Bharat Forge Ltd Result Update: Q3 FY 12 C.M.P: Rs. 308.25 Target Price: Rs. 351.00 Date: Feb 29 th, 2012 BUY Stock Data: Sector: Auto Components Face Value Rs. 2.00 52 wk. High/Low (Rs.) 370.50/231.00 Volume (2 wk. Avg.) 77608 BSE Code 500493 Market Cap (Rs.In mn) 71776.01 Share Holding Pattern 1 Year Comparative Graph SYNOPSIS Bharat Forge Ltd., the flagship company of the US $ 2.5 billion Kalyani Group, is a leading global Full Service Supplier of forged and machined - engine & chassis components. During the quarter, the operating profit margin increased 151 bps to 16.91% from 15.39% for the same period last year. During the quarter, exports grew by 29.3% on YoY basis to Rs. 464.4 crores. Export markets continue to perform well on back of strong demand, new client additions and increasing penetration with global customers. Bharat Forge BSE SENSEX Net Sales and PAT of the company are expected to grow at a CAGR of 32% and 57% over 2010 to 2013E respectively. Years Net sales EBITDA Net Profit EPS P/E FY 11 29473.50 7623.10 3105.70 13.34 23.11 FY 12E 36829.41 9428.00 4199.16 18.03 17.09 FY 13E 42722.12 10809.93 4944.86 21.24 14.52 1
Peer Group Comparison Name of the company CMP(Rs.) Market Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%) Bharat Forge 308.25 71776.01 17.50 17.61 3.60 175.00 Kalyani Forge 190.00 685.00 35.62 5.33 0.88 20.00 Bosch 7645.00 240168.60 335.03 22.82 10.00 400.00 Wheels India 370.00 3652.20 35.29 10.48 1.67 65.00 Investment Highlights Q3 FY12 Results Update Bharat Forge has posted a net profit of Rs.1,031.30 million for the quarter ended December 31, 2011 as compared to Rs.826.10 million for the quarter ended December 31, 2010, representing an increase of 24.84%. Net sales for the quarter surged by 21.13% to Rs.9411.70 million for the quarter ended Dec 2011. Total Income has increased from Rs.7895.20 million for the quarter ended December 31, 2010 to Rs.9444.90 million for the quarter ended December 31, 2011, representing an increase of 19.63%. The EPS of the company is stood at Rs.4.43 per share for the quarter ended Dec 2011. Quarterly Results - Standalone (Rs in mn) As At Dec-11 Dec -10 %change Net sales 9411.70 7769.60 21.13 PAT 1031.30 826.10 24.84 Basic EPS 4.43 3.55 24.84 2
Break up of Expenditure Segment wise Revenue Particulars Q3FY12 Q3 FY11 Steel Forging 9370.6 7741.2 Gen.Engg. Trading etc 62.7 46.5 Total 9433.3 7787.7 3
Company Profile Bharat Forge Ltd., the Pune based Indian multinational & the flagship company of the over $ US 2.5 billion Kalyani Group is a global forging conglomerate. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world. A technology driven global leader, end-to-end capability and manufacturing footprint across India, Germany, Sweden, US & China, the company manufactures a wide range of highly engineered critical & safety components for several sectors including Automobile, Oil & Gas, Rail & Marine, Energy (across renewable & non renewable sources), Construction & Mining and general engineering. A customer base includes virtually every global automotive OEM and Tier I supplier to the few global auto component manufacturers. BFL completed capacity expansion to set up dedicated state of the art facility for manufacture of critical & value added components for non automotive applications including rail & marine, Oil & Gas, power & construction and mining. Over the years, Bharat Forge has been investing in creating State-of-the-art facilities, world-class capacities and capabilities. Provide facilities include, fully automated forging and machining lines, the largest of its kind and comparable to the best in the industry. Bharat Forge has built up a strong capability in design and engineering, including a full fledged product testing and validation facility, which gives Bharat Forge a Full Service Supply Capability - from product conceptualization to designing to manufacturing and product testing & validation. Kalyani Group companies Automotive Axles Kalyani Steel Kenersys BF Utlities Kalyani Carpenter special steel 4
Kalyani Lemmerz Kalyani Thermal systems Kalyani Global Hikal Ltd EPI center Technologies Synise Technologies BF Investment Ltd Business Areas Business Area Automotive Non Automotive Capital Goods Customers Domestic Customers 5
Global Customers 6
Financial Results 12 Months Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) FY10 FY11 FY12E FY13E Description 12m 12m 12m 12m Net Sales 18564.00 29473.50 36829.41 42722.12 Other Income 323.40 462.00 424.48 471.18 Total Income 18887.40 29935.50 37253.89 43193.29 Expenditure -14408.20-22312.40-27825.89-32383.36 Operating Profit 4479.20 7623.10 9428.00 10809.93 Interest -1027.70-1214.40-1266.27-1329.59 Gross profit 3451.50 6408.70 8161.73 9480.34 Depreciation -1644.40-1932.60-2194.94-2436.38 Profit Before Tax 1807.10 4476.10 5966.79 7043.96 Tax -536.70-1370.40-1767.64-2099.10 Profit After Tax 1270.40 3105.70 4199.16 4944.86 Equity capital 445.40 465.70 465.70 465.70 Reserves 14826.70 19488.10 23687.26 28632.12 Face value 2.00 2.00 2.00 2.00 EPS 5.70 13.34 18.03 21.24 7
