 3mth 6mth 1 Year Absolute Return -10.0% -9.6% -18.2% Absolute Sensex -8.6% 0.9% 4.2% Relative Return -1.4% -10.6% -22.4% *over or under performance to benchmark index Consolidated (Rs.cr) FY18A FY19E FY20E Sales 8,358 9,806 10,998 Growth (%) 30.7 17.3 12.2 EBITDA 1,723 2,108 2,398 Margin (%) 20.6 21.5 22.3 Adj. PAT 849 991 1,225 Growth (%) 49.2 16.7 23.6 Adj. EPS 18.2 21.3 26.3 Growth (%) 49.2 16.7 23.6 P/E 27.8 23.8 19.3 P/B 5.0 4.3 3.7 EV/EBITDA 15.3 12.5 10.9 ROE (%) 19.3 20.8 22.3 D/E 0.7 0.5 0.4 Saji john Analyst
Quarterly Financials (Standalone) Profit & Loss Account (Rscr) Q2FY19 Q2FY18 YoY Growth % H1FY19 H1FY18 YoY Growth % Sales 1,679 1,258 33.5 3,159 2,459 28.5 EBITDA 475 381 24.6 904 715 26.5 EBITDA margins 28.3 30.3-200bps 28.6 29.1-50bps Depreciation 91 78 17.1 174 156 11.8 EBIT 384 303 26.6 730 559 30.6 Interest 32 22 48.0 57 40 42.7 Other Income 34 37-7.7 68 62 10.5 Exceptional Items -41 0 - -41 0 - PBT 345 306 12.5 700 569 23.1 Tax 117 103 14.3 238 191 24.7 Share of profit from Associate 0 0-0 0 - Reported PAT 227 204 11.7 462 378 22.3 Adjustments 41 0-41 0 - Adj PAT 268 216 24.5 503 390 29.1 No. of shares (cr) 46.6 46.6-46.6 46.6 - EPS (Rs) 5.8 4.6 24.5 10.8 8.4 29.1 Change in estimates Old estimates New estimates Change % Year / Rs cr FY19E FY20E FY19E FY20E FY19E FY20E Revenue 9,827 11,217 9,805 10,998 1.4-1.9 EBITDA 2,113 2,445 2,108 2,397 2.1-1.9 Margins (%) 21.5 21.8 21.5 21.8 - - Adj. PAT 1,125 1,346 991 1,225-11.9-8.9 EPS 24.2 28.9 21.3 26.3-11.9-8.9 Standalone Segment Revenue (Rscr) Q2FY19 Q2FY18 YoY Growth % Q1FY19 QoQ Growth % Segments Domestic 695 529 31.5 600 15.8 Export 943 704 34.0 844 11.7 Other operating income 41 26 57.6 35 17.1 Total Segmental Revenue (Gross) 1,679 1,258 33.5 1,480 10.8
Consolidated Financials Profit & Loss Account Sales 6,809 6,396 8,358 9,806 10,998 % change -10.7-6.1 30.7 17.3 12.2 EBITDA 1408 1251 1723 2108 2397 % change -2.3-11.2 37.7 22.4 13.7 Depreciation 453 452 467 508 549 EBIT 955 799 1256 1600 1848 Interest 140 100 107 119 119 Other Income 78 119 142 147 154 PBT 887 947 1196 1587 1884 % change -20.9 6.7 26.3 32.7 18.7 Tax 424 249 442 556 659 Tax Rate (%) 47.7 26.3 36.9 35.0 35.0 Reported PAT 467 698 754 991 1224 Adj -5 128-95 0 0 Adj PAT 472 569 849 991 1224 % change -34.8 20.6 49.2 16.7 23.6 No. of shares (mn) 23.3 23.3 46.6 46.6 46.6 Adj EPS (Rs) 10.1 12.2 18.2 21.3 26.3 % change -34.8 20.6 49.2 16.7 23.6 DPS (Rs) 6.9 3.6 5.4 5.3 5.3 Balance Sheet Cash 647 288 203 496 267 Accounts Receivable 1402 1342 1961 2310 2591 Inventories 997 1075 1360 1605 1807 Other Cur. Assets 472 514 583 645 723 Investments 289 1892 2027 2399 2994 Gross Fixed Assets 6919 7124 7809 8459 9109 Net Fixed