Bharat Forge Limited HOLD CMP: Rs.275.00 Date: November 18, 2009 Key Ratios: Particulars FY09 FY10E FY11E OPM (%) 20 25 26 NPM (%) 5 6 7 ROE (%) 7 7 8 ROCE (%) 17 17 18 P/BV(x) 4.12 3.83 3.53 P/E(x) 59.39 54.35 44.86 EV/EBDITA(x) 15.03 13.83 12.18 Debt Equity Ratio 1.2 1.18 1.14 Key Data: Sector Automobile Ancillary Face Value Rs.2.00 52 wk. High/Low (Rs.) 307.35/69.15 Volume (2 wk. Avg.) 188634 BSE Code 500493 V.S.R. Sastry Vice President Equity Research Desk 91-22-25276077 vsrsastry@firstcallindiaequity.com Target Price: Rs.308.00 Market Cap.: Rs.61242.5mn. SYNOPSIS Bharat Forge is the second largest forging company in the world with operations at nine locations in six countries. It manufactures and sells forged and machined components for the automotive and nonautomotive sectors primarily in Europe, India, the United States, and the Asia Pacific. Company standalone revenues are grew by 29.1% and 4.3% with an amount of Rs.2.8 bn and 1.5bn respectively. Bharat Forge will raise USD 150 million nearly Rs 7.2 billion through various fund raising routes. Bharat Forge is mulling to foray Rs 500 billion and a targeted generation capacity of up to 10,000 MW, over the next ten years. The company to raise fresh debt / quasi equity to repay its first two tranche of FCCBs worth USD120mn in FY10 while the balance USD80mn is expected to be repaid in FY11. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com 1
Table of Content Investment Highlights... 3 Peer Group comparison...4 Keyconcern. 4 Financials.5 Charts....7 Outlook and conclusions...8 Industry Overview...... 9 2
Investment Highlights Q2 FY10 Results Update Bharat Forge Ltd. announced earnings results for the second quarter ended September 30, 2009. The company has posted a net profit of Rs.268.3 million for the second quarter ended September 30, 2009 compared with Rs. 112.5 million for the quarter ended September 30, 2008. Total income was at Rs. 4335.5 million during the quarter ended September 30, 2009 while it was Rs. 6857.8 million in the corresponding quarter previous fiscal. It reported earnings of Rs 1.20 a share, growth of 2.47 times as against same quarter in the previous year. Quarterly Results - standalone (RS in mn) As At Sept-09 Sept-08 %change Net sales 4275.8 6755.6 (37) Net profit 268.3 112.5 138 Basic EPS 1.20 0.51 138 Bharat Forge mulls Rs 500 bn investment in power sector The Kalyani Group`s flagship company Bharat Forge, is mulling to foray Rs 500 billion and a targeted generation capacity of up to 10,000 MW, over the next ten years. Company is planning to establish power plants in Gujarat, Maharashtra, coastal Andhra Pradesh and Tamil Nadu. The company plans to diversify into other capital goods segment to de-risk itself from relying only on the auto components business. It has identified power sector as a priority area and is looking at generating 10,000 MW of power in the next ten years. 3
Obtains shareholder`s nod to raise Rs 7.2 bn Auto component maker Bharat Forge will raise USD 150 million nearly Rs 7.2 billion through various fund raising routes. The company is obtained shareholder`s nod to raise USD 150 million by way of issuing bonds, debentures or through global depository receipts to meet company`s long term financing requirements. Credit rating Credit rating agency, ICRA has assigned a long-term rating of LA+ to the proposed Rs. 3.5 billion Non-Convertible Debenture Programme of Bharat Forge. The outlook on the rating is stable. ICRA has also revised the rating assigned earlier to the Rs 2.5 billion NCD Programme, Rs 8.25 billion Fund-Based Limits and Rs 900 million Long-Term Loans of BFL from LAA- to LA+. Peer Group Comparison Name of the company CMP(Rs. ) Market Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend(%) Bharat Forge Ltd 275.00 61242.5 4.64 59.29 4.12 50.00 Denso India Ltd 79.00 2202.5 6.66 11.86 1.13 15.00 Bosch Ltd 4350.00 136585.2 164.82 26.39 4.41 250.00 Wheels India Ltd 175.00 1727.2 9.51 18.40 0.92 55.00 Key Concerns Adverse Govt. policies High inflation rate Increasing competition. 4
