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Auto Components April 28, 2015

Bharat Forge

Bloomberg: BHFC IN Reuters: BFRG.BO

BUY

Institutional Equities

India Research

UPDATE

Recommendation

CMP: Rs1,180

Target Price: Rs 1,470

Previous Target Price: Rs1,470

Upside (%) 25%

Stock Information

Market Cap. (Rs bn / US$ mn) 275/4,322

52-week High/Low (Rs) 1,363/401

3m ADV (mn) Rs1,285/ US$20.2

Beta 1.1

Sensex/ Nifty 27,177/8,214

Share outstanding (mn) 233

Stock Performance (%)

1M 3M 12M YTD

Absolute (3.4) 16.1 150.8 24.9

Rel. to Sensex (2.4) 26.3 136.3 26.4

Performance

Source: Karvy Institutional Research

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Analysts Contact

Mitul Shah

+91 22 6184 4312

[email protected]

Admin

66006600

[email protected]

Multiple Opportunities Yet to Unfold;

Diversification Keep Off-Setting near Term Hiccups Bharat Forge Limited (BFL) delivered very strong performance in 9MFY15,

which we believe to continue in Q4FY15 as well as over next 3-4 years.

Company is well protected from near term slowdown in Europe as well slow

ramp up in domestic industrial segment with increasing contribution from

premium car segment, new non auto segments and gaining shares in

majority of geographies. Moreover, company’s revenue contribution from car

segment in US market has been increasing, lowering dependence on truck

segment. Our interaction with industry experts in overseas markets indicates

healthy volumes of class-8 trucks in Q1FY16, which would continue in

CY2015. In CY2016, growth may taper down, while BFL’s increasing

contribution from PV segment would offset the effect. On the other hand,

Company’s presence in aerospace, marine business and other non auto

engineering segment would help company record 20%+ revenue growth over

next 3-4 years. European slowdown is mainly on account of turmoil in

Russian markets, while Bharat forge has hardly any presence in the country.

Within Asian region, biggest market of China is showing sign of slowdown,

where in BFL’s revenue contribution is negligible, at present.

We believe that, BFL would continue double digit growth in US on account

of incremental volumes from PV segment, client addition in truck segment

and penetration into new non auto segment. Within Europe region,

company’s growth prospect remains strong on account of healthy volumes

from Aluminum forging. Within domestic segment, we expect BFL to

significantly scale up its performance on the back of a strong recovery in the

domestic CV industry and better traction from domestic industrial segment.

A higher contribution from the non-auto business and a richer product mix

with a higher machining contribution will drive an increase of 590 bps in the

BFL’s console EBIDTA margin over FY14-FY17E. As we highlighted in our

BFL initiation, we believe that BFL’s business would inclined towards

engineering segment and it would become an engineering company.

Valuation & Rating: In view of higher earnings growth, better return ratios

and ample opportunity arising out of economic revival for industrial

business, We reiterate our “BUY” recommendation on Bharat Forge and

maintain our price target of Rs 1470, valuing the stock at 24x FY17E EPS.

Key Financials (Consolidated) Y/E March (Rs.mn) FY13 FY14 FY15E FY16E FY17E

Net Sales 51,665 67,161 79,599 95,507 116,828

EBITDA 7,915 10,271 15,504 19,911 24,776

EBITDA margin (%) 15.3 15.3 19.5 20.8 21.2

Adj. Net Profit 2,764 4,449 7,782 10,852 14,259

EPS(Rs.) 11.9 19.1 33.4 46.6 61.3

EPS Growth (%) -34.2 61.0 74.9 39.5 31.4

RoE (%) 12.3 17.8 25.3 27.9 28.3 PER (x) 99.4 61.7 35.3 25.3 19.3 EV/ EBITDA 36.9 28.3 18.2 13.9 10.9

Source: Company, Karvy Stock Broking

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April 28, 2015

Bharat Forge

Exhibit 1: Key Fundamental Parameters Indicates Rerating on the back of Regaining Historical Business Performance

(Rs.mn) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

Consolidated Rev Growth (%) - 51.4 38.4 11.3 2.6 -30.3 52.9 23.4 -9.2 18.8 18.5 20

