[ Result Update Equity India Forging & Industrials Bharat Forge Ltd. No Respite in Sight May 29, 2013 CMP (`) Target (`) 241 238 Potential Upside Absolute Rating (1.24)% HOLD Market Info (as on May 28, 2013) BSE Sensex 20,160 Nifty S&P 6,111 Stock Detail BSE Group A BSE Code 500493 NSE Code BHARATFORGE Bloomberg Code BHFC IN Market Cap (`bn) 56.13 Free Float (%) 60% 52wk Hi/Lo 322 / 196 Avg. Daily Volume (NSE) 328044 Face Value / Div. per share (`) 2.00 / 2.40 Shares Outstanding (mn) 232.7 Shareholding Pattern (in %) Promoters FIIs DII Others 42.05 9.44 18.95 29.56 Financial Snapshot (`mn) Y/E Mar FY11 FY12 FY13E FY14E Net Sales 28,434 35,766 30,892 33,507 EBITDA 6,119 8,075 6,535 7,533 PAT 3,108 3,621 3,056 3,821 EPS 13.3 15.5 12.8 16.0 ROE (%) 17.6 17.5 13.0 14.2 ROCE (%) 11.8 15.6 10.6 12.7 P/E 21.1 18.1 22.1 17.7 EV/EBITDA 12.9 9.6 11.3 9.2 Share Price Performance 130 120 110 100 90 80 70 Q4FY13 Result Highlights On Standalone basis, Bharat Forge reported 31% drop in revenues in Q4FY13 to `6,603 mn vs `9,558 mn in Q4FY12. This drop was due to continuing deceleration in exports (-32% y-o-y) in addition to decline in domestic revenue (-29% y-o-y). The demand drop is attributed to shrinking customer demand across the segment coupled with continuing slowdown in domestic market mostly in CVs and lower non auto business. Even volumes for Q4FY13 were lower by 35% y-o-y to 37,119 tons vs 57,242 tons, however surprisingly realization improved by 7% y-o-y to `177,874 per ton. Even non-auto segment continued to remain sluggish. With continuation of revenue decline, its effect was keenly visible on EBITDA margins, as it was down by 460bps y-o-y to 21% due to lower capacity utilization which was a result of subdued demand. With interest cost declining marginally by 3% y-o-y to `334 mn the reported net profit stood at `501 mn, down by 9% y-o-y. The decline in net profit was not significant as compared to revenue and EBITDA is due to lower outgo of tax in Q4FY13 y-o-y (33% as compared to 49% in Q4FY12). Foreign subsidiaries continue to disappoint due to continued severe downturn in the Heavy Truck and Passenger Vehicles market in China and decline in demand in Europe. Revenue for Q4FY13 decreased by 6.5% y-o-y to `6,648 mn, however, EBITDA margin witnessed an improvement despite challenging environment. For Q4FY13, EBITDA margin stood at 7.9% vs 5.9% in Q3FY12 due to cost rationalisation initiatives and productivity improvements followed by PBT of `144 mn as compared to loss of `277 mn in Q3FY13. However on y-o-y basis PBT for Q4FY13 stood at 115% higher. Valuation This overhang is expected to remain in near future due to weakness in the domestic market and Subdued market conditions in China and Europe. We have lowered our revenue estimates and growth for FY13 and FY14, further we have also lowered the utilization rate from 67% to 60% in FY13 and from 72% to 65% in FY14. We maintain the rating of the stock to HOLD with a target price of `238 per share. Quarterly Result Snapshot Y/E Mar ` mn Q3FY13 Q3FY12 Y-o-Y Chg Q2FY13 Q-o-Q Chg Net Sales 6,604.90 9,206.30 (28.3)% 8,521.90 (22.5)% EBITDA 1,302.90 2,185.70 (40.4)% 1,789.70 (27.2)% PAT 475.20 1,031.30 (53.9)% 1,027.80 (53.8)% EPS 2.04 4.43 (53.9)% 4.41 (53.8)% Margin Profile Y-o-Y Chg Q-o-Q Chg EBITDA Margin % 19.73% 23.74% (401)bps 21.00% (121)bps PAT Margin % 7.19% 11.20% (401)bps 12.06% (487)bps 60 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Bharat Forge BSE SENSEX Rel. Perf. 1Mth 3 Mths 6Mths 1Yr Bharat F (%) (4.9) 3.3 (11.1) (26.8) SENSEX (%) 1.5 1.9 6.3 21.5 Analyst Gaurav Oza +91-22- 6614 2696 gaurav@geplcapital.com Institutional Research 1
