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Spark Capital: Bharat Forge 3QFY13 results review - Demand weakness continues; Maintain Reduce




Spark Capital Advisors(India) Private Limited


11 Feb 2013





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Bharat Forge: Demand weakness continues; Maintain Reduce Bharat Forge reported standalone revenue decline of 29% yoy due to weak demand from non-auto exports. EBITDA margin decline of 120bps qoq to 21.2% and PAT declined by 54% yoy. Consolidated revenues declined 16% yoy while EBITDA margins declined 200bps qoq. We expect the weak demand outlook across segments to impact revenue growth in the medium term and believe recovery could be slow and weak. We maintain our negative stance on the stock until signs of stabilization/ recovery in revenues emerge. Revenues in the non-automotive exports segment declined sharply during the quarter impacting standalone revenues. Robust growth in this segment had been cushioning the weak automotive and domestic non-auto demand until 2QFY13. We expect growth in this segment to stabilize at lower levels given low energy and gas prices which hamper power sector and gas exploration demand in N. America. Management indicated that they were yet to see the upside from a ‘housing recovery’ in the US and expect this sector to aid growth N. American Class 8 trucks had the first quarter of inventory correction after 11 quarters of build-up. We expect this correction to continue in the next quarter. However, at ~6.4 years, the age of the active class 8 fleet continues to be higher than average (although lower than and declining from the peak of 6.7 in 2010). We therefore believe replacement led demand growth in the segment will stabilize albeit at lower levels than seen in the past. We also factor in a sequential recovery in EU HCV volumes and expect automotive exports to grow 5% in FY14 and 8% in FY15 We believe domestic non-auto demand could remain weak through FY14 and expect a growth of 2% and 10% in FY14 and FY15 respectively. We factor in a recovery off a low base in the domestic automotive business from 2HFY14 and factor in a growth of 7.5% and 15% respectively in FY14 and FY15. In our view, performance in overseas subsidiaries will continue to be weak. We expect the China JV to continue incurring losses and factor in a recovery in other wholly owned subsidiaries Estimates and Valuation: We expect consolidated net sales to grow by 3.8% CAGR for FY12-15E to Rs. 64bn, margins to come in at 14.8% in FY15 and an earnings decline of 10% in the same period. We value the stock on an SOTP basis at a target price of Rs. 227. We value the core business (ex-power JV) at 14x FY15 consol EPS at Rs. 223 and value its JV with Alstom and NTPC at Rs. 4 per share. We maintain our Reduce rating on the stock Other takeaways from the call: (1) Machining content is 50% in standalone business in 3QFY13 against 55% in 2QFY13. (2) USDINR realizations were between 52 and 53 per dollar vs. 51 in Q2FY13. (3) Utilizations stood at 50% in India, 60% in Europe and 40-45% in China

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