Bharat Forge (Q1 FY15)

Bharat Forge reported a reasonably good set of Q1 FY15 financial results. Standalone revenues grew by 24.8% yoy.

Aug 02, 2014 07:08 IST India Infoline News Service

CMP Rs720, Target Rs1,250, Upside 73.6% 

  • Revenues at Rs9.9bn higher by 24.8% yoy; better than our estimates

  • Tonnage volumes surged 19% yoy and 2.3% qoq

  • Realizations were higher by 4.9% and 3.8% qoq

  • OPM at 28.7% was higher by 390bps and 392bps qoq, yoy improvement was on the back of benefits of operating leverage and better product mix, favorable product mix along with some inventory gains helped sequential improvement in margins

  • PAT at Rs1.5bn jumped 60.1% yoy and 35.9% qoq was substantially better than our and street estimates

  • Maintain our rating to BUY with a 2-year price target of Rs1,250

Result table
(Rs m) Q1 FY15 Q1 FY14 % yoy Q4 FY14 % qoq
Tonnage (MT) 49,123 41,279 19.0 48,015 2.3
Domestic 4,529 4,146 9.2 4,355 4.0
Exports 5,518 3,972 38.9 5,079 8.6
Net sales 9,882 7,915 24.8 9,305 6.2
Material costs (3,591) (3,252) 10.4 (3,853) (6.8)
Manufacturing Expense (1,849) (1,385) 33.5 (1,720) 7.5
Personnel costs (795) (707) 12.5 (690) 15.3
Other overheads (812) (611) 33.0 (740) 9.8
Operating profit 2,833 1,961 44.5 2,303 23.0
OPM (%) 28.7 24.8 390 bps 24.8 392 bps
Depreciation (658) (611) 7.7 (598) 9.9
Interest (316) (354) (10.7) (349) (9.2)
Other income 242 354 (31.7) 326 (25.8)
PBT 2,101 1,350 55.6 1,683 24.9
Tax (651) (444) 46.6 (616) 5.7
Effective tax rate (%) 31.0 32.9 36.6
Adjusted PAT 1,450 906 60.1 1,067 35.9
Adj. PAT margin (%) 14.7 11.4 323 bps 11.5 321 bps
Extra ordinary items - - 124
Reported PAT 1,450 906 60.1 1,190 21.8
Ann. EPS (Rs) 24.9 15.6 60.1 18.3 35.9
Source: Company, India Infoline Research

Revenues better than expectations

Bharat Forge reported a reasonably good set of Q1 FY15 financial results. Standalone revenues grew by 24.8% yoy. This was led by 19.0% yoy growth in tonnage and 4.9% yoy growth in realizations. While domestic sales were higher by 9.2% yoy in spite of weak CV sales, export growth was strong at 38.9% yoy. Export growth was led by strong growth in US (+78% yoy) and Asia Pacific (+22%) while Europe growth was muted at 2% yoy. On a sequential basis, revenues were higher by 6.2% owing to 2.3% rise in tonnage and 3.8% increase in realizations. Domestic sales were higher by 4% qoq in spite of seasonally weak CV volumes owing to strength in Industrial business. Exports were higher by 8.6% driven by 13% rise in US sales and 7% higher sales from Europe.


With non-auto segment seeing much stronger growth the contribution of the segment rose from 39% a year ago to 46% in Q1 FY15. Non-auto India revenues grew by 22% to Rs1.55bn while non-auto exports surged to Rs2.7bn. The key segments that drove the non-auto business were Oil & Gas, Marine and Railways.


OPM surges 390bps yoy to 28.7% much higher than our and street expectations

Bharat Forge reported OPM of 28.7% compared to our expectations of 25.1%. Margins were substantially ahead of our and street expectations with increase of 390bps yoy and 392bps qoq. Improvement in margins came in on two counts 1) better product mix whereby non-auto contribution continued to rise which commands higher margins and also machining (value addition) was higher in the non-auto business and 2) benefits of operating leverage. On a yoy basis, gross margins improved 474bps while staff costs were lower by 88bps as a percentage of net sales. This was offset by increase in 122bps increase in manufacturing costs and 50bps increase in overheads (high expenses related to exports). On a sequential basis, gross margins improved by 507bps due to 1) inventory benefits, 2) write offs in the previous quarter and 3) favorable product mix. This was partially offset by increase all other expenses.


Cost analysis
As a % of net sales Q1 FY15 Q1 FY14 bps yoy Q4 FY14 bps qoq
Raw material 36.3 41.1 (474) 41.4 (507)
Manufacturing Expenses 18.7 17.5 122 18.5 24
Personnel Costs 8.0 8.9 (88) 7.4 64
Other overheads 8.2 7.7 50 7.9 27
Total costs 71.3 75.2 (390) 75.2 (392)
Source: Company, India Infoline Research

Strong volume prospects ahead

The company believes that domestic CV business has hit a bottom in Q3 FY14 and expects a modest recovery seen in Q4 FY14 to continue into FY15. Recovery in US and European markets is expected to sustain. Non-auto demand in India and export markets is likely to remain strong, all of which will be supplied from the standalone operations. With capacity utilization at 65% in standalone operations and 70% in European operations, the company believes that the current margin levels will sustain. In the standalone entity the company has lined up a capex of Rs1.5bn primarily for maintenance capex. The company has a target to be net-debt free in three years. The company sees great opportunity in the passenger car market contribution from which was at just 8% in Q1 FY15. On the standalone business the company is hopeful of huge investments in oil & gas, power generation, mining and railways bringing in strong order inflow for the industrial segment of Bharat Forge. The Alstom JV has an order book of Rs45bn of which Rs8bn was booked in FY14. We maintain our BUY rating with two-year price target of Rs1,250.


Financial Summary
Y/e 31 Mar (Rs m) FY14 FY15E FY16E FY17E
Revenues 67,161 77,948 92,495 112,628
yoy growth (%) 30.0 16.1 18.7 21.8
Operating profit 10,271 13,574 16,691 21,141
OPM (%) 15.3 17.4 18.0 18.8
Pre-exceptional PAT 4,178 6,292 8,385 11,378
Reported PAT 5,215 6,292 8,385 11,378
yoy growth (%) 110.8 20.6 33.3 35.7
         
EPS (Rs) 17.9 27.0 36.0 48.9
P/E (x) 40.1 26.6 20.0 14.7
Price/Book (x) 6.1 4.9 4.0 3.1
EV/EBITDA (x) 17.4 12.6 9.6 7.0
Debt/Equity (x) 0.7 0.5 0.3 0.2
RoE (%) 16.7 20.5 22.0 23.7
RoCE (%) 15.4 20.9 24.1 27.7
Source: Company, India Infoline Research

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