Bharat Forge Ltd (Q4 FY12)

CMP Rs319, Target Rs368, Upside 15.5% 

• Bharat Forge Ltd (BFL) reported net sales growth of 19% yoy driven by a volume growth of 11.7% yoy and 7% higher blended realizations. Export growth was very strong with a 27.8% yoy jump in revenues. For the year as a whole exports grew by 42%. Amongst the export markets, US registered a 48% growth while Europe remained flat yoy.
  
• An impairment provision of Rs704mn has been made towards the investment in North American operations and a decision against any further investment in these operations has been taken by the management. Net profit adjusted for the impairment has grown by 24.8% yoy. OPM was higher by 165bps yoy and 28bps qoq to 25.7% on the back of benefits of operating leverage and better product mix. Raw material costs as a percentage of sales were lower by 105bps yoy.
  
• Non-automotive revenue contribution stood at Rs12,885mn in FY12, forming 38% of standalone entity revenues, and reflecting a growth of 32%. The exports in this segment grew by 37% in FY12.
  
• Despite the slowdown being observed in domestic CV industry, LCV segment has been growing in double digits and company is gaining market share in this segment. European, Chinese automotive markets are expected to be sluggish while US markets are expected to remain strong. Growth in exports is expected on back of non auto businesses.
  
• There would be no new capital expenditure taken up in FY13 and the focus would be on asset utilization and improving the productivity. Company aims to focus on value addition and look for opportunities at product level instead of being a component supplier. In FY12, 44% of the products shipped were value added products and this in a way is reflected by the higher realizations achieved. On basis of value addition and cost control management expects margins to go up in FY13.
  
• We upgrade our rating to BUY from Market Performer and raise our 9-month price target to Rs368.