Bharat Forge: Europe slowdown to impact FY13 growth

Exports provided the necessary push to Bharat Forge’s revenues in the December 2011 quarter, posting 29% year-on-year growth on the back of strong auto demand in both North America and Europe in 2011. Heavy truck sales, while much lower than earlier peaks, recovered strongly in both North America and Europe (up 65% and 36% year-on-year, respectively). Domestic revenues grew at a more sedate 16% year-on-year and were just marginally higher than numbers clocked in the September 2011 quarter given the slowdown in auto sales domestically. Total operating revenues thus increased by 21% year-on-year to Rs 941 crore but were just 3% higher sequentially, reflecting lower other operating income led by reduction in export incentives after the government replaced the DEPB scheme with the duty drawback scheme in September last year.

Non-auto revenues, which contribute to about 37% of total revenues, grew by 12.7% year-on-year, struggling against the slowing capital investments domestically. Management stated that it hadn’t received any capital goods orders from the power sector in the last seven months and current orders are mainly from oil and gas, renewable energy and locomotives segments.

Ebitda margins were up 40 bps year-on-year (up a strong 100 basis point sequential expansion) as realisations per tonne improved 5%. A change in the product mix towards heavier products with greater revenue contribution from higher value machined components were the key levers for this expansion. Machined output is currently 65% of total output with non-auto machined output about 25-30%. This trend is expected to continue over the next few quarters, according to analysts at Spark Capital Research.

The company reported a forex loss of Rs 16 crore for the quarter given the volatile environment; this includes a forex loss of Rs 7 crore and an Rs 9 crore mark-to-market loss on forward contracts. The company had reported a total gain of Rs 2 crore in December 2010 quarter and Rs 4 crore in September 2011 quarter. Thus, impacting reported net profits by 3.1% which at Rs 103 crore, still a 25% increase year-on-year.
 

MUTED FY13 GROWTH
In Rs crore	Q3' FY12	FY12E	FY13E	FY14E
Revenues	941.2	6337.7	6748.1	8079.0
% chg y-o-y	21.1	24.6	6.5	19.7
Ebitda Margins (%)	24.7	15.9	15.4	15.1
PAT	103.1	480.2	489.0	603.9
EPS (Rs)	4.4	20.6	21.0	25.9
% chg y-o-y	24.8	64.8	1.9	23.3
P/E (x)		14.9	14.7	11.9
E: Estimates Source: Company, Brics Research

On a consolidated basis, the company felt the impact of the slowdown in Chinese automotive market (17% decline in commercial vehicles sales and stagnant passenger vehicle demand) which pulled down capacity utilisation in its China operations and its Ebitda margins by 120 basis points year-on-year to 4.7%. This in turn restricted total subsidiary Ebitda margin to 5.5% and gains to 30 bps year-on-year. However, losses in the Chinese subsidiary led to halving of total profits before tax for subsidiaries.

Outlook

As per management guidance based on outlook by auto manufacturers, commercial vehicle sales in India should be about 8-10% next year while it could touch 15-18% in the US. However, the European market could struggle and manufacturers are expecting up to 5% lower sales in 2012. Non-auto segment orders should continue to boost capacity utilisation over the next two years from current levels of around 60% domestically, according to Brics research. The plug-in hybrid engine technology developed with KPIT Cummins, Revolo is expected to be launched in FY13.

While analysts believe that the current environment as well as a high base would impact revenue growth in FY13 to 6-10% year-on-year, the longer term story continues to be strong. Subsidiary revenues will feel the pinch of the shrinking European demand, believes Brics analyst Umesh Karne, which would flatten profit growth. Revenues and profits are expected to pick up only in FY14.

Analysts believe therefore that the stock will trade at a lower multiple (15-16 times) compared to historical valuations of about 20 times. The stock gained 2.5% post results after riding the bounce-back wave in the last month, but gave up most of the gains on Friday to close at Rs 304.65. It is up 18% in the last one month, 5% more than the BSE Sensex.