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October 25, 2008 1

2QFY2009 Result Update

Bharat Forge

BUY

Price Rs103

Target Price Rs117

Investment Period 12 months

Stock Info

Sector Auto Ancillary

Market Cap (Rs cr) 2,283

Beta 0.8

52 WK High / Low 390/100

Avg Daily Volume 106950

Face Value (Rs) 2

BSE Sensex 8,701

Nifty 2,584

BSE Code 500493

NSE Code BHARATFORG

Reuters Code BFRG.BO

Bloomberg Code BHFC@IN

Shareholding Pattern (%)

Promoters 40.6

MF/Banks/Indian FIs14.6

FII/ NRIs/ OCBs 13.4

Indian Public31.4

Abs. 3m 1yr 3yr

Sensex (%) (41.1) (53.0) 9.9

BFL (%) (58.2) (66.1) (68.2)

Standalone Results: Bharat Forge (BFL) recorded 19.4% yoy growth inNet Sales (Standalone) during 2QFY2009 largely on the back of 30.4%growth in its outside India operations and 7.4% yoy growth in the domesticmarket. This growth has come as a surprise especially because theAutomobile industry in India and US are struggling to recover from macroslowdown and high input costs. In 2QFY2009, BFL clocked a decline inOperating Margins by 311bp yoy to 24.1% (27.2%). Management hadindicated in the last quarter that it was able to fully pass the increase ininput costs to its customers, which helped improve Margins and post higherNet Profit of Rs98.8cr (excluding Forex losses of Rs87.5cr) during2QFY2009. Including Exceptional items however, BFL reported 83.4% yoydecline in Net Profit to Rs11.3cr.

Consolidated Results : BFL reported 28.8% yoy increase in ConsolidatedNet Sales to Rs1,347cr, which was higher than our estimate of Rs1,194cr,aided by higher realisation. Consolidated Net Profit, excluding Foreigncurrency loss and Exceptional items of Rs23.6cr, was up 69.4% toRs115.7cr (Rs68.29cr). The company has recognised forex loss ofRs87.5cr (Rs10.9cr Profit in 2QFY2008) on revaluation of loans consequentto depreciation of the Rupee. OPMs declined by 260bp to 14.4% (17%). NetProfit including Forex loss and Extraordinary item was down 94.2% yoy toRs4.6cr. BFLs consolidated numbers did not include FAW Bharat Forge,BFL's joint venture in China.

Diversifying market concentration and capacity addition on track: BFLs initiatives to de-risk its Export Revenues have been paying off, withits exports to the European markets growing rapidly. The companys capexfor its Non-Auto business is also on track, with capacities at Baramatiexpected to get commissioned in 3QFY2009. Trial production commencedin Baramati during the quarter while the Mundhwa facility is expected tobegin trial runs from August 2008. Serial production in Mundhwa is likely tocommence six months thereafter. BFL, at present, has an Order book ofaround 75% for its combined Non-Auto Forging capacity (1,00,000 tonnesp.a.) at the two plants. The company expects to generate Rs800-1,000cr atfull capacity, and on planned capex of more than Rs400cr.

Key Financials (Consolidated)

Y/E March (Rs cr) FY2007 FY2008 FY2009E FY2010ENet Sales 4,148.9 4,597.5 5,128.9 5,898.2

% chg 39.6 10.8 11.6 15.0

Net Profit 299.4 302.4 344.7 400.1

% chg 19.5 1.0 14.0 16.1

OPM (%) 14.6 14.1 14.1 14.9

EPS (Rs) 11.0 13.6 14.4 16.7P/E (x) 9.4 7.6 7.1 6.2

RoE (%) 1.9 1.4 1.0 0.9

RoCE (%) 19.0 17.6 13.8 14.5

P/BV (x) 12.2 12.1 12.7 13.0

EV/Sales (x) 0.7 0.7 0.6 0.5

EV/EBITDA (x) 5.2 4.8 4.3 3.6Source: Company, Angel Research; Note:FY2009, FY2010 EPS on fully diluted Equity Shares.

Performance Highlights

Vaishali Jajoo

Tel: 022 4040 3800 Ext: 344e-mail: vaishali.jajoo@angeltrade.com

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October 24, 2008 2

Auto Ancillary

Bharat Forge

Key Highlights and Business Outlook The Indian Automobile industry has witnessed a drop in activity and demand due to the

difficult economic conditions coupled with the high oil prices and hardening of Interestrates. This has resulted in a drop in production across segments.

Although the demand from major geographies continued to be sluggish, BFL registereda stable performance in 2QFY2009 with Top-line growing by 28.8% on consolidatedbasis. This was aided, to some extent, by the Rupee depreciation against majorcurrencies. Among the subsidiaries, BFA had experienced a difficult 1HFY2009 due toprolonged shutdown at one of its key customer facilities and due to the severe slowdown in the US economy.

The company has taken simple forward covers against Export receivables. Torecognise impact of forex fluctuation arising out of instruments acquired to hedgehighly probable transactions in appropriate accounting periods, the company has fromthis year decided to apply the principles of recognition set out in the InternationalAccounting Standards (IAS) as suggested by the ICAI, which is also reflected in theAccounting Standard-30- Financial Instruments - Recognition and Measurement. As aresult, impact of unrealised loss (net) consequent to foreign currency fluctuation in

respect of effective hedging instruments, to hedge future exports, aggregatingRs21.7cr for the quarter and Rs47.2cr year-to-date are carried as a Hedging Reserveto be ultimately settled when the underlying transaction arises, in the Profit and Lossaccount as against the practice of recognising the same in the Profit and Loss account,on valuation at the end of each period. Hence, previous period / year figures are notstrictly comparable.