M&HCV Growth (%) 23 4.5 32.8 -0.4 -33.2 33.5 31.9 8.1 -23.1 -25.3 16 20

US Revenue Growth (%) - 87.1 38.4 -9.9 -3.4 -34.7 44.3 35.3 11 -6.7 96 22

Europe Revenue Growth (%) - 75.4 51 13.7 8.9 -45.1 89.8 44.1 -24.3 42.2 5.6 10

Export Growth (%) 53.3 28.4 14.6 27.9 4.2 -29.4 72.4 42.2 -8.5 15.7 48 18

Exchange rate Rs/$ 44.9 44.3 45.2 40.3 45.8 47.4 45.6 47.9 54.4 60.5 62 63

Non Auto Growth (%) - 51.4 38.4 17.9 19.7 -33.6 91.1 30.8 -4 18.1 22 25

EBITDA Margin (%) 21.2 17.3 15.5 15.1 9.5 10 15.4 15.9 13.5 17 19.5 20.8

RoE (%) 36.2 27.4 20.6 18 3.1 0.7 17.2 20 8.8 15.7 25.3 27.9

RoCE (%) 18.5 15.6 12 10.6 2.6 4.1 10 12.1 6.2 10.1 17.5 21.3

No of Positive Fundamental

10 9 10 3 1 1 8 8 2 5 10 10 Parameters out of 9

Source: Company, Karvy Institutional Research, Note: : Colour indicates unfavourable business factor, : Colour indicates favourable business factor

All the Factors favorable in FY16E to Re-establish Historical high Multiples of

FY05-07: As indicated in above table, all the domestic as well as global factors

including forex would be favourable for BFL in Fy16. Domestic MHCV growth,

Incremental volume from new segments in US, high growth in engineering

business, higher machining mix, healthy margins and better return ratio would act

as key trigger for 49% EPS CAGR. These factors are comparable to BFL’s good

period of FY05-07. We believe that, these factors would bring back historical high

multiple for the Company and stock would continue trading at high multiple to

capture 20%+ revenue and 25%+ earning growth over next 3-4 years.

Exhibit 2: Standalone – Key Financials

Y/E March (Rs.mn) FY13 FY14 FY15E FY16E FY17E

Net revenues 31,512 33,993 46,406 56,460 68,019

EBIDTA 7,156 8,637 13,780 17,409 21,380

EBIDTA margin (%) 22.7 25.4 29.7 30.8 31.4

Adjusted Net Profit 2,983 3,916 7,519 10,455 13,599

EPS (Rs.) 12.8 16.8 32.3 44.9 58.4


Exhibit 3: US Class 8 Truck Sales – 40% Below Peak Exhibit 4: US Class 8 Truck – Positive Trend Continues

Source: Company, HT USA, Karvy Institutional Research Source: HT USAKarvy Institutional Research

-60

-40

-20

0

20

40

-

50

100

150

200

250

300

350

400

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Class 8 Production YoY (RHS)

('000 uniit) (%)

(20.0)

(10.0)

-

10.0

20.0

30.0

40.0

-

5

10

15

20

25

Ap

r-13

Jun

-13

Au

g-1

3

Oct

-13

Dec

-13

Feb

-14

Ap

r-14

Jun

-14

Au

g-1

4

Oct

-14

Dec

-14

Feb

-15

Class - 8 YoY (RHS)

('000 uniit) (%

) Healthy Vol Cont

40% Gap

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April 28, 2015

Bharat Forge

In US, Sales of Class 8 truck rose 25.4% YoY in March 2015 and grew 25.3% YoY in

Jan-Mar 2015 quarter. Though, it dropped sequentially in the quarter, while

healthy double digit YoY growth continues in the quarter. For the full year 2014,

Class 8 truck production stood at 220K units, up 19.2% YoY, though it is well

below its peak level of 2006 (40% gap).

Exhibit 5: NA - Fright Index –Rising in Mar’15 Exhibit 6: US – Cass Truckload Index Hits Record High

Source: HT USA, Karvy Institutional Research Source: HDT USA, Karvy Institutional Research

North America’s Spot Freight Rate index also shows uptick in Mar’15, after

witnessing marginal dip in the month of Feb’15. On the other hand, Cass truckload

Index hits all time record high in Mar’15, up 5.1% YoY. The Cass Truckload

Linehaul Index rose to 126.5, a 2.3% increase from the month before, following a

1.3% drop in February and a 0.9% decline in January. These parameters indicate

that with demand increasing and capacity remaining tight, the contract rate

increases will continue in coming quarters as well. Although spot market pricing

has decelerated somewhat in Feb’15, it remains strong and it is expected to post

mid-to-high single digit gains.

