Bharat Forge: Melting point

Slowing overseas revenues cause for concern.

The Bharat Forge stock has been an underperformer over the last one year; whereas the Sensex has moved by about 40 per cent, the forgings player's price has remained more or less flat.

The market is more concerned about slowing overseas revenues given the slowdown in the automobile industry overseas, especially in the heavy vehicles segment.

The numbers for the year ended March 2007 have been fairly good with consolidated revenues up a smart 38.4 per cent to Rs 4178.3 crore.

However, cost pressures (including raw material costs) have pulled down operating profit margin by 180 basis points to 15.5 per cent.

As a result, operating profit rose just under 24 per cent to Rs 646.4 crore, which includes a loss of Rs 7 crore from the China operations. The net profit too came in lower than expected at Rs 303 crore, a rise of 13 per cent.

Margins have been weak because of the lower margins from wholly owned subsidiaries, which contribute about half the company's revenues but fetch operating margins of around 10 per cent.

Ostensibly, it will take the management some time to improve the utilisation of facilities acquired overseas. Besides, margins for the standalone entity in the March quarter were disappointing, possibly because the company's new facilities are taking time to stabilise.

It is unlikely that margins from overseas firms can exceed very much beyond these levels, even if they are better utilised. Bharat Forge plans to foray into non-auto components with a view to de-risk its business model. Perhaps once the new business achieves some scale, operating margins will improve.

At the current price of Rs 340, the stock is trading at about 21 times estimated FY08 earnings but the near-term upsides seem to be priced in given that the outlook for growth of the automobile industry overseas doesn't appear too bright.

Marico: Higher expenses

Marico reported an improved performance in the March 2007 quarter helped by an improved performance in both domestic and overseas (primarily in the Middle East) markets, but higher other expenditure put pressure on operating margins.

As a result, operating profit grew 10.3 per cent y-o-y to Rs 40.1 crore in the last quarter, while net sales grew 33.3 per cent to Rs 396.96 crore.

Operating profit margin also fell 210 basis points y-o-y to 10.1 per cent in the last quarter. Higher other expenditure is attributed to initial fixed expenses incurred in its Egyptian operations in the previous quarter.

In the second quarter of FY07, it had acquired the Fiancee brand in Egypt and in the third quarter, it entered into a strategic alliance with Pyramids group for its hair care brand HairCode. Marico reported an organic growth of 21 y-o-y per cent in the fourth quarter of FY07, while inorganic growth was 12 per cent.

Meanwhile in the domestic market, the company's volume sales of Parachute in rigid packs grew 13 per cent y-o-y in the March 2007 quarter, while Saffola grew 19 per cent in volumes.

Marico has maintained Parachute retail prices since August 2004, however, with cost of inputs such as copra showing a rising trend, a price hike is expected shortly. In Q3 FY07, the company's organic growth was 20 per cent y-o-y, while inorganic was 16 per cent.

In international markets too, the company's FMCG business, excluding operations in Egypt, grew 24 per cent y-o-y in Q4 FY07. Marico's growth in the Middle East in the last quarter was driven largely by improved sales of Parachute hair cream and coconut oil. In FY07, operating profit margin grew 110 basis points y-o-y to 13.7 per cent.

Going forward, the company management would be focusing on ensuring synergies with its earlier acquisitions in Egypt. Also, Marico is expected to once again leverage strong growth in the FMCG market over the next few quarters. However, at Rs 58, the stock trades at 21-22 times estimated FY08 earnings and leaves little room for further upside.

With contributions from Shobhana Subramanian and Amriteshwar Mathur