Bharat Forge Ltd. Auto Ancillaries Date Jul 23, 2014 CMP (Rs.) 708 Target (Rs.) 828 Potential Upside 17% BSE Sensex 26026 NSE Nifty 7768 Scrip Code Bloomberg BHFC IN Reuters BFRG.BO BSE Group A BSE Code 500493 NSE Symbol BHARATFRG Market Data Market Cap.(Rs. Cr) 16713 Equity Sh. Cap. (Rs Cr) 46.6 52 Wk High/Low 721/185.6 Avg. Quarterly Volume 940000 Face Value (Rs.) 2 Shareholding Pattern (As on 30 th Jun 2014) FII 13.7 DII 16.9 Promoters 46.7 Public & Others 22.7 Total 100.0 Comparative Price Chart 350 300 250 200 150 100 50 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Bharat Forge Atul Karwa Research Analyst atulkarwa@systematixshares.com BSE Sensex Arun Gopalan VP Research & Investments arungopalan@systematixshares.com STOCK IDEA Rating: BUY Bharat Forge Ltd (BFL), is a global leader in metal formings having transcontinental presence across eight manufacturing locations, serving several sectors including automotive, power, oil & gas, construction & mining, locomotive, marine and aerospace. Part of the Kalyani Group, it s a $2.5 bn conglomerate with 10,000 global work force and manufacturing facilities spread across India, Germany and Sweden. BFL is consciously changing the structure of its business model from the traditional auto segment to industrials. This diversified business model of the company, coupled with the revival in key global markets, BFL appears to be geared for period of strong growth ahead. Recovery in the international CV cycle: The export markets both in North America & Europe had a strong end to CY13 with the Heavy Truck market in both geographies witnessing volume growth. Robustness in NA Heavy truck segment which is expected to continue driven by strong US economy & aging of the fleet. According to the management NA Heavy Truck market is expected to grow by 10-15% in CY14. Volumes in the European markets were driven by pre-buy in advance of new emission norms starting from January 2014. Although H1CY14 is expected to be sluggish sales in the 2 nd half are likely to improve. Diversifying revenue base to reduce impact of slowdown: Looking at the slowdown in economic environment and consequent contraction in CV sales, BFL decided to diversify its revenue stream and focus more on passenger vehicles and non-automotive business. Geographical diversification to US, Europe and Asia has also helped the company as all the three continents have had different CV cycles. BFL has now started producing components for oil & gas, mining, railways, marine and aerospace industries which are more complex than auto components and provide a higher margin. The company has indigenously developed a field artillery gun and is all set to significantly increase its presence in the defence sector. Share of non-automotive business in the consolidated revenues has grown from ~18% in FY08 to ~37% in FY14. Asset light strategy; Strengthening Balance Sheet: Over the last few years BFL has focused on becoming lean on manufacturing and leveraging past investments to achieve newer heights. The company does not intend to increase its capacity over the next two years and is focusing on increasing gross asset turnover >2x in standalone operation over the next five years from 1x currently. Also the company intends to become debt free on a net level over the next 2 years which would help in improving return ratios and generating cash flows. Significant order wins: The German subsidiary of the company has won a prestigious multi-year contract worth EURO 250 million from a German OEM. This order will boost the company s presence in fast growing business of aluminum components, which is finding increasing application in passenger vehicles. BFL has won four export orders in the passenger car forging business from a global OEM, which will start contributing from FY2015. As a result share of passenger car forging is expected to increase