Quarterly Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) 30-Jun-11 30-Sep-11 31-Dec-11 31-Mar-12E Description 3m 3m 3m 3m Net sales 8576.70 9099.90 9411.70 9741.11 Other income 147.20 206.90 33.20 37.18 Total Income 8723.90 9306.80 9444.90 9778.29 Expenditure -6492.50-6946.10-7091.20-7296.09 Operating profit 2231.40 2360.70 2353.70 2482.20 Interest -300.20-309.60-321.80-334.67 Gross profit 1931.20 2051.10 2031.90 2147.53 Depreciation -516.90-538.90-558.40-580.74 Profit Before Tax 1414.30 1512.20 1473.50 1566.79 Tax -440.10-448.20-442.20-437.14 Profit After Tax 974.20 1064.00 1031.30 1129.66 Equity capital 465.70 465.70 465.70 465.70 Face value 2.00 2.00 2.00 2.00 EPS 4.18 4.57 4.43 4.85 8
Key Ratios Particulars FY10 FY11 FY12E FY13E No. of Shares(In Million) 222.70 232.85 232.85 232.85 EBITDA Margin (%) 24.13% 25.86% 25.60% 25.30% PBT Margin (%) 9.73% 15.19% 16.20% 16.49% PAT Margin (%) 6.84% 10.54% 11.40% 11.57% P/E Ratio (x) 54.04 23.11 17.09 14.52 ROE (%) 8.32% 15.56% 17.39% 16.99% ROCE (%) 18.12% 27.55% 29.33% 29.21% EV/EBITDA (x) 15.33 9.42 7.61 6.63 Debt equity ratio 1.21 0.738 0.641 0.5583 Book Value (Rs.) 68.58 85.69 103.73 124.96 P/BV 4.49 3.60 2.97 2.47 9
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Outlook and Conclusion At the current market price of Rs.308.25, the stock is trading at 17.09 x FY12E and 14.52 x FY13E respectively. Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs.18.03 and Rs.21.24 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 32% and 57% over 2010 to 2013E respectively. On the basis of EV/EBITDA, the stock trades at 7.61 x for FY12E and 6.64 x for FY13E. Price to Book Value of the stock is expected to be at 2.97 x and 2.47 x respectively for FY12E and FY13E. We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs.351.00 for Medium to Long term investment. Industry Overview 12
Introduction Indian auto component industry is robustly driven by the growth in demand for automobiles. The sector has become a lucrative business proposition for global players, majorly owing to two factors. First, needless to say, the demand for automobiles is increasing day by day in the country. India, a market with high potential for the automobiles sector, is expected to witness a three-fold increase in demand for automobiles by 2020. Secondly, all major global auto-makers are establishing their bases here due to highly positive business environment, favourable policies and government support. According to a study by UK-based global financial advisory firm-rothschild, India would become the third largest auto industry by volumes after China and the US by 2015. This would give immense support to the growth of ancillary sector as well. Major developments, investments and Government initiatives relating to the sector are discussed hereafter. Indian Auto Components Industry Profile According to a recent study by the Automotive Component Manufacturers' Association of India (ACMA), original equipment manufacturers (OEMs) account for 41 per cent of the auto components consumed in the Indian aftermarket. The study estimated current size of Indian components business at Rs 24,800 crore (US$ 4.87 billion), 49.7 per cent of which is formed by two-wheeler segment. Passenger vehicles, commercial vehicles and three-wheelers follow with 24.7 per cent, 23.1 per cent and 2.5 per cent of the share respectively. According to Arvind Kapur, President, ACMA, a large market in Indian spares business is dominated by organised, semi-organised and a number of small, unorganised players. He thus acknowledged the need for a process of accreditation to ensure better customer service. 13
The study further projected that OEM-authorised network of service stations would account for 20-30 per cent of the Indian auto components market by 2017 while that of multi-brand organised service chains would grow to 5-10 per cent from 1-2 per cent. Similarly semi-organised service centres and unorganised garages market share would be 20-30 per cent and 45-55 per cent, respectively, in 2017. India The Global Auto Hub Canada is looking for substantial investment opportunities in Indian auto components market through the comprehensive economic partnership agreement (CEPA) which is being discussed and negotiated by the two Governments. The agreement is likely to get finalised by 2013. If fructified, the agreement would facilitate an