Bharat Forge: Strong Q1, more gains ahead

Higher proportion of non-auto business is helping the company improve revenues and margins

Driven by strong performance in exports and favourable product mix, Bharat Forge beat expectations in the June quarter. Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins at 29.4 per cent stood at a 20-quarter high. Standalone net profit grew 60 per cent year-on-year (y-o-y) to Rs 145 crore, against Bloomberg consensus estimates of Rs 120 crore. Net sales at Rs 964 crore were ahead of estimates of Rs 947 crore. Sales growth was led by Americas, exports to which increased 76 per cent y-o-y to Rs 330 crore. This, coupled with 10 per cent increase in domestic revenues to Rs 453 crore, helped standalone revenues rise 25 per cent. Export revenues constitute 55 per cent of standalone revenues.

Revenues from overseas subsidiaries were flat at Rs 625 crore, with Ebitda margins of 7.3 per cent. Strong results saw the stock move up 1.5 per cent on Wednesday and close at Rs 720 on the BSE.

The firm has indicated strong demand across segments, both in India and abroad, except for domestic automobile sales, which are expected to take a quarter or two to see a turnaround.

The highlight for the quarter was the strong standalone margins, which came in at 29.4 per cent and were 460 basis points higher on a y-o-y as well as sequential basis. Robust sales growth, a higher proportion of non-automobile in the revenue mix and increased value addition were the key reasons for the same. Non-auto revenues, which were at 39 per cent in the year-ago quarter, constitute 46 per cent of the standalone revenue pie now. While raw material to sales ratio was down 475 basis points y-o-y, only a part of this helped boost margins, as inventory adjustments led to the higher differential. However, given the favourable product mix and utilisation, the company indicated margins for the standalone business would be around the 28-29 per cent mark.

The management believes revenues would double by FY18.

Given the higher margins and strong outlook, the stock could see a re-rating and upgrades in target price. Prior to the results, the consensus target price for the stock, which is up over 77 per cent since May, was Rs 701.

While the company is generating strong cash flows and has a surplus of Rs 1,000 crore, the management indicated the priority will be to pay down debt and invest in growth.