Growth on all fronts; Accumulate November 08, 2017 Saksham Kaushal sakshamkaushal@plindia.com +91 22 66322235 Poorvi Banka poorvibanka@plindia.com +91 22 66322426 Rating Accumulate Price Rs728 Target Price Rs784 Implied Upside 7.7% Sensex 33,219 Nifty 10,303 (Prices as on November 08, 2017) Trading data Market Cap. (Rs bn) 169.6 Shares o/s (m) 232.8 3M Avg. Daily value (Rs m) 1111.9 Major shareholders Promoters 45.85% Foreign 20.58% Domestic Inst. 12.51% Public & Other 21.06% Stock Performance (%) 1M 6M 12M Absolute 12.5 32.4 71.3 Relative 8.1 21.4 50.9 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2019 22.4 24.0 (6.7) 2020 28.5 26.0 9.6 Price Performance (RIC: BFRG.BO, BB: BHFC IN) (Rs) 800 700 600 500 400 300 200 100 0 Nov 16 Jan 17 Mar 17 Source: Bloomberg May 17 Jul 17 Sep 17 Nov 17 Bharat Forge (BHFC) delivered a good performance in Q2FY18 registering strong growth across segments as well as geographies. Overall revenue growth for the quarter was at 41% YoY to Rs12.6bn, which was on expected lines. Growth in revenues was on the back of 27% YoY increase in sales tonnage and 16% improvement in per ton realisations. Operating performance too was strong with EBITDA margins expanding 160bps YoY as well as sequentially to 29.4% (PLe:29%) and EBITDA growth at ~49% YoY to Rs3.7bn. While both the automotive as well as the industrial segment for the company saw strong growth during the quarter, the industrial segment grew higher at ~79% YoY whereas the automotive segment revenues rose 26% YoY. As for the geographical mix, domestic revenues grew ~26% YoY while exports surged ~56% YoY, forming ~57% of total net sales in Q2FY18 (against 52% in Q2FY17). Wholly owned subsidiaries sustained the decent operating performance witnessed since Q4FY16. With revival in the overseas industrial segment, medium term and long term outlook for BHFC remains healthy and its strategy for Aerospace, Defence and Auto transmission parts provides further reason for optimism. North American truck demand too has recovered and has been seeing strong growth over the past few months while production volumes are expected to further improve by CY18. The company s expansion in the PV segment too would aid revenue growth ahead. On the domestic front, BS IV roll out related disruptions behind, increased government focus on infrastructure, strict overloading restrictions and better freight availability would auger well for the CV industry over the medium term. Further, the company has also said that it is seeing strong traction in the domestic industrial segment. We maintain Accumulate with a price target of Rs784, based upon 31x Sep 19 EPS. At the current market price, the stock is trading at 41x FY18E & 32x FY19E Standalone EPS. Key financials (Y/e March) 2017 2018E 2019E 2020E Revenues (Rs m) 63,961 74,317 85,516 98,756 Growth (%) (6.1) 16.2 15.1 15.5 EBITDA (Rs m) 12,511 15,406 18,433 22,237 PAT (Rs m) 6,138 7,894 10,420 13,268 EPS (Rs) 26.4 17.0 22.4 28.5 Growth (%) (6.5) (35.7) 32.0 27.3 Net DPS (Rs) 7.5 10.0 10.0 10.0 Profitability & Valuation 2017 2018E 2019E 2020E EBITDA margin (%) 19.6 20.7 21.6 22.5 RoE (%) 16.3 18.6 22.5 25.2 RoCE (%) 10.5 13.1 16.5 19.8 EV / sales (x) 3.0 4.8 4.2 3.6 EV / EBITDA (x) 15.1 23.0 19.3 15.9 PE (x) 27.6 43.0 32.5 25.6 P / BV (x) 4.1 7.7 7.0 6.0 Net dividend yield (%) 1.0 1.4 1.4 1.4 Source: Company Data; PL Research Q2FY18 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
BHFC s Q2FY18 revenues were higher a strong 41% YoY (on lower base) to Rs12.6bn (in line with PLe). Shipment tonnage was up 27% YoY and realisations were higher 11.3% YoY. In the geographical mix, domestic sales were up 25.6% YoY and 5% QoQ, while exports were up a strong 56% YoY and 5% QoQ. In the sales mix, exports constituted 57.1% of net revenues, which was an impressive improvement YoY (Q2FY17 exports as % of sales were at 51.8%) while sequentially, it was stable. The company has attributed the growth in exports to recovery in the North American industrial segment, continuously improving US class 8 truck orders and the company s expansion in the PV