Financials Results 12 Months Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) FY08 FY09 FY10E FY11E Description 12m 12m 12m 12m Net Sales 21964.96 20575.50 17489.18 19238.09 Other Income 884.04 488.00 284.69 313.16 Total Income 22849.00 21063.50 17773.87 19551.25 Expenditure -16439.90-16988.70-13344.24-14524.76 Operating Profit 6409.10 4074.80 4429.62 5026.49 Interest -1049.91-1003.70-1073.96-1181.35 Gross profit 5359.19 3071.10 3355.67 3845.14 Depreciation -1389.40-1494.40-1673.73-1807.63 Profit Before Tax 3969.79 1576.70 1681.94 2037.51 Tax -1233.90-543.80-555.04-672.38 Profit After Tax 2735.89 1032.90 1126.90 1365.13 Equity capital 445.40 445.40 445.40 445.40 Reserves 14287.37 14423.90 15550.80 16915.93 Face value (Rs.) 2.00 2.00 2.00 2.00 EPS 12.29 4.64 5.06 6.13 5
Quarterly Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) 31-Mar-09 30-Jun-09 30-Sep-09 31-Dec-09E Description 3m 3m 3m 3m Net sales 2915.80 3586.40 4275.80 4489.59 Other income 152.60 51.80 59.70 65.67 Total Income 3068.40 3638.20 4335.50 4555.26 Expenditure -1501.00-2986.10-3281.20-3456.98 Operating profit 1567.40 652.10 1054.30 1098.28 Interest -294.80-253.50-245.60-252.97 Gross profit 1272.60 398.60 808.70 845.31 Depreciation -309.20-384.10-408.40-432.90 Profit Before Tax 963.40 14.50 400.30 412.40 Tax -352.10-4.90-132.00-136.09 Profit After Tax 611.30 9.60 268.30 276.31 Equity capital 445.40 445.40 445.40 445.40 Face value (Rs.) 2.00 2.00 2.00 2.00 EPS 2.74 0.04 1.20 1.24 6
Charts: 7
1 Year Comparative Graph Bharat Forge Ltd BSE SENSEX Outlook and Conclusion At the current market price of Rs.275.00, the stock is trading at 54.35 x FY10E and 44.86 x FY11E respectively. Price to Book Value of the stock is expected to be at 3.83 x and 3.53 x respectively for FY10E and FY11E. Earning per share (EPS) of the company for the earnings for FY10E and FY11E is seen at Rs.5.06 and Rs.6.13 respectively. The company to raise fresh debt / quasi equity to repay its first two tranche of FCCBs worth USD120mn in FY10 while the balance USD80mn is expected to be repaid in FY11. Bharat Forge will raise USD 150 million nearly Rs 7.2 billion through various fund raising routes. Bharat Forge is mulling to foray Rs 500 billion and a targeted generation capacity of up to 10,000 MW, over the next ten years. On the basis of EV/EBITDA, the stock trades at 13.83 x for FY10E and 12.18 x for FY11E. 8
We expect that the company will keep its growth story in the coming quarters also. We recommend Hold in this particular scrip with a target price of Rs.308.00. Industry Overview Auto ancillary The Indian auto ancillary industry has come a long way since it had its small beginnings in the 1940s. If the evolution of the industry is traced in India, it can be classified into three distinct phases namely: Period prior to the entry of Maruti Udhyog Ltd, Period after the entry of Maruti Udhyog Ltd and Period post Liberalization. The period prior to the entry of Maruti Udhyog Ltd was characterized by small number of auto majors like Hindustan Motors, Premier Automobiles, Telco, Bajaj, Mahindra and Mahindra, low technology and assured business for most of the auto-component manufacturers. The entry of Maruti in the 1980s marked the beginning of the second phase of the industry. The auto ancillary industry in the country really showed a spurt in growth during this period. This period witnessed the emergence of a new generation of auto ancillary manufacturers who were required to meet the stringent quality standards of Maruti s Korean collaborator Suzuki of Japan. The good performance of Maruti resulted in a upswing for the domestic auto ancillary industry. It was during this period that auto components from India began to be exported. The entry of foreign automobile manufacturers ranging from Mercedes Benz, Ford, and General Motors to Daewoo following the government liberalizing the foreign investment limits saw the beginning of the third phase of the evolution of the industry. The auto ancillary industry witnessed huge capacity expansions and modernization initiatives in the post liberalization period. Technological collaborations and equity partnerships with world leaders in auto components became a common affair. However, the global automobile majors soon realized the folly of their estimations in India. The market did not seem to be as big as it appeared to be. 9
