Bharat Forge: Topping it up

The auto component maker's topline, which rose 41 per cent y-o-y, was driven by better exports & productivity.

Pune-based Bharat Forge, India's leading auto component maker, has posted a strong growth of 25 per cent y-o-y in standalone sales for the September quarter, the highest in the last four quarters.

The topline has been driven by significantly better exports, which rose 41 per cent y-o-y with the company seeing better demand from Europe and the Asia Pacific regions.

The firm managed to push sales of engine components for both cars and commercial vehicles to the European market. As a result, Bharat Forge's exposure to non-US markets is now up at 50 per cent compared with 33 per cent earlier.

In fact, had there not been a currency impact, the export performance would have been even stronger. Thanks to good topline performance and better productivity, the operating margin was up 420 basis points q-o-q to 24.6 per cent, though it showed a fall of 150 basis points y-o-y.

However, the ancillary maker hasn't turned in great numbers as a consolidated entity because several of its subsidiaries have not done well.

With revenues from overseas subsidiaries (excluding the Chinese joint venture with FAW) falling 7.3 per cent y-o-y, consolidated net sales were up just 7.7 per cent y-o-y at Rs 1,045 crore.

But, operating margin for overseas companies was steady during the quarter and as a result, the consolidated operation margin rose 40 basis points y-o-y to 17 per cent.

While the share of the Indian operations to consolidated sales has increased sharply to 54 per cent in the September quarter from 47 per cent a year ago, it should stabilise at these levels or even fall somewhat as the overseas ventures grow.

Since the operating margins of the subsidiaries are much lower than those of the domestic entity, the consolidated margins are unlikely to expand too much.

However, Bharat Forge does plan to improve the share of machined components and with the plant for non-auto components going onstream next year, margins for the domestic business should not be under too much pressure.

The stock has under-performed the market over the last six months with the company's performance not being up to the mark.

At the current price of Rs 340, the stock trades at just under 20 times estimated FY09 consolidated earnings and appears to be a trifle expensive.

Sail: Leveraging domestic demand

Sail reported an improved performance in the September 2007 quarter thanks to higher realisations on a y-o-y basis, which helped to offset the negative impact of the lower volume growth and the surging rupee.

The company's operating profit grew 12.7 per cent y-o-y to Rs 2629.1 crore in the last quarter, while its net sales rose 7.3 per cent to Rs 9163.4 crore.

Its operating profit margin also expanded 140 basis points y-o-y to 28.7 per cent in the second quarter of the financial year.

Rival Tata Steel's operating profit margin improved 180 basis points y-o-y to 42.3 per cent, but these numbers do not include those of its earlier acquisition of the UK-based Corus.

Meanwhile, Sail's production of saleable steel was 3.25 million tonnes in the September 2007 quarter, 10 per cent higher on a y-o-y basis. However, a 2 per cent volume growth in sales impacted the growth.

Average realisations improved by over 5 per cent y-o-y in Q2 FY08, which is reasonably good considering that steel prices were lower in Q2 due to the appreciating rupee and lower international prices.

Rival Tata Steel's realisations in Q2 FY08 were estimated at Rs 39,275 a tonne, a y-o-y rise of 10.7 per cent thanks to sales of higher margin auto-grade steel.

Sail, like other players, is expected to leverage strong domestic demand in the next few quarters. However, the company's ability to keep operational costs under check would be crucial.

Ore and coal prices have been on an uptrend this year and are likely to rise further.

While Sail has captive iron ore mines, it will have to worry about coal prices. Sail's captive iron ore reserves have resulted in a re-rating of the Sail stock - it used to trade at an estimated P/E of 6 times FY08 earnings last November.

At its current price of Rs 244, it trades at 11.5 times estimated FY09 earnings, and is likely to be a market performer.

With contributions from Shobhana Subramanian and Amriteshwar Mathur