Analyst Research Report Snapshot

Title:

Spark Capital: Auto Sector June Qtr Result Review - Bharat Forge

Price:

$46.00

Provider:

Spark Capital Advisors(India) Private Limited

Date:

12 Aug 2013

Pages:

5

Type:

AcrobatPDF

Companies referenced:

BFRG.NS

Available for Immediate Download
Summary:

Bharat Forge: Margin improvement softens sluggish revenue trends. Maintain Add. Bharat Forge’s standalone revenues declined 15% yoy driven by continued demand weakness but grew 17% qoq driven by an uptick in non automotive and export revenues. EBITDA margins increased 380bps qoq on the back of favourable exchange rates, cost reduction measures and better revenue mix. Consolidated revenues declined 4% yoy while EBITDA margins improved 150bps qoq. We remain positive on the stock given the strong profitability improvement and management commentary indicating signs of a bottom in demand. Maintain Add. Management indicated that demand during the quarter was better than expected particularly in export markets (27% qoq growth). New truck production in North America increased 23% qoq, while heavy truck sales in 1HCY13 declined 10% yoy in Europe. We believe European truck demand could see a recovery in 2HCY13 driven by pre-buying ahead of the implementation of Euro 6 norms. This will however dampen the demand in the ensuing quarters. Although underlying demand remains weak, non-auto revenues grew 27% yoy driven by inventory restocking in the export market. Management also won new orders in the passenger cars, utility vehicles and the industrial segment, and indicated that they have gained market share in the existing businesses. However, demand is expected to remain muted (at levels seen in Q1FY14) for the rest of the year. We factor in a revenue decline of 2% for FY14 and a growth of 13% in FY15 driven by a recovery in domestic demand. Cost reduction initiatives over the last few quarters along with a sequential 16% growth in revenues (11% in tonnage) and higher share of non-auto business enabled a strong margin performance during the quarter. We expect a sequential dip in margins of ~100bps and expect margins standalone EBITDA to come in at 24% for FY14. In FY15, we expect a higher share of automotive OEMs in the revenue mix to offset increasing utilizations and expect margins to remain at 24%. Estimates and Valuation: We expect consolidated net sales to grow by 7.5% CAGR for FY13-15E to Rs. 66bn, margins to come in at 15.7% in FY15 and an earnings CAGR of 39% in the same period. We value the stock on an SOTP basis at a target price of Rs. 260. We value the core business (ex-power JV) at 14x FY15 consol EPS at Rs. 255 and value its JV with Alstom and NTPC at Rs. 5 per share. We maintain our Add rating on the stock. Other Takeaways: (1) Realization of Rs 57/USD in 1QFY14 vs. Rs 54/USD in 4QFY13. Forward cover of ~50% of FY14 exports at rates between Rs 58-59/ USD. (2) Standalone capex of Rs 600mn; investment of Rs 1bn and Rs 700mn in the Alstom JV in FY14 and FY15 (3) Utilizations at 60% in India, 65% in Europe and under 50% in China.

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