Auto Components April 28, 2015

Institutional Equities
India Research
Bharat Forge
Bloomberg: BHFC IN
UPDATE Reuters: BFRG.BO BUY
Multiple Opportunities Yet to Unfold; Recommendation
CMP: Rs1,180
Diversification Keep Off-Setting near Term Hiccups Target Price: Rs 1,470
Bharat Forge Limited (BFL) delivered very strong performance in 9MFY15, Previous Target Price: Rs1,470
which we believe to continue in Q4FY15 as well as over next 3-4 years. Upside (%) 25%
Company is well protected from near term slowdown in Europe as well slow Stock Information
ramp up in domestic industrial segment with increasing contribution from Market Cap. (Rs bn / US$ mn) 275/4,322
premium car segment, new non auto segments and gaining shares in 52-week High/Low (Rs) 1,363/401
majority of geographies. Moreover, company’s revenue contribution from car 3m ADV (mn) Rs1,285/ US$20.2
segment in US market has been increasing, lowering dependence on truck Beta 1.1
segment. Our interaction with industry experts in overseas markets indicates Sensex/ Nifty 27,177/8,214
Share outstanding (mn) 233
healthy volumes of class-8 trucks in Q1FY16, which would continue in
CY2015. In CY2016, growth may taper down, while BFL’s increasing Stock Performance (%)
contribution from PV segment would offset the effect. On the other hand, 1M 3M 12M YTD
Company’s presence in aerospace, marine business and other non auto Absolute (3.4) 16.1 150.8 24.9
engineering segment would help company record 20%+ revenue growth over Rel. to Sensex (2.4) 26.3 136.3 26.4
next 3-4 years. European slowdown is mainly on account of turmoil in Performance
Russian markets, while Bharat forge has hardly any presence in the country.
Within Asian region, biggest market of China is showing sign of slowdown,
where in BFL’s revenue contribution is negligible, at present.
We believe that, BFL would continue double digit growth in US on account
of incremental volumes from PV segment, client addition in truck segment
and penetration into new non auto segment. Within Europe region,
company’s growth prospect remains strong on account of healthy volumes
from Aluminum forging. Within domestic segment, we expect BFL to
significantly scale up its performance on the back of a strong recovery in the Source: Karvy Institutional Research
domestic CV industry and better traction from domestic industrial segment. Click here to enter text.
A higher contribution from the non-auto business and a richer product mix
with a higher machining contribution will drive an increase of 590 bps in the
BFL’s console EBIDTA margin over FY14-FY17E. As we highlighted in our
BFL initiation, we believe that BFL’s business would inclined towards
engineering segment and it would become an engineering company.
Valuation & Rating: In view of higher earnings growth, better return ratios
and ample opportunity arising out of economic revival for industrial
business, We reiterate our “BUY” recommendation on Bharat Forge and
maintain our price target of Rs 1470, valuing the stock at 24x FY17E EPS.
Key Financials (Consolidated)
Y/E March (Rs.mn) FY13 FY14 FY15E FY16E FY17E
Net Sales 51,665 67,161 79,599 95,507 116,828
EBITDA 7,915 10,271 15,504 19,911 24,776
EBITDA margin (%) 15.3 15.3 19.5 20.8 21.2
Adj. Net Profit 2,764 4,449 7,782