to ~20% over the next 3-4 years from ~16% currently. The JV with Alstom has also secured two orders from NTPC worth Rs 3800 cr. Valuation & Outlook: The company is looking to double its standalone revenues and increase consolidated revenues by 65% by FY18. Cyclical recovery in the CV segment and increasing share of non-auto components in the revenue mix would drive the future revenues of the company. With focus on value addition and developing technologically advanced products margins of the company are likely to increase. At a CMP of Rs.708 the stock trades at 22.2x its FY16E EPS. We recommend a BUY at the current levels with a target of Rs 828 over the next 12 months. Particulars Sales (` Cr) EBITDA (` Cr) EBITDAM (%) PAT (` Cr) PATM (%) EPS (`) BVPS (`) P/E (x) P/BV (x) EV/EBITDA (x) FY13 5702.2 769.5 13.5 247.6 4.3 10.6 96.9 66.5 7.3 24.2 FY14P 6716.1 1027.1 15.3 498.5 7.4 21.4 115.2 33.1 6.1 18.1 FY15E* 7168.1 1237.3 17.3 568.9 7.9 24.4 136.7 29.0 5.2 15.1 FY16E* 8326.3 1476.9 17.7 741.8 8.9 31.9 165.7 22.2 4.3 12.6 *Bloomberg estimates
Blend of Businesses Across Geographies and Segments BFL is looking at increasing the share of non-auto to 50-60% over the next few years Geography wise BFL derives almost 46% of its revenues from the domestic market. US and Europe contribute to ~25% each to the consolidated revenues while Asia-Pacific accounts for the rest. Segment wise chassis and engines for commercial vehicles accounts for more than half the revenues while the non-auto segment contributes~40%. BFL is looking at increasing the share of non-auto to 50-60% over the next few years. The non-auto business have better margin given higher machining proportion. The company is positive on energy, transportation (including railways and aerospace) construction and defence sectors to scale up its non-auto business. Segment wise Europe, 23% Asia Pacific, 4% India, 46% PV, 8% CV Chassis, 20% US, 27% Non Auto, 41% CV Engines, 31% A World Leader in the Forgings Business BFL has a total forging capacity of 565000 TPA spread across 8 manufacturing locations in 3 countries i.e. India, Germany and Sweden. 450000 400000 350000 Total forging capacity of 565000 TPA in 3 countries i.e. India, Germany and Sweden TPA 300000 250000 200000 150000 100000 50000 0 India Germany Sweden In India the company has a forging capacity of 385,000 TPA. Besides forging BFL has crank shaft and axle beam machining capacity of 1.2 million and 0.75 million units respectively. It caters to sectors like Commercial & Passenger Vehicles, Energy, Transportation & Mining Sector. In Germany the company has 2 facilities catering to Commercial & Passenger Vehicles, Locomotives (80000 TPA) and providing aluminium forgings for premium vehicles (20000 TPA). The Sweden facility caters to commercial vehicles only.
Modernization and Indigenization to Drive Growth : In a recent discussion, the management charted out a 3-pronged strategy over the next 5 years. Focus on value additions in the CV segment to deepen existing relationships Expansion into non-auto verticals such as aerospace and defence Follow a low-capex model by first creating capability and procuring the orders and thereafter creating capacity. Railways, Oil and Gas and Defence to be crucial drivers of growth in the next 5 years. With a key focus on capturing growth opportunities in non-auto business industrial segment as it provides higher margin than auto components. Besides the company had decided to diversify into manufacturing industrial components 3 years ago for oil & gas, railways, aerospace, mining, construction and marine industries and is reaping the benefits of this diversification today through improved margins. According to the management future growth would be driven by: Railway modernization: BFL is already supplying crankshafts and engine components to the railways High speed trains in various