Quarterly Financial table (` mn) Q4FY13 Q4FY12 Y-o-Y FY13 FY12 Y-o-Y Gross Income Domestic Sales 3,862.90 5,441.10 (29)% 16,622.70 20,208.50 (18)% Exports 3,112.30 4,575.50 (32)% 15,866.30 17,347.10 (9)% Total Gross Sales 6,975.20 10,016.60 (30)% 32,489.00 37,555.60 (13)% Less: Excise Duty 372.70 459.00 (19)% 1,597.20 1,683.20 (5)% Net Sales 6,602.50 9,557.60 (31)% 30,891.80 35,872.40 (14)% Other Operating Income 144.30 213.90 (33)% 620.50 987.40 (37)% Total Net Sales 6,746.80 9,771.50 (31)% 31,512.30 36,859.80 (15)% Operating expenses: Raw Material Consumed 2,918.30 4,237.20 (31)% 13,430.90 16,496.20 (19)% (Inc)/Dec in stock in trade (79.90) 6.10 141.50 (162.10) Employee costs 612.60 635.30 (4)% 2,573.90 2,549.60 1% Manufacturing Exp 1,285.70 1,752.80 (27)% 5,952.50 6,448.40 (8)% Selling & Other expenses 592.20 641.10 (8)% 2,257.80 2,374.70 (5)% Total operating expenses 5,328.90 7,272.50 (27)% 24,356.60 27,706.80 (12)% Operating income 1,417.90 2,499.00 (43)% 7,155.70 9,153.00 (22)% Other Income 205.20 155.20 32% 916.30 675.70 36% PBIDT 1,623.10 2,654.20 (39)% 8,072.00 9,828.70 (18)% Interest 333.60 344.30 (3)% 1,533.60 1,504.60 2% PBDT 1,289.50 2,309.90 (44)% 6,538.40 8,324.10 (21)% Depreciation 545.40 535.10 2% 2,239.40 2,149.30 4% PBT 744.10 1,774.80 (58)% 4,299.00 6,174.80 (30)% Exceptional Item - (704.20) 105.70 (704.20) PBT after exceptional Items 744.10 1,070.60 (30)% 4,404.70 5,470.60 (19)% Provision for Taxes 243.30 519.40 (53)% 1,348.80 1,849.90 (27)% PAT 500.80 551.20 (9)% 3,055.90 3,620.70 (16)% EO - - - - Reported PAT 500.80 551.20 (9)% 3,055.90 3,620.70 (16)% Margins OPMs 21.0% 25.6% 22.7% 24.8% PBIDTM 24.1% 27.2% 25.6% 26.7% PBT 11.0% 18.2% 13.6% 16.8% PAT 7.4% 5.6% 9.7% 9.8% Tax Rate 32.7% 48.5% 30.6% 33.8% EPS 2.2 2.4 13.1 15.5 Reported EPS 2.2 2.4 13.1 15.5 CEPS 4.5 4.7 22.7 24.8 No of shares issued 232.85 232.85 232.85 232.85 Institutional Research Q4FY13 Result Update 2
Particulars Q4FY13 % of Total Q4FY12 % of Total Growth % India 3,634 54% 5,196 53% (30)% America 1,612 24% 2,356 24% (32)% Europe 1,316 20% 1,717 18% (23)% Asia Pacific 184 3% 503 5% (63)% Total 6,746 9,772 (31)% Particulars FY13 % of Total FY12 % of Total Growth % India 15,645 50% 19,513 53% (20)% America 8,933 28% 8,098 22% 10% Europe 5,862 19% 7,766 21% (25)% Asia Pacific 1,072 3% 1,483 4% (28)% Total 31,512 36,860 (15)% Weakness may continue in FY14 Improvement in macroeconomic scenario by rate cuts through the year would likely only set the stage for FY15. With the management indicating that inventory adjustment process is still underway at OEMs across geographies, we expect conditions to remain difficult in FY14. New customer additions BFL recently won a global passenger vehicle original equipment manufacturer (OEM) order for supply to its new platform. Also, BFL has witnessed new orders in the nonautomotive segments (oil and gas, construction and railway). The revenues from the new orders are likely to commence from 2015. Going ahead, BFL plans to focus on high technology products to drive growth Institutional Research Q4FY13 Result Update 3
Outlook: Still bleak Management has given clear indications that coming two quarters might see further decline in volumes from both export as well as domestic front as majority of BFL s clientele will take the required necessary corrective measures of clearing off its inventory. This might impact its revenue growth and EBITDA margin. This makes us believe that the there would be more than expected time required to find light at the end of the tunnel. Valuation This overhang is expected to remain in near future due to weakness in the domestic market and Subdued market conditions in China and Europe. We have lowered our revenue estimates and growth for FY13 and FY14, further we have also lowered the utilization rate from 67% to 60% in FY13 and from 72% to 65% in FY14. We maintain the rating of the stock to HOLD with a target price of `238 per share. SOTP Valuation BFL's Investment (in ` Mn) FY14 EPS Assigned P/E Multiple (x) Value Per Share BFL standalone - 15.96 14 223 BFL Alstom JV 3,500 15 Total Target Price (`) 238 Institutional Research Q4FY13 Result Update 4
