Exports remain subdued, outlook better November 08, 2016 Rohan Korde rohankorde@plindia.com +91 22 66322235 Rating BUY Price Rs850 Target Price Rs957 Implied Upside 12.6% Sensex 27,591 Nifty 8,544 (Prices as on November 08, 2016) Trading data Market Cap. (Rs bn) 198.0 Shares o/s (m) 232.8 3M Avg. Daily value (Rs m) 902.1 Major shareholders Promoters 46.75% Foreign 7.50% Domestic Inst. 17.63% Public & Other 28.12% Stock Performance (%) 1M 6M 12M Absolute (11.1) 9.0 (1.7) Relative (9.4) (0.4) (6.7) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 27.7 29.0 4.5 2018 37.8 37.6 0.6 Price Performance (RIC: BFRG.BO, BB: BHFC IN) (Rs) 1,200 1,000 800 600 400 200 0 Nov 15 Jan 16 Source: Bloomberg Mar 16 May 16 Jul 16 Sep 16 Nov 16 With export sales recorded fifth successive quarter of YoY decline, BHFC s standalone revenues declined 20.7% YoY and 1.5% QoQ during Q2FY17. While the EBITDA margin was lower 70bps YoY, it was higher 80bps QoQ to 27.8%, as the benefits of fixed cost rationalisation and cost reduction were felt. Standalone adjusted profit in Q2FY17 was marginally better than expected at Rs1.27bn, a decline of 26.3% YoY. However, wholly owned subsidiaries sustained the improvement witnessed since Q4FY16. Medium term and long term outlook for BHFC remains healthy and its strategy for Aerospace, Defence and Auto transmission parts provides reason for optimism. In the near term, better domestic CV and PV segment sales would be offset by lower demand in the industrial segment and sluggish North American truck demand. However, the latter is at its bottom and is expected to mark a slow recovery ahead. H1FY17 was subdued for BHFC with a better performance outlook from H2FY17 onwards. We maintain our estimates and price target and reiterate a BUY. At the current market price, the stock is trading at 30.7x FY17e EPS and 22.5x FY17e. BHFC s Q2 sales tonnage was lower 15.3% YoY (down 5.9% QoQ) at 46,203 MT. This was the fourth consecutive quarter of YoY shipment tonnage decline for the company. Standalone exports declined 30.3% YoY, while domestic net sales fell 6.7% YoY. In the gross sales mix, exports constituted 49.2%, which was a sequential improvement. Realization decreased 6.3% YoY (higher 4.3% QoQ), while other operating income declined 25.5% YoY, leading to total income decline of 20.7% YoY to Rs8.9bn. Contd...2 Key financials (Y/e March) 2015 2016 2017E 2018E Revenues (Rs m) 76,248 76,465 75,556 86,013 Growth (%) 13.5 0.3 (1.2) 13.8 EBITDA (Rs m) 14,408 14,213 13,561 16,940 PAT (Rs m) 7,366 6,563 6,442 8,813 EPS (Rs) 31.6 28.2 27.7 37.8 Growth (%) 73.1 (10.9) (1.9) 36.8 Net DPS (Rs) 7.5 7.5 7.5 10.0 Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 18.9 18.6 17.9 19.7 RoE (%) 24.0 18.7 17.0 20.4 RoCE (%) 14.7 12.4 11.9 15.4 EV / sales (x) 2.8 2.9 2.8 2.5 EV / EBITDA (x) 15.0 15.4 15.8 12.5 PE (x) 26.9 30.2 30.7 22.5 P / BV (x) 5.7 5.5 4.9 4.3 Net dividend yield (%) 0.9 0.9 0.9 1.2 Source: Company Data; PL Research Q2FY17 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