Other Foreign currency financial assets, liabilities, receivables etc. that do not qualifyfor hedge accounting have been revalued at the period end rate and resultant Net Lossof Rs87.5cr for the quarter and Rs156.9cr year-to-date has been debited to the Profitand Loss account and treated as Exceptional Items in the above results on account ofthe wide fluctuation in foreign exchange rates witnessed during the quarter/ period. Outof this loss Rs73.6cr for the quarter and Rs130.4cr year-to-date is with respect to theFCCBs, which if not converted are repayable from April 2010 to April 2013 and Rs14crfor the quarter and Rs26.5cr year-to-date is with respect to other loans, etc.

Due to breakdown of the crankshaft at the press during February 2007, one of thewholly-owned subsidiaries of the company, acknowledged claims from its customersfor reimbursement of all costs, expenses, loss and damage incurred by an allegedfailure to deliver. The said subsidiary filed a claim with the Insurance company forbusiness interruption and material damages for an amount of Rs32.9cr. The claim withthe Insurance company is yet to be settled. BFL acknowledged Rs24.1cr against thisdamage in 2QFY2009.

Emerging opportunities in Non-Automotive Business: BFL sees a lot ofopportunity in its Non-Automotive business also and is focusing on six sectors, viz.,Marine, Power, Aerospace, Construction Equipment, Locomotive and Railways. BFLexpects its Non-Automotive business to contribute around 40% of its global revenuesover the next four years. Over the last two years, BFL announced fresh investments tothe tune of Rs490cr (Rs350cr in Baramati and Rs140cr in Pune) to set up capacity tocater to the opportunities arising in its Non-Automotive business. Currently, thecompanys Non-Automotive business accounts for around 17% of its consolidatedrevenues. Going ahead, it expects to increase it to 25% once new capacities becomeoperational in Baramati. Margins in this segment are also expected to be superiorcompared to the Auto segment.

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October 24, 2008 3

Auto Ancillary

Bharat Forge

Valuation

At the CMP of Rs103, the stock is trading at 7.1x FY2009E and 6.2x FY2010Econsolidated Earnings. Foreign currency convertible bond (FCCB) loans make up a majorportion of the companys loan book. Out of a total of Rs730cr in FCCB loans, Rs410cr isdue in April 2010. Since the exercise price is way above the current market price, it looksunlikely that it would be converted to equities. Hence, the company may have to raise freshloans thereby increasing its Interest costs.

We believe Industry valuations are likely to remain subdued in the near term due to overallslowdown in the sector. A substantial portion of the companys Revenue comes from theCommercial Vehicle segment, where recovery looks unlikely in the near term. Further, amajor portion of the companys consolidated Revenue comes from the US and Europeanmarkets, which is almost in recessionary mode, indicting further underperformance for thestock. In view of all these, we lower our Target multiple to 4x (earlier 5.5x) FY2010EEV/EBITDA and P/E to 7x (earlier 12x) FY2010E Earnings. We maintain a Buy on thestock, with a revised Target Price of Rs117 (Rs218).

Exhibit 2: 2QFY2009 Performance (Standalone)

Y/E Mar (Rs cr) 2QFY2009 2QFY2008 % chg 1HFY2009 1HFY2008 % chg Net Sales 654.5 548.1 19.4 1,291.8 1,045.0 23.6 Other Income 10.2 14.4 (29.0) 22.3 34.4 (35.2)Total Income 664.7 562.5 18.2 1,314.1 1,079.4 21.7 EBITDA 157.7 149.2 5.8 313.7 250.4 25.3 OPM (%) 24.1 27.2 24.3 24.0Interest 23.6 27.3 (13.7) 43.1 50.7 (14.9)Depreciation 38.9 35.1 10.8 76.6 68.0 12.7 Profit Before Tax 18.0 101.2 (82.2) 59.4 199.5 (70.2)Tax 6.7 33.4 (79.8) 21.6 66.9 (67.7)Profit After Tax 11.3 67.8 (83.4) 37.8 132.6 (71.5)

EPS (Rs) 0.5 3.0 1.7 6.0Source: Company, Angel Research

Exhibit 3: 2QFY2009 Performance (Consolidated)Y/E Mar (Rs cr) 2QFY2009 2QFY2008 % chg 1HFY2009 1HFY2008 % chg Net Sales 1,346.6 1,045.2 28.8 2,657.9 2,106.6 26.2 Other Income 13.2 15.2 (13.3) 25.7 35.8 (28.2)Total Income 1,359.8 1,060.4 28.2 2,683.6 2,142.4 25.3 EBITDA 193.8 177.6 9.1 398.4 324.2 22.9

OPM (%) 14.4 17.0 15.0 15.4 Interest 28.9 30.0 (3.7) 54.2 56.7 (4.3)Depreciation 60.8 54.3 11.9 120.9 106.8 13.2 Profit Before Tax 29.8 119.4 (75.0) 92.1 240.8 (61.8)Tax 1.6 40.2 (95.9) 23.0 81.2 (71.7)Profit After Tax 4.6 79.2 (94.2) 45.5 159.6 (71.5)

EPS (Rs) 0.2 3.6 2.0 7.2 Source: Company, Angel Research

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October 24, 2008 4

Auto Ancillary

Bharat Forge

Angel Broking LimitedResearch Team Tel: 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

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