De-risking and plans to go beyond commercial vehicles may help Bharat Forge improve revenue growth, margins.
Aided by a strong show in exports and higher volumes, Bharat Forge posted a 27 per cent increase in revenues at Rs 910 crore for the September quarter. Exports, which constitute half of its standalone numbers, were up 58 per cent, aided by strong sales to the US and Europe. Heavy truck sales in Europe were up 25 per cent over the year-ago quarter. The company’s realisations also improved due to increase in prices, currency gain and product mix, which was more skewed to the higher margin non-auto business. Though the ratio of raw material costs to sales was down, earnings before interest, taxes, depreciation and amortisation (Ebitda) margins for the standalone entity were down 50 basis points year-on-year, due to an increase across manufacturing, employees and other expenditure heads.
The company’s foreign subsidiaries (Germany and China), which account for 40 per cent of consolidated revenues, clocked a 23 per cent year-on-year growth at Rs 649 crore, with Ebitda margins at six per cent. Going ahead, the company's prospects remain healthy led by higher contribution from the non-auto business. Overall, analysts expect its earnings to grow by 23-25 per cent in the next fiscal. At Rs 283, the stock is trading at a PE of 17 times FY12 and 13 times FY13 estimated earnings, which is lower than its historic average of 20 times. Most analysts are positive on the stock.
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GLOBAL MARKETS
The company’s key markets are North America, Europe and China. Demand is likely to be strong in the North American market, aided by fleet replacement of trucks in the US. With the average replacement once in every 6-6.5 years and the current truck life at over nine years, the fleet replacement is likely to benefit Bharat Forge. The company is a strong player in the engine and chassis components space and should be able to reap the gains from the replacement. While North America is expected to do well, the two areas which could hit growth are China and Europe. While political issues overshadow business growth in Europe, the Chinese government’s steps to control inflation have led to a production slowdown and are impacting the company’s prospects. Given that the anti-inflationary measures of China are bearing fruit, analysts feel the company’s sales should improve in that country, whose automotive market is thrice India’s.
NON-AUTO SEGMENT
Revenue from the non-auto business increased by 24 per cent to Rs 329 crore and was impacted by the slowdown and uncertainty related to capex plans of manufacturers. The business has seen a gradual scaling up, from 29 per cent of the total standalone revenue two years ago to about 40 per cent now. With new facilities coming into operation, the share could inch up going ahead. The company, too, is expecting its share to rise to 60 per cent. A large part of its capital expenditure over the next two years, estimated at about Rs 300 crore, is likely to be in the non-auto business. The company expects its capacity utilisation to improve from 50-55 per cent to over 80 per cent in two years.
Analysts feel the company will be able to maintain the current growth rates. This is because it is in a ramp-up phase, compared to the auto segment, where it dominates with a market share of 75-80 per cent. While the key areas are oil and gas, construction equipment and railways, analysts believe its joint ventures with NTPC and Alstom are key growth drivers going ahead in the non-auto space. Says Nikhil Deshpande of PINC Research: “From 2012-13, the power business is expected to contribute significantly to the non-auto revenues.”
OUTLOOK
The company is likely to be impacted by the partial withdrawal of the duty entitlement passbook scheme in India. The export benefit has come down from six per cent to three per cent, and the company is likely to be impacted to the tune of Rs 48 crore annually. It is likely to look at steps such as raising prices, to mitigate the impact. While there are headwinds in the Indian commercial vehicle space, given the high interest rates and industrial slowdown, its growth is likely to be seven-eight per cent next year. With the ramp up in the number of clients, as well as improvement in existing capacity utilisation, revenues are likely to hold steady. While most of the auto business growth is priced in the stock, analysts say the kicker would be the scaling of the non-auto segment, especially power.