In the Q2FY17 geographical sales mix, Europe constituted 20%, North America 27.1%, India 49.3% and the Rest of the World 3.6%. North America witnessed the biggest declines at 42.2% YoY. India revenues declined 9.6%, while Europe declined by 7% YoY. EBITDA margin came at 27.8% (lower 70bps YoY and higher 80bps QoQ), as EBITDA declined 22.7% YoY to Rs2.5bn. QoQ margin improvement was mainly due to lower other expenditure (down 24.7% YoY and 7.6% QoQ). Profit declined 26.3% YoY to Rs1.27bn, which was marginally better than expected. BHFC has approved execution of the share sale agreement for the company s entire 49% stake in its JV Alstom Bharat Forge Power P.L. to GE Pacific P.L. for a consideration of US$35m, subject to certain conditions being fulfilled. Conference call highlights While the North American truck demand was subdued, BHFC focussed on widening its product range and new customer addition. Management has reiterated its target of becoming a net debt free company by next year. Demand improvement is expected in Q3 and Oil & Gas segment should also improve ahead. While railways share in the business is very small, BHFC expects good growth potential in this segment. Capacity utilisation in Q2 was ~62% (~65% in Q1 and in Q4FY16 it was ~72%). BHFC s focus ahead would be on accelerating product development and mining existing customers for additional business with new products and offerings. November 08, 2016 2
Exhibit 1: Q2FY17 Result Overview (Rs m) Y/e March Q2FY17 Q2FY16 YoY gr. (%) Q1FY17 H1FY17 H1FY16 YoY gr. (%) Net Revenues 8,909 11,239 (20.7) 9,044 17,953 22,627 (20.7) Raw Materials 3,068 4,050 (24.2) 3,108 6,176 7,933 (22.1) % of Net Sales 34.4 36.0 34.4 34.4 35.1 Personnel 904 932 (3.0) 916 1,820 1,868 (2.6) % of Net Sales 10.1 8.3 10.1 10.1 8.3 Manufacturing & Other Exp 2,460 3,053 (19.4) 2,577 5,036 6,056 (16.8) % of Net Sales 27.6 27.2 28.5 28.1 26.8 Total Expenditure 6,432 8,034 (19.9) 6,600 13,032 15,857 (17.8) EBITDA 2,477 3,204 (22.7) 2,444 4,921 6,770 (27.3) EBITDA Margin (%) 27.8 28.5 27.0 27.4 29.9 Depreciation 726 714 1.7 740 1,466 1,462 0.2 EBIT 1,751 2,491 (29.7) 1,705 3,455 5,308 (34.9) Interest Expenses 189 222 (14.8) 170 360 435 (17.4) Non operating income 309 282 9.7 256 566 581 (2.6) PBT 1,870 2,550 (26.7) 1,791 3,661 5,454 (32.9) Tax Total 601 827 (27.3) 570 1,172 1,771 (33.9) Tax Rate (%) Total 32.2 32.4 (0.9) 31.8 32.0 32.5 (1.5) Reported PAT 1,269 1,723 (26.3) 1,221 2,490 3,682 (32.4) Adj. PAT 1,269 1,723 (26.3) 1,221 2,490 3,682 (32.4) Source: Company Data, PL Research Exhibit 2: Operating Metrics Y/e March Q2FY17 Q2FY16 YoY gr. (%) Q1FY17 H1FY17 H1FY16 YoY gr. (%) Volume (MT) 46,203 54,559 (15.3) 49,098 95,301 106,543 (10.6) Realisation / ton (Rs) 188,793 201,417 (6.3) 181,018 188,383 212,375 (11.3) Gross Profit / ton (Rs) 126,414 131,767 (4.1) 120,911 123,579 137,919 (10.4) Staff Cost / ton (Rs) 19,570 17,082 14.6 18,652 19,097 17,531 8.9 Other Mfg cost / ton (Rs) 53,239 55,952 (4.8) 52,479 52,847 56,844 (7.0) EBITDA / ton (Rs) 53,605 58,733 (8.7) 49,780 51,634 63,544 (18.7) Adj. Profit / ton (Rs) 27,464 31,575 (13.0) 24,860 26,122 34,563 (24.4) Domestic / Export Mix Domestic sales 4,658 4,980 (6.5) 5,335 21,836 19,433 12.4 % of gross sales 50.8 43.5 56.7 53.2 44.1 Exports 4,515 6,480 (30.3) 4,079 19,189 24,602 (22.0) % of gross sales 49.2 56.5 43.3 46.8 55.9 Source: Company Data, PL Research November 08, 2016 3