annual increase of economic output in two countries by almost US$ 6 billion and boost the two-way trade by 50 per cent. UK sees immense potential in the Indian auto ancillary sector, especially in the city of Rajkot as it is known for auto components manufacturing. Peter Beckingham, British Deputy High Commissioner for Western India, also indicated possible ventures between UK and Rajkot companies in near future. According to industry sources, Rajkot's auto component industry, with over 500 manufacturers aggregating a net turnover of around Rs 1,500 crore (US$ 294.5 million), grows at an annual rate of 15-20 per cent. Furthermore, 60 French automobile component suppliers are contemplating on business opportunities to set up a vendor park near Sanand in Ahmedabad district. The proposed vendor park would accommodate tier-1 and tier-2 auto-component suppliers who would supply spares to the recent auto entrants in the State and even to others. Sanand is already home to a number of global auto-makers, like Ford and Peugeot. 14
Indian Auto Components Industry: Key Developments and Investments Global private equity (PE) firm Actis PE has bought 10-13 per cent stake in Indian auto component manufacturer Endurance Technologies for about US$ 71 million. Endurance Technologies is a part of the automotive component major Endurance Group and caters to companies like Bajaj, Yamaha, Suzuki, Honda Motorcycles and Scooters and Royal Enfield. Global car makers such as Daimler, Audi, Fiat and Porsche are the company's customers in passenger car segment. German auto component maker Schaeffler Group is on an expansion spree in India. The company plans to invest over Rs 1,000 crore (US$ 196 million) during 2012-15 in the country to set up a manufacturing facility and to expand its existing plants. To support its growth, the company would also double the number of its engineers and recruit 1, 200 employees in the country. Federal-Mogul's new facility in Chennai will commence its operations by March 2012. The plant, being set up for producing braking and friction materials, will initially focus on after market products like linings and brake pads. Federal Mogul is a global automotive components manufacturer. Government Initiatives The Government of India is in the process of forming a National Automotive Board (NAB) which would become a formal set-up to look into the issue of recall of vehicles and hence improve manufacturing standards. The prospective body, to oversee technical and safety aspects of vehicles, will have representatives from all the nodal ministries and automotive bodies such as the Automotive Research Association of India (ARAI). The Government of Gujarat has always been on a high to promote its industrial space especially it's the automobile sector. In order to boost the State Government's efforts in this regard, Gujarat Government's Industrial Extension Bureau, along with Automotive Components Manufacturers Association, French Vehicles Equipment 15
Industries (FIEV) and French auto-major Peugeot, organised a seminar and business meeting on January 9, 2011 wherein 60 French automobile component makers were briefed on opportunities to set up vendor park near Sanand (Gujarat's auto hub) in Ahmedabad district. Similarly, the Government of Gujarat has also announced its plan to disburse 240 acres of land at Sanand to the All India Plastic Manufacturers Association (AIPMA) to set up a plastic park that could attract an investment of about Rs 5000 crore (US$ 981.65 million). The Government's move marks its eye for detail as the measure has come in the light of the fact that a finished car would require about 150 kgs of plastic. Road Ahead Ratings agency Fitch has maintained a stable outlook towards the Indian auto components industry for the year 2012. The industry is expected to perform well owing to OEM s robust demand for localised spares. According to a report by ACMA, the Indian auto component industry would garner US$ 113 billion of turnover by 2020-21, growing at a compounded annual growth rate (CAGR) of 11 per cent through 2011-21. Not only domestic demand, India is poised to scale new heights in terms of exports as well as the report estimates exports to be worth US$ 29 billion by 2020-21, growing at a CAGR of 18.8 per cent through the forecast period. 16
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. Firstcall India Equity Research: Email info@firstcallindia.com C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods A. Rajesh Babu FMCG H.Lavanya Oil & Gas Ashish.Kushwaha Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s,takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions(domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and 17