Bharat Forge: Engine trouble

Weak auto sector impacts numbers.

India's biggest auto component maker, the Rs 4,178 crore Bharat Forge is raising about Rs 300 crore through a preferential allotment to the promoters, to fund investments in the non-auto components sector.

These include areas such as power equipment, oil and gas and aerospace. The Pune-headquartered firm's strategy is to de-risk the business by reducing its dependence on the auto sector which has been going through difficult times both in India and overseas. The investments should start kicking in sometime around the last quarter of FY09.

Meanwhile, the slowdown in the US commercial vehicles market impacted Bharat Forge's numbers in the December 2008 quarter with stand-alone sales up just 17 per cent to Rs 560 crore.

The growth in exports, which account for about 40 per cent of sales, was about 17 per cent. Operating margins were lower by about 150 basis points while the net profit fell 5 per cent thanks to higher interest costs.

The performance of the overseas subsidiaries was also somewhat below expectations and consolidated revenues (excluding operations in China) grew just 6 per cent with the net profit falling by about 9 per cent.

Bharat Forge is expected to post consolidated revenues of Rs 4550 in FY08 which should grow by about 15-16 per cent in FY09. Net profits for FY08 are expected to be in the region of Rs 300 crore which could rise to Rs 370 crore in the following year.

The dilution in the equity base resulting from the preferential allotment should not be more than about 4 per cent. The stock has been an underperformer and has lost 21 per cent since the start of 2008.

At the current price of Rs 289, the stock trades at just over 18 times FY09 estimated earnings and is likely to underperform the markets for a while before the automobile sector stages a recovery.

Dr Reddy's Labs: In poor health

The Rs 3,750 crore Dr Reddy's Laboratories stock has lagged its peers since the beginning of the year: it has lost about 22 per cent closing at Rs 560 on Tuesday. The Rs 4366 crore Ranbaxy, on the other hand, has gained 7 percent while Sun Pharma has risen about 3 per cent.

Dr Reddy's had reported an 18 per cent fall in consolidated revenues and near 41 per cent fall in consolidated net profits in the December 2007 quarter, due to a write-off of Rs 240 crore relating to intangibles from the Germany-based Betapharm which it had acquired in February 2006.

Meanwhile, analysts are concerned that company may face further difficulties in the German market. They believe the drug firm could be asked to reduce prices because insurance companies may ask for higher rebates.

Thus, some of the gains that Dr.Reddy's would have made by shifting the production of four products from Germany to its Indian facilities, may be lost.

Besides, it is possible, say analysts, that the company could face some problems relating to safety concerns in its R&D company Perlecan, in which it has a stake of 14. 3 per cent.

As a consequence, earnings estimates for the stock have been trimmed. Besides, the value of some of the products in the pipeline have been lowered as has the value that Perlecan could add to the company.

At the current price of Rs 560, the stock trades at just under 16 times FY09 estimated earnings and could continue to underperform peers. Ranbaxy, at Rs 453 trades at 19 times CY08 earnings while Sun Pharma at Rs 1,235 gets a discounting of 18 times FY09 earnings.