Income Statement (Rs m) Net Revenue 76,248 76,465 75,556 86,013 Raw Material Expenses 28,837 26,017 25,366 28,925 Gross Profit 47,411 50,448 50,189 57,088 Employee Cost 9,051 9,456 9,636 10,234 Other Expenses 23,952 26,779 26,992 29,913 EBITDA 14,408 14,213 13,561 16,940 Depr. & Amortization 3,624 4,187 4,397 4,704 Net Interest 1,356 1,403 1,184 1,074 Other Income 1,795 1,281 1,424 1,518 Profit before Tax 11,223 9,904 9,404 12,680 Total Tax 3,587 3,408 2,962 3,867 Profit after Tax 7,636 6,495 6,442 8,813 Ex Od items / Min. Int. 270 (68) Adj. PAT 7,366 6,563 6,442 8,813 Avg. Shares O/S (m) 232.8 232.8 232.8 232.8 EPS (Rs.) 31.6 28.2 27.7 37.8 Cash Flow Abstract (Rs m) C/F from Operations 7,437 18,363 12,027 12,248 C/F from Investing (3,313) (13,544) (5,000) (6,000) C/F from Financing (1,532) (6,867) (8,284) (6,873) Inc. / Dec. in Cash 2,593 (2,048) (1,257) (625) Opening Cash 4,227 6,820 4,755 3,498 Closing Cash 6,820 4,772 3,498 2,874 FCFF 4,411 (2,197) 6,718 6,049 FCFE 4,262 (2,483) 1,718 3,049 Key Financial Metrics Growth Revenue (%) 13.5 0.3 (1.2) 13.8 EBITDA (%) 40.3 (1.4) (4.6) 24.9 PAT (%) 73.1 (10.9) (1.9) 36.8 EPS (%) 73.1 (10.9) (1.9) 36.8 Profitability EBITDA Margin (%) 18.9 18.6 17.9 19.7 PAT Margin (%) 9.7 8.6 8.5 10.2 RoCE (%) 14.7 12.4 11.9 15.4 RoE (%) 24.0 18.7 17.0 20.4 Balance Sheet Net Debt : Equity 0.5 0.6 0.4 0.3 Net Wrkng Cap. (days) 32 48 45 45 Valuation PER (x) 26.9 30.2 30.7 22.5 P / B (x) 5.7 5.5 4.9 4.3 EV / EBITDA (x) 15.0 15.4 15.8 12.5 EV / Sales (x) 2.8 2.9 2.8 2.5 Earnings Quality Eff. Tax Rate 32.0 34.4 31.5 30.5 Other Inc / PBT 12.7 13.4 15.1 12.0 Eff. Depr. Rate (%) 6.4 5.5 5.5 5.6 FCFE / PAT 57.9 (37.8) 26.7 34.6 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 34,442 35,758 40,100 46,114 Total Debt 25,464 25,179 20,179 17,179 Other Liabilities 1,617 1,795 1,920 2,045 Total Liabilities 61,523 62,731 62,199 65,337 Net Fixed Assets 34,336 40,628 40,231 40,527 Goodwill 537 554 554 554 Investments 4,955 8,037 9,037 10,037 Net Current Assets 21,695 13,513 12,377 14,220 Cash & Equivalents 6,820 4,755 3,498 2,874 Other Current Assets 35,691 35,507 37,196 42,392 Current Liabilities 20,816 26,749 28,318 31,046 Other Assets Total Assets 61,523 62,731 62,199 65,337 Quarterly Financials (Rs m) Y/e March Q3FY16 Q4FY16 Q1FY17 Q2FY17 Net Revenue 10,520 10,080 9,044 8,909 EBITDA 3,173 2,982 2,444 2,477 % of revenue 30.2 29.6 27.0 27.8 Depr. & Amortization 674 644 740 726 Net Interest 226 202 170 189 Other Income 231 225 256 309 Profit before Tax 2,504 2,361 1,791 1,870 Total Tax 800 716 570 601 Profit after Tax 1,662 1,645 1,221 1,269 Adj. PAT 1,690 1,645 1,221 1,269 Key Operating Metrics Standalone Sales tonnage (MT) 233,381 214,153 191,101 216,428 Standalone Realisation / ton (Rs) 194,877 201,044 207,303 215,780 Standalone Gross margin / ton (Rs) 120,325 129,743 134,747 140,257 Standalone EBITDA / ton (Rs) 56,987.6 59,911.5 59,815.8 65,325.2 Standalone Adjusted profit / ton (Rs) 30,950 32,920 31,990 37,701 Source: Company Data, PL Research. November 08, 2016 4
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