Thus majority of the indicators remains positive for the US trucking industry and

indicates double digit volume growth for CY2015, while CY2016 may see some

deceleration but it would remain positive with high single digit growth to low

double digit growth territory.

We believe that BFL has ample opportunity in terms of growing/entering into

number of new non auto segments with competency and capability to produce

large size high tech forging products. Moreover, company has added advantage of

having in house machining unit aided by automation and CAD/CAM facilities. To

our mind, BFL’s key growth driver would be high revenues from engineering

segment in domestic as well as overseas market going forward. We believe that

company’s lower volume from M&HCV and Oil & Gas segment would be

compensated by incremental volumes from PV segment and other non auto

segment in America. Similarly in Europe company is expected to outperform with

higher business from Aluminum forging and PV segment. For its India business,

we are positive on M&HCV segment as well as non auto engineering segment.

Thus we believe that majority of the growth parameters remains strong for

company over next 3-4 years, though near term hiccups persist. In view of higher

earnings growth, better return ratios and ample opportunity arising out of

economic revival for industrial business, We reiterate our “BUY” recommendation

on Bharat Forge and maintain our price target of Rs 1470, valuing the stock at 24x

FY17E EPS. Any fall in price is a buying opportunity to own such quality stock.

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April 28, 2015

Bharat Forge

Financials (Consolidated)

Exhibit 7: Profit & Loss Statement


Net revenues 51,665 67,161 79,599 95,507 116,828

Operating expenses 43,750 56,890 64,095 75,595 92,052

EBIDTA 7,915 10,271 15,504 19,911 24,776

EBIDTA margin (%) 15.3 15.3 19.5 20.8 21.2

Other income 1,121 1,249 1,302 1,440 1,643

Interest 1,672 1,692 1,607 1,107 929

Depreciation 3,195 3,579 3,755 4,094 4,365

Profit Before Tax 4,537 7,287 11,444 16,149 21,124

Tax 1,529 2,100 3,662 5,297 6,865

Minority Interest (453) (160) 0 0 0

Reported Net Profit 2,476 4,985 7,782 10,852 14,259

Net Margin (%) 4.8 7.4 9.8 11.4 12.2

Extraord. Income 368 1,037 0 0 0

Adjusted Net Profit 2,764 4,449 7,782 10,852 14,259

Adj. Net Margin (%) 5.3 6.6 9.8 11.4 12.2


Exhibit 8: Balance Sheet


Equity capital 466 466 466 466 466

Reserves & surplus 22,098 26,367 33,058 42,820 55,989

Shareholders funds 22,564 26,832 33,524 43,286 56,455

Minority Int. 1,642 170 170 170 170

Total Loans 23,326 20,074 16,074 11,074 6,074

Deferred tax liability 1,345 1,645 1,645 1,645 1,645

Total Liabilities and Equity 48,878 48,721 51,413 56,175 64,343

Gross block 56,440 53,888 56,888 60,388 64,388

Depreciation 27,374 28,604 32,359 36,453 40,819

Net block 29,066 25,283 24,529 23,935 23,569

Capital WIP 6,324 5,827 6,002 6,182 6,367

Intangible Assets 407 319 319 319 319

Investments 4,160 8,012 10,015 12,519 15,648

Inventory 11,320 10,386 11,765 13,876 16,897

Debtors 7,967 8,660 7,633 9,158 11,203

Cash & Bank Bal 5,553 4,227 8,759 9,416 11,571

Loans & Advances 11,150 12,631 14,912 17,357 20,505

Current Assets 35,990 35,904 43,069 49,807 60,175

Sundry Creditors 7,977 7,702 11,414 13,462 16,393

Other Current Liability 19,092 18,922 21,106 23,124 25,343

Current Liability& Provisions 27,069 26,624 32,520 36,586 41,736

Net current assets 8,922 9,280 10,549 13,221 18,440

Total Assets 48,878 48,721 51,413 56,175 64,343


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April 28, 2015

Bharat Forge

Exhibit 9: Cash Flow

Y/E March (Rs. in mn) FY13 FY14 FY15E FY16E FY17E

EBIT 4,720 6,693 11,749 15,817 20,410

Other Income 1,121 1,249 1,302 1,440 1,643

Depreciation & Amortisation 3,195 3,579 3,755 4,094 4,365

Interest paid(-) (1,672) (1,692) (1,607) (1,107) (929)