segment in key export markets. For the quarter, sales in North America were up a strong 97.4% YoY (~38% of sales v/s 27% in Q2FY17 and 36% in Q1FY18), while sales in Europe were higher 8% YoY (~15% of sales v/s 20% in Q2FY17 and 16% in Q1FY18). India sales contributed ~44% to Q2 18 revenues. While both the automotive as well as industrial segments saw strong growth, overall industrial segment growth for Q2 was higher at ~79% YoY (Automotive segment growth at ~26% YoY). The growth in the industrial segment was on the back of growing demand for construction equipment, sustained recovery in NA shale gas and recovery in the mining segment. EBITDA margin stood at 29.4%, higher 160bps YoY as well as QoQ (PLe: 29%), as EBITDA grew 49% YoY (up 11% QoQ) to Rs3.7bn. The improvement in margins was mainly on account of improved product mix, enhanced productivity and favourable forex realisation. Gross margins were lower 60bps YoY (stable QoQ). Staff costs as a % of sales were lower 160bps YoY (down 40bps QoQ) and other expenses as a % of sales too were lower 50bps YoY (lower 120bps QoQ). Q2FY18 Net profit for BHFC grew a robust 60.5% YoY to Rs2.03bn (on expected lines). The company has mentioned that with BS IV emission norms and GST related disruptions somewhat behind, the domestic automotive segment is seeing improved traction and BHFC s M&HCV segment for the quarter surged 65% after a tepid Q1. The domestic passenger vehicle segment has also done well and the company has gained market share in the segment. As for the overseas automotive division, the company s NA class 8 truck segment has registered decent growth YoY as well as sequentially and the company expects this growth to continue in H2FY18 too. BHFC s overseas subsidiaries have reported decent performance, with revenue growth of ~25% YoY and EBITDA margin at 7.7% (lower 100bps YoY but up 30bps QoQ). November 08, 2017 2
Conference call highlights The company has secured new orders worth Rs40mn in the domestic segment and Rs60mn for the export market. The NA Oil and gas segment revenues for the quarter were marginally above Q1FY18 levels (Q1 revenues were at ~Rs1.6bn) and the company continue to see strong demand in the segment. The company has gained market share in the domestic CV segment in H1FY18. The company had taken a price hike of ~Rs1,500/unit in the quarter and another price increase is expected to come in Q3FY18 to pass on the commodity price rise. BHFC got a second order for Aerospace in the quarter. However, the company has said that its announced target of attaining USD100mn of revenues by 2020 from this segment seems difficult. BHFC is currently operating at ~75% of forging capacity and 80% machining capacity. The company is hence looking at debottlenecking and cycle time reduction. Capex guidance for the same is ~Rs3 3.5bn, most of which is to be spent over FY18. The company is also looking at a Greenfield plant in Andhra Pradesh to cater to the need for light weighing solutions and the EV segment. Initial capex for the same is at Rs2bn to be spent over 3 years. The plant is planned to be commissioned in FY19. BHFC has fairly strong customer traction for the plant already. November 08, 2017 3
Exhibit 1: Q2FY18 Result Overview (Rs m) Y/e March Q2FY18 Q2FY17 YoY gr. (%) Q1FY18 H1FY18 H1FY17 YoY gr. (%) Net Revenues 12,580 8,909 41.2 12,008 24,588 17,953 37.0 Raw Materials 4,409 3,068 43.7 4,208 8,617 6,176 39.5 % of Net Sales 35.0 34.4 35.0 35.0 34.4 Personnel 1,071 904 18.4 1,064 2,135 1,820 17.3 % of Net Sales 8.5 10.1 8.9 8.7 10.1 Manufacturing & Other Exp 3,406 2,460 38.5 3,403 6,809 5,036 35.2 % of Net Sales 27.1 27.6 28.3 27.7 28.1 Total Expenditure 8,886 6,432 38.1 8,675 17,561 13,032 34.7 EBITDA 3,694 2,477 49.2 3,333 7,028 4,921 42.8 EBITDA Margin (%) 29.4 27.8 27.8 28.6 27.4 Depreciation 781 726 7.6 774 1,555 1,466 6.1 EBIT 2,913 1,751 66.4 2,559 5,473 3,455 58.4 Interest Expenses 217 189 14.4 185 402 360 11.8 Non operating income 366 309 18.4 259 625 566 10.6 PBT 3,063 1,870 63.7 2,633 5,696 4,041 40.9 Tax Total 1,026 601 70.5 882 1,908 1,172 62.8 Tax Rate (%) Total 33.5 32.2 33.5 33.5 29.0 Reported PAT 2,037 1,269 60.5 1,751 3,788 2,870 32.0 Adj. PAT 2,037 1,269 60.5 1,751 3,788 2,604 45.5 Source: Company Data, PL Research November 08, 2017 4
