Stock Reivew: BHARAT FORGE

 

BHARAT Forge reported June quarter results which were ahead of analysts' expectations, as exports to the US and Europe bounced on strong demand from the commercial vehicle (CV) section in these markets. The ramping up of non-auto business, which grew 50 per cent year-on-year, buffered against the expected impact from slowing domestic auto demand. The management has said it expects healthy-tostrong growth in overseas markets and its subsidiaries, as against slowing domestic demand.

The stock, after dipping 18 per cent in the last month, recovered some lost ground post results and is up nearly seven per cent. At `288 levels, it trades at 15.4 times FY12 consensus EPS estimates and looks fairly priced. Further upside will depend on the ability of the management and the company's joint ventures to deliver along expectations.

JUNE QUARTER

Even as overall domestic auto sales slipped 10.2 per cent and the medium and heavy CV sales dropped 13.3 per cent in the June quarter, the company reported a strong 36 per cent year-on-year rise in revenues. This was aided by domestic sales (up 18.6 per cent year-onyear and 2.8 per cent sequentially) and exports (up 67 per cent year-on-year and 6.4 per cent sequentially). Notably, despite upward bias in prices of inputs like metals, the company's operating margins slipped marginally on a year-on-year basis. Flat depreciation and interest costs boosted net profit for the quarter.

Revenues from overseas subsidiaries and Chinese joint venture (JV) have grown by about 38 per cent with Ebitda growing 36 per cent year-onyear. The slowing auto demand in China (CV volumes in the first half of CY11 are down 6.3 per cent and total auto sales clocked a growth of under three per cent year-on-year) restricted topline growth for the JV to 15 per cent year-on-year (`164 crore) for the quarter with margins at 5.4 per cent, marginally lower than the year ago quarter. Combined Ebitda margins (of overseas subsidiaries and Chinese JV) reported were around 5.6 per cent and are expected to move into double-digit zone over the next two years as cost reduction programmes kick in.

OUTLOOK

Management expects domestic volume growth to be between five and seven per cent this year but indicated that CV demand continues to be strong in Europe and the US, attributed to fleet replacement and new emission norms in the US and latent demand revival in Germany and Sweden. The company retained expectation of 40 per cent growth in US and 15-20 per cent in Europe citing customer feedback so far and added that inventory levels are very low currently, in contrast to the slowdown in 2008. Both, domestic and export order pipeline, for nonauto components is also fairly robust, the company added, with key sectors being oil and gas and energy.

The company expects a strong performance from its joint venture with KPIT Cummins and stated that two European manufacturers are looking at developing products to improve fuel efficiency and two fleet operators are also pilottesting the product. Trials are expected to take between 12-18 months, management said in an analyst call after the results.

The outlook is hinged on non-auto and export revenue growth and improving overseas subsidiary margins even as domestic auto growth is expected to be steady. The risks therefore are clearly from the global environment although further domestic slowdown would also hurt estimates. The JV with Alstom for manufacturing power equipments is a key interest area and a Nomura research report believes that any execution delays, while unlikely, could disappoint investors.