Assets 3468 3221 3439 3581 3682 CWIP 566 400 344 338 364 Intangible Assets 29 109 60 0 0 Def. Tax (Net) -52-261 -215-199 -180 Other Assets 0 0 0 0 0 Total Assets 7818 8580 9762 11176 12249 Current Liabilities 550 1101 848 1056 1181 Provisions 166 185 195 269 301 Debt Funds 2518 2321 2711 2821 2571 Other Liabilities -4 0 0 0 0 Equity Capital 47 47 93 93 93 Reserves & Surplus 3704 4080 4588 5334 6314 Shareholder s Fund 3751 4126 4681 5427 6407 Total Liabilities 7818 8580 9762 11176 12249 BVPS (Rs) 80 86 99 117 138 Cash flow Net inc. + Depn. 1340 1399 1663 2096 2433 Non-cash adj. -296-326 -298-452 -560 Changes in W.C 2-21 -398-232 -293 C.F.O 1046 1052 967 1412 1580 Capital exp. -1079-645 -584-585 -676 Change in inv. 538-78 -269-275 -546 Other invest.cf 0 0 0 0 0 C.F - investing -833-684 -814-864 -1196 Issue of equity - - - - - Issue/repay debt 185-212 -4 110-250 Dividends paid -160-84 -252-245 -245 Other finance.cf -272-119 -101-119 -119 C.F - Financing -248-401 -314-254 -614 Chg. in cash -35-69 -69 293-229 Closing cash 647 288 203 496 267 Ratios Y.E March FY16A FY17A FY18A FY19E FY20E Profitab. & Return EBITDA margin (%) 20.7 19.6 20.6 21.5 21.8 EBIT margin (%) 14.0 12.5 15.0 16.3 16.8 Net profit mgn.(%) 6.9 8.9 10.2 10.1 11.1 ROE (%) 13.1 14.5 19.3 19.6 20.7 ROCE (%) 8.9 9.1 12.0 13.2 15.1 W.C & Liquidity Receivables (days) 60.4 78.3 72.1 79.5 81.3 Inventory (days) 54.4 59.1 53.2 55.2 56.6 Payables (days) 52.2 48.0 47.5 53.8 54.9 Current ratio (x) 5.0 3.0 4.4 4.3 4.1 Quick ratio (x) 3.7 1.5 2.6 2.7 2.4 Turnover &Levg. Gross asset T.O (x) 1.1 0.9 1.1 1.2 1.3 Total asset T.O (x) 0.9 0.8 0.9 0.9 0.9 Int. covge. ratio (x) 6.8 8.0 11.8 13.5 15.6 Adj. debt/equity (x) 0.8 0.8 0.7 0.5 0.4 Valuation ratios EV/Sales (x) 3.8 4.1 3.1 2.7 2.4 EV/EBITDA (x) 18.6 20.7 15.3 12.5 10.9 P/E (x) 50.0 41.5 27.8 23.8 19.3 P/BV (x) 3.1 2.9 5.0 4.3 3.7
Recommendation Summary (last 3 years) Dates Rating Target 6-Apr -15 Accumulate 740 22-Jan-16 Buy 487 26-May-16 Accumulate 415 9-August-16 Buy 480 11 November 16 Hold 468 9 th February 17 Hold 540 29 th May17 Buy 626 9 th November 17 Buy 792 26 th December 17 Buy 810 13 th March 18 Hold 789 29 th May 18 Buy 753 31 st August 18 Buy 751 28 th December 18 Buy 579 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0% - 10%. Reduce - Downside is more than 0%. Neutral - Not Applicable Mid Cap and Small Cap; Buy - Upside is above 15% Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable 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.NEUTRAL-The analyst has no investment opinion on the stock, under review 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. 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