corridors will open up new markets for BFL PPP invest and supply products pose a big opportunity going forward. Auto business: Company is witnessing traction in the export markets especially in North America Average monthly Class-8 truck sales have increased by 25% yoy during Jan-May 2014. Robust growth expected for FY15 which will continue in FY16. Share of exports likely to increase Defence: Being a global component player BFL will continue to have an opportunity to be the main supplier of components that go into most defence equipment as there are very few players in this country who have the know-how. Lot of indigenization seen in the next few years which will be of great advantage to the company. Oil & Gas: Strong growth is expected in the shale gas segment from increasing opportunities in North America Robust growth is expected for FY15 which will continue in FY16. Mix between exports (55%) and domestic (45%) is likely to continue with a bias towards higher exports (upto 60%)
Company Background Bharat Forge Limited (BFL), is a $2.5 billion conglomerate with 10,000 global work force. The flagship company of the Kalyani Group, based out of Pune, India it s a technologically driven multinational with manufacturing facilities spread across India, Germany and Sweden. It s a global leader in metal forming having transcontinental presence across eight manufacturing locations, serving several sectors including automotive, power, oil and gas, construction & mining, locomotive, marine and aerospace. It manufactures a wide range of high performance, critical & safety components for the automotive & non-automotive sector. It is India's largest manufacturer and exporter of automotive components and leading chassis component manufacturer in the world. The operations of Bharat Forge can be classified as: Key Management Personnel : Key Management personnel Mr. B. N. Kalyani Mr. G. K. Agarwal Mr. Amit B. Kalyani Mr. B.P. Kalyani Mr. S. E. Tandale Mr. Sunil K. Chaturvedi Mr. Vimal Bhandari Designation Chairman & Managing Director Deputy Managing Director
FINANCIAL PERFORMANCE PROFIT & LOSS (Rs Cr) CASH FLOW (Rs Cr) Particulars FY12 FY13 FY14P Particulars FY12 FY13 FY14P Operating Income 6279.1 5702.2 6716.1 Cash from operating act. 686.4 757.6 691.1 Materials consumed 2912.9 2530.9 2461.3 Cash from investing act. (1049.8) (210.2) (306.0) Employee cost 780.4 801.3 790.1 Cash from financing act. 461.9 (351.3) (460.5) Other operating expenses 1589.3 1600.5 2437.7 Net Change in Cash 98.5 196.0 (75.4) EBITDA 996.4 769.5 1027.1 Depreciation 302.2 336.0 357.9 EBIT 694.3 433.4 669.3 Interest 186.0 190.8 169.2 Other Income 91.5 112.6 124.9 Profit Before Tax 599.8 391.8 728.7 Tax 179.6 172.8 210.0 PAT 420.2 219.0 518.7 PAT after Min Int 413.0 247.6 498.5 BALANCE SHEET RATIO ANALYSIS Particulars FY12 FY13 FY14P Particulars FY12 FY13 FY14P Share Capital 46.6 46.6 46.6 EPS 17.7 10.6 21.4 Reserves & Surplus 2137.3 2209.8 2636.7 BVPS 93.8 96.9 115.2 Total Shareholder funds 2183.9 2256.4 2683.2 P/E 39.9 66.5 33.1 Minority Interest 195.7 164.2 17.0 P/BV 7.5 7.3 6.1 Non Current Liabilities RoE 18.9% 11.0% 18.6% Total borrowings 2760.8 2784.5 2561.2 RoCE 14.0% 8.6% 12.8% Deferred tax liabilities 88.6 134.5 164.5 EV/EBITDA 18.7 24.2 18.1 Other long term liabilities 22.3 38.3 18.1 Growth Operating Income 23.4% -9.2% 17.8% SOURCES OF FUNDS 5251.2 5377.9 5444.0 EBITDA 26.8% -22.8% 33.5% Fixed Assets 3169.5 3542.3 3116.7 PAT 41.9% -40.0% 101.3% Investments 445.0 416.0 801.2 Profitability Other Non-current Assets 443.1 290.8 262.3 EBITDA Margin 15.9% 13.5% 15.3% PBIT Margin 11.1% 7.6% 10.0% Current Assets 3276.6 3190.4 3354.2 PAT Margin 6.7% 3.8% 7.7% Current Liabilities 2083.0 2061.5 2090.5 Stability Net Current Assets 1193.7 1129.0 1263.7 Debt/Equity 1.3 1.2 1.0 Current Ratio 1.6 1.5 1.6 TOTAL ASSETS 5251.2 5377.9 5443.9 Interest Coverage 3.7 2.3 4.0