Income Statement Y/E Dec (`mn) FY10(A) FY11(A) FY12(A) FY13(UA) FY14(E) Total net revenues 18,045 28,434 35,766 30,892 33,507 COGS 11,385 18,161 22,732 21,783 21,288 Gross Profit 6,660 10,272 13,034 9,109 12,219 Employee Cost 1,436 2,105 2,543 2,574 2,639 Selling & Admin Exp. 1,588 2,049 2,417 0 2,047 EBITDA 3,637 6,119 8,075 6,535 7,533 EBITDA Margin (%) 20.2 21.5 22.6 21.2 22.5 Depreciation 1,644 1,933 2,149 2,239 2,227 Other Income 842 1,502 1,754 1,537 1,508 Interest (Net) 1,028 1,214 1,505 1,534 1,110 Exceptional Items - - (704.16) 105.70 - PBT 1,807 4,474 5,471 4,405 5,703 PBT Margin (%) 10.0 15.7 15.3 14.3 17.0 Tax 537 1,365 1,850 1,349 1,882 Adjusted PAT 1,270 3,108 3,621 3,056 3,821 Extraordinary Items - - - - - Reported PAT 1,270 3,108 3,621 3,056 3,821 Key Ratio Y/E Dec (`mn) FY10(A) FY11(A) FY12(A) FY13(E) FY14(E) Per Share Ratios Fully diluted E P S 5.7 13.3 15.5 12.8 16.0 Book Value 68.6 85.7 92.0 106.2 118.7 Dividend per share 1.0 3.5 4.0 3.0 3.0 per share FCFO 4.2 (0.3) 6.5 16.8 24.0 Valuation Ratio P/E 49.4 21.1 18.1 22.1 17.7 P/BV 4.1 3.3 3.1 2.7 2.4 EV/EBITDA 21.0 12.9 9.6 11.3 9.2 EV/Sales 4.2 2.8 2.2 2.4 2.1 Growth Ratios Sales Growth (8.7) 57.6 25.8 (13.6) 8.5 EBITDA Growth 31.3 68.3 32.0 (19.1) 15.3 Net Profit Growth 23.0 144.7 16.5 (15.6) 25.0 EPS Growth 23.0 134.0 16.5 (17.9) 25.0 Common size Ratios Gross Margin 36.9 36.1 36.4 29.5 36.5 EBITDA Margin 20.2 21.5 22.6 21.2 22.5 PAT Margin 7.0 10.9 10.1 9.9 11.4 Employee Cost 8.0 7.4 7.1 8.3 7.9 S&G Expenses 8.8 7.2 6.8 0.0 6.1 Return ratios RoNW 8.4 17.6 17.5 13.0 14.2 RoCE 5.7 11.8 15.6 10.6 12.7 Turnover ratios (days) Debtors ( Days) 62.1 53.9 50.1 48.0 46.0 Creditors ( Days) 178.1 113.0 159.1 149.0 139.0 Inventory (Days) 126.6 94.1 80.8 75.0 69.0 Solvency Ratios Total Debt/Equity 1.2 0.7 0.8 0.6 0.4 Interest coverage 1.9 3.4 3.9 2.8 4.8 Balance Sheet Y/E Dec (`mn) FY10(A) FY11(A) FY12(A) FY13(E) FY14(E) Equity capital 445 466 466 479 479 Reserves & Surplus 14,827 19,488 20,965 24,937 27,933 Net worth 15,272 19,954 21,431 25,416 28,411 FCM Transaction 12 - - - - Deferred tax liability 1,065 1,556 1,272 1,272 1,272 Total debt 18,528 14,734 16,852 15,184 11,874 Total Liabilities & Equity 34,877 36,244 39,555 41,871 41,556 Net block 17,761 17,633 17,962 16,723 14,995 Capital WIP 1,385 1,611 2,891 2,891 2,891 Total fixed assets 19,146 19,244 20,853 19,613 17,886 Investments 7,209 9,198 8,848 8,848 8,848 Other Fixed Assets - - 788.05 788.05 788.05 Current Assets 18,116 18,867 22,793 24,220 25,581 Inventories 3,948 4,684 5,031 4,476 4,024 Debtors 3,072 4,197 4,912 4,062 4,223 Cash & bank 4,935 1,466 5,386 8,656 10,265 Loans & advances 5,584 7,525 6,670 6,348 6,334 Other Current Assets 578 995 793 677 734 Current Liab. & Prov. 9,595 11,065 13,727 11,598 11,547 Creditors 7,032 6,908 12,072 9,943 9,892 Provisions 2,563 4,157 1,655 1,655 1,655 Net Working capital 8,521 7,802 9,066 12,622 14,034 Total Assets 34,877 36,244 39,555 41,871 41,556 Cash Flow Y/E Dec (`mn) FY10(A) FY11(A) FY12(A) FY13(E) FY14(E) PBT 1,807 4,476 5,471 4,405 5,703 Add: Depreciation 1,644 1,933 2,149 2,239 2,227 Other Adjustments 945 1,283 2,128 0 0 Change in working capital 1,603 (3,446) (603) (286) 196 Taxes paid (416) (531) (1,708) (1,349) (1,882) Extra Ordinary Items (253) (304) (468) 0 0 CF from operations 5,331 3,410 6,969 5,009 6,244 Change in fixed assets (1,164) (2,025) (4,259) (1,000) (500) Investment in Subsidiaries (1,059) (805) (103) 0 0 Change in investments (2,298) 329 (1,606) 0 0 Other Adjustments 130 (989) 506 0 0 CF from investing acti. (4,391) (3,491) (5,462) (1,000) (500) Change in debt 1,711 (3,800) 4,176 (1,669) (3,310) Change in Equity capital 0 2,775 0 1,755 0 Changes