Hence, sales targets went awry. The tough competitive scenario saw a lot of consolidation in the industry and it still continues unabated. Consistent growth and dedication have made the Indian automobile industry the secondlargest tractor and two-wheeler manufacturer in the world. It is also the fifth-largest commercial vehicle manufacturer in the world. It is also the fifth-largest commercial vehicle manufacturer in the world. The Indian automobile market is among the largest in Asia. The key players like Hindustan Motors, Maruti Udyog, Fiat India Private Ltd, Tata Motors, Bajaj Motors, Hero Motors, Ashok Leyland, Mahindra & Mahindra have been dominating the vehicle industry. A few of the foreign players like Toyota Kirloskar Motor Ltd., Skoda India Private Ltd., Honda Siel Cars India Ltd. have also entered the market and have catered to the customers needs to a large extent. Not only the Indian companies but also the international car manufacturing companies are focusing on compact cars to be delivered in the Indian market at a much smaller price. Moreover, the automobile companies are coming up with financial schemes such as easy EMI repayment systems to boost sales. There have been exhibitions like Auto-expo at Pragati Maidan, New Delhi to share the technological advancements. Besides, there are many new projects coming up in the automobile industry leading to the growth of the sector. The Government of India has liberalized the foreign exchange and equity regulations and has also reduced the tariff on imports, contributing significantly to the growth of the sector. Having firmly established its presence in the domestic markets, the Indian automobile sector is now penetrating the international arena. Vehicle exports from India are at their highest levels. The 10
leaders of the Indian automobile sector, such as Tate Motors, Maruti and Mahindra and Mahindra are leading the exports to Europe, Middle East and African and Asian markets. The Ministry of Heavy Industries has released the Automotive Plan 2006-2016, with the motive of making India the most popular manufacturing hub for automobiles and its components in Asia. The plan focuses on the removal of all the bottlenecks that are inhibiting its growth in the domestic as well as international arena. Key points: Supply Demand Barriers to entry Competition : The Indian automobile market has some amount of excess capacity. : Largely cyclical in nature and dependent up on economic growth and per capita income. Seasonality is also a vital factor. : High capital costs, technology, distribution network, and availability of auto components. : High. Expected to increase even further. The Future Growth Drivers: Higher GDP Growth India's huge geographic spread- Mass Transport System Increasing Road Development Increasing disposable Income with the service sector Cheaper ( declining interest rates) & easier finance Schemes Replacement of aging four wheelers Graduating from two wheelers to four wheelers Increasing dispensable income of rural agri sector Growing Concept of Second Vehicle in Urban Areas. 11
Review of Indian Market The Indian Automotive Industry had witnessed strong growth across the board for the past five years (FY2003-FY2007) with CAGR of over 22%. The Passenger & Commercial Vehicle segments registered a growth of 21% & 26% respectively over the same period. The Markets in FY2008 took a breather and recorded a modest growth of 12%. The commercial vehicle market, the traditional mainstay of BFL in India, saw a sluggish growth of less than 5% in FY 2008. The LCV segment grew by 13% while the M&HCV segment declined by 1% over the previous year. The growth in domestic turnover of 11% is in line with the market, despite a drop of 1% in the M&HCV segment. This growth has been achieved on the back of: Increased traction with all major Commercial vehicle OEM s by becoming the preferred supplier for all the new platforms resulting in CV sector sales growing by 13.1% against CV segment growth of 4.8%. Enhanced presence in the tractor & agri equipment business, which grew at 40% during the year FY2008. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 12
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