Exhibit 2: Operating Metrics Y/e March Q2FY18 Q2FY17 YoY gr. (%) Q1FY18 H1FY18 H1FY17 YoY gr. (%) Volume (MT) 58,659 46,203 27.0 55,100 113,759 95,301 19.4 Realisation / ton (Rs) 219,000 188,793 16.0 213,180 216,143 188,383 14.7 Gross Profit / ton (Rs) 139,297 126,414 10.2 141,568 140,397 123,579 13.6 Staff Cost / ton (Rs) 18,250 19,570 (6.7) 19,314 18,765 19,097 (1.7) Other Mfg cost / ton (Rs) 58,070 53,239 9.1 61,757 59,855 52,847 13.3 EBITDA / ton (Rs) 62,978 53,605 17.5 60,497 61,776 51,634 19.6 Adj. Profit / ton (Rs) 34,726 27,464 26.4 31,780 33,299 27,319 21.9 Domestic / Export Mix Domestic sales 5,285 4,208 25.6 5,032 10,317 9,017 14.4 % of gross sales 42.9 48.2 42.8 22.0 22.6 Exports 7,039 4,515 55.9 6,714 13,753 8,594 60.0 % of gross sales 57.1 51.8 57.2 29.4 21.6 Source: Company Data, PL Research November 08, 2017 5
Income Statement (Rs m) Net Revenue 63,961 74,317 85,516 98,756 Raw Material Expenses 24,358 28,575 32,832 37,794 Gross Profit 39,604 45,742 52,684 60,962 Employee Cost 9,309 10,428 11,565 12,805 Other Expenses 17,784 19,908 22,686 25,920 EBITDA 12,511 15,406 18,433 22,237 Depr. & Amortization 4,521 4,747 4,865 4,987 Net Interest 1,000 902 545 492 Other Income 2,477 1,275 1,364 1,459 Profit before Tax 9,468 11,032 14,387 18,216 Total Tax 2,492 3,199 4,028 5,009 Profit after Tax 6,976 7,833 10,359 13,207 Ex Od items / Min. Int. 838 (61) (61) (61) Adj. PAT 6,138 7,894 10,420 13,268 Avg. Shares O/S (m) 232.8 465.7 465.7 465.7 EPS (Rs.) 26.4 17.0 22.4 28.5 Cash Flow Abstract (Rs m) C/F from Operations 15,506 9,906 11,992 14,399 C/F from Investing (10,343) 32 (6,000) (6,000) C/F from Financing (7,165) (8,974) (9,081) (9,029) Inc. / Dec. in Cash (2,001) 965 (3,090) (630) Opening Cash 4,493 3,361 4,325 1,236 Closing Cash 2,492 4,325 1,236 606 FCFF 6,921 4,440 6,384 8,843 FCFE 700 1,440 3,384 5,843 Key Financial Metrics Growth Revenue (%) (6.1) 16.2 15.1 15.5 EBITDA (%) (11.2) 23.1 19.6 20.6 PAT (%) (6.5) 28.6 32.0 27.3 EPS (%) (6.5) (35.7) 32.0 27.3 Profitability EBITDA Margin (%) 19.6 20.7 21.6 22.5 PAT Margin (%) 9.6 10.6 12.2 13.4 RoCE (%) 10.5 13.1 16.5 19.8 RoE (%) 16.3 18.6 22.5 25.2 Balance Sheet Net Debt : Equity 0.5 0.4 0.3 0.2 Net Wrkng Cap. (days) 97 97 97 98 Valuation PER (x) 27.6 43.0 32.5 25.6 P / B (x) 4.1 7.7 7.0 6.0 EV / EBITDA (x) 15.1 23.0 19.3 15.9 EV / Sales (x) 3.0 4.8 4.2 3.6 Earnings Quality Eff. Tax Rate 26.3 29.0 28.0 27.5 Other Inc / PBT 14.6 11.6 9.5 8.0 Eff. Depr. Rate (%) 6.3 6.2 6.0 5.8 FCFE / PAT 11.4 18.2 32.5 44.0 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 41,164 43,925 48,747 56,417 Total Debt 23,213 20,213 17,213 14,213 Other Liabilities 2,568 2,693 2,818 2,943 Total Liabilities 66,944 66,831 68,778 73,573 Net Fixed Assets 36,878 32,100 32,235 32,248 Goodwill 424 424 424 424 Investments 11,916 11,916 12,916 13,916 Net Current Assets 17,726 22,391 23,203 26,985 Cash & Equivalents 3,361 4,325 1,236 606 Other Current Assets 35,511 41,435 47,670 54,689 Current Liabilities 21,145 23,370 25,702 28,310 Other Assets Total Assets 66,944 66,831 68,778 73,573 Quarterly Financials (Rs m) Y/e March Q3FY17 Q4FY17 Q1FY18 Q2FY18 Net Revenue 9,437 11,257 12,008 12,580 EBITDA 2,606 3,200 3,333 3,694 % of revenue 27.6 28.4 27.8 29.4 Depr. & Amortization 739 744 774 781 Net Interest 183 185 185 217 Other Income 208 222 259 366 Profit before Tax 1,892 2,492 2,633 3,063 Total Tax 606 797 882 1,026 Profit after Tax 1,286 2,075 1,751 2,037 Adj. PAT 1,286 1,820 1,751 2,037 Key Operating Metrics Standalone Sales tonnage (MT) 186,184 210,356 240,971 276,383 Standalone Realisation / ton (Rs) 207,573 217,845 227,400 237,411 Standalone Gross margin / ton (Rs) 136,646 141,599 147,242 153,723 Standalone EBITDA / ton (Rs) 57,609.6 62,405.4 66,346.4 69,921.1 Standalone Adjusted profit / ton (Rs) 29,366 39,037 43,952 47,064 Source: Company Data, PL Research. November 08, 2017 6
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