in Pref. capital 0 0 0 0 0 Dividend & dividend tax (261) (272) (1,343) (826) (826) Interest paid (1,095) (1,139) (1,308) 0 0 Other Adjustments (27) (97) 34 0 0 CF from financing acti. 328 (2,533) 1,559 (739) (4,136) Change in cash 1,268 (2,615) 3,066 3,270 1,609 Opening cash 3,667 4,935 2,320 5,386 8,656 Closing cash 4,935 2,320 5,386 8,656 10,265 Du-Pont Analysis (%) FY10(A) FY11(A) FY12(A) FY13(E) FY14(E) Net Profit Margin 7.0 10.9 10.1 9.9 11.4 Asset Turnover 0.5 0.8 0.9 0.7 0.8 Leverage 2.3 1.8 1.8 1.6 1.5 ROE 8.4 17.6 17.5 13.0 14.2 Institutional Research Q4FY13 Result Update 5
NOTES GEPL CAPITAL Pvt Ltd Reg Office: D-21 Dhanraj mahal, CSM Marg, Colaba, Mumbai 400001 Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Name : Gaurav Oza Sector : Forging & Industrials Disclaimer: This report has been prepared by GEPL Capital Private Limited ("GEPL Capital "). GEPL Capital is regulated by the Securities and Exchange Board of India. This report does not constitute a prospectus, offering circular or offering memorandum and is not an offer or invitation to buy or sell any securities, nor shall part, or all, of this presentation form the basis of, or be relied on in connection with, any contract or investment decision in relation to any securities. This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a representation that any investment strategy, recommendation or any other content contained herein is suitable or appropriate to a recipient s individual circumstances or otherwise constitutes a personal recommendation. All investments involve risks and investors should exercise prudence in making their investment decisions. The report should not be regarded by the recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of GEPL Capital as a result of using different assumptions and criteria. GEPL Capital is under no obligation to update or keep current the information contained herein. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other instruments. There is no representation that any transaction can or could have been effected at those prices and any prices do not necessarily reflect GEPL Capital s internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions, by GEPL Capital or any other source may yield substantially different results. GEPL Capital makes no representation or warranty, express or implied, as to, and does not accept any responsibility or liability with respect to, the fairness, accuracy, completeness or correctness of any information or opinions contained herein. Further, GEPL Capital assumes no responsibility to publicly amend, modify or revise any forward-looking statements, on the basis of any subsequent development, information or events, or otherwise. Neither GEPL Capital nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. In no event shall GEPL capital be liable for any direct, special indirect or consequential damages, or any other damages of any kind, including but not limited to loss of use, loss of profits, or loss of data, whether in an action in contract, tort (including but not limited to negligence), or otherwise, arising out of or in any way connected with the use of this report or the materials contained in, or accessed through, this report. GEPL Capital and its affiliates and/or their officers, directors and employees may have similar or an opposite positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). The disclosures contained in the reports produced by GEPL Capital shall be strictly governed by and construed in accordance with Indian law. GEPL Capital specifically prohibits the redistribution of this material in whole or in part without the written permission of GEPL Capital and GEPL Capital accepts no liability whatsoever for the actions of third parties in this regard. Institutional Research Q4FY13 Result Update 6