Dividends paid(-) (654) (681) (1,090) (1,090) (1,090)

Tax paid(-) (1,529) (2,100) (3,662) (5,297) (6,865)

Extra Ord Income 368 1,037 0 0 0

Operating Cash Flow 5,549 8,085 10,446 13,856 17,534

Change in Working Capital 2,514 (1,685) 3,263 (2,016) (3,064)

Cash flow from Operations 8,063 6,400 13,709 11,840 14,470

Capex (6,791) 790 (3,175) (3,680) (4,185)

Non Strategic Investment 291 (3,852) (2,003) (2,504) (3,130)

Cash flow from Investing (6,500) (3,063) (5,178) (6,184) (7,315)

Change in borrowing (863) (3,253) (4,000) (5,000) (5,000)

Others (1,484) (1,411) 0 0 0

Cashflow from Financial Activities (2,347) (4,663) (4,000) (5,000) (5,000)

Change in Cash (784) (1,326) 4,532 657 2,155

Opening cash 6,337 5,553 4,227 8,759 9,416

Closing cash 5,553 4,227 8,759 9,416 11,571


Exhibit 10: Key Ratios


Revenue Growth -17.7 30.0 18.5 20.0 22.3

EBITDA Margin 15.3 15.3 19.5 20.8 21.2

Net Profit Margin 5.3 6.6 9.8 11.4 12.2

ROCE (%) 7.9 11.5 17.5 21.3 24.5

ROE (%) 12.3 17.8 25.3 27.9 28.3


Exhibit 11: Valuation Parameter


EPS( Rs) 11.9 19.1 33.4 46.6 61.3

P/E (x) 99.4 61.7 35.3 25.3 19.3

P/ BV (x) 12.2 10.2 8.2 6.3 4.9

EV/ EBITDA (x) 36.9 28.3 18.2 13.9 10.9

Fixed Assets Turnover Ratio (x) 1.4 2.1 2.6 3.1 3.9

Debt / Equity (x) 1.0 0.7 0.5 0.3 0.1

EV/ Sales (x) 5.7 4.3 3.5 2.9 2.3


6

April 28, 2015

Bharat Forge

For further enquiries please contact:

[email protected]

Tel: +91-22-6184 4300

Disclosures Appendix

Analyst certification

The following analyst(s), who is (are) primarily responsible for this report and whose name(s) is/ are mentioned

therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject

security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related

to the specific recommendation(s) or views contained in this research report.

Disclaimer

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and also distributes financial products. Subsidiaries and group companies of KSBL [associates] provide services as

Registrar and Share Transfer Agent, Commodity Broker, Currency and forex broker, merchant banker and

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relations with most of the companies whose securities are traded on the exchange platform. The information and

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Stock Ratings Absolute Returns Buy : > 15% Hold : 5 - 15% Sell : < 5%

7

April 28, 2015

Bharat Forge

Associates of KSBL might have received compensation from the subject company mentioned in the report during the

period preceding twelve months from the date of this report for investment banking or merchant banking or

brokerage services from the subject company in the past twelve months or for services rendered as Registrar and

Share Transfer Agent, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment

Advisory services, insurance repository services, consultancy and advisory services, realty services, data processing,

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Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of

the month preceding the publication of the research report. KSBL or its analysts did not receive any compensation or

other benefits from the companies mentioned in the report or third party in connection with preparation of the

research report and have no financial interest in the subject company mentioned in this report. Accordingly, neither

KSBL nor Research Analysts have any material conflict of interest at the time of publication of this report. It is

confirmed that KSBL and Research Analysts primarily responsible for this report and whose name(s) is/ are

mentioned therein of this report have not received any compensation from the subject company mentioned in the

report in the preceding twelve months. Since associates of KSBL are engaged in various financial service businesses,

they might have financial interests or beneficial ownership in various companies including the subject

company/companies mentioned in this report.

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