Bharat Forge: Forging ahead

Bharat Forge should better revenues as overseas sales surge

Having managed to get a manufacturing base in China through its joint venture with FAW, Bharat Forge now has a virtually global presence with a total global capacity of 6 lakh tonne per annum.

So it is well positioned to exploit demand from passenger car and commercial vehicle manufacturers, most of which it already caters to. Its dual shore manufacturing model will allow it to produce all key components at two locations at least.

The company plans to grow by also exploring opportunities in non-automotive sectors, such as energy, where the management believes there are opportunities.

According to the management, demand for forgings from auto makers remains good, even though there may be a realignment of market share among players.

In FY06, the company has grown its consolidated revenues by about 33 per cent to Rs 2,650 crore with operating profit margin remaining flat at around 20 per cent.

Consolidated margins will continue to remain lower than standalone margins "" around 27 per cent, since margins overseas can at best be around 13-14 per cent.

A larger portion of revenues-about 27 per cent""now comes from passenger car segment, while around 46 per cent is derived from commercial vehicles.

At present, non-automotive business accounts for around 17 per cent but this would increase to around 25 per cent in a few years.

The stock has been an underperformer in the last couple of months and at the current price of Rs 347, the stock trades at 23 times estimated FY07 earnings and 19 times estimated FY08 earnings, and appears attractive. There are concerns of a slowdown in demand from domestic CV players.

However, with an increasing portion of sales coming from overseas, Bharat Forge should be able to grow revenues though margin pressures may continue owing to increasing raw material costs, even though it would be able to pass on some of it.

Novartis: Local boost

In the fourth quarter of FY06, pharma multinationals have benefited from a pick-up in domestic sales, coupled with a low base effect in the previous year.

Novartis India has reported an operating profit of Rs 12.08 crore in the March 2006 quarter compared with a loss of Rs 9.13 crore in the corresponding previous period.

The street appears to have ignored the improved performance of the company as the stock has fallen about 17.25 per cent over the past four months compared with 13.5 per cent rise in the Sensex.

For FY06, operating profit margins grew 141 basis points y-o-y to 16.38 per cent as net sales improved 11.5 per cent to Rs 525.92 crore.

The company reported significantly improved performance in the key pharmaceuticals division with a 26 per cent y-o-y growth.

Analysts highlight improved demand for the company's products such as Voveran (medication for pain and inflammation segment) and Methergin and Syntocinon (gynaecology segment).

As a result, segment profit (before interest and tax) of the pharmaceuticals division went up by 40 per cent in FY06.

Also, in the OTC segment, the company is understood to have improved demand for its medications for the cold and allergy segments and vitamins.

Nevertheless, segment profitability in this business improved to 13 per cent in FY06, compared to 5.6 per cent a year ago, it is still lower than in pharmaceuticals and generics.

The generics business declined by 45 per cent in FY05, as the company sold its Rifampicin bulk drug business to group company Sandoz Private Limited with effect from April 2005.

The transfer of this business is good for Novartis India shareholders as it was ailing owing to surplus capacities and cheaper imports from China.

For a pharma multinational, the Novartis stock at Rs 486 appears reasonably valued at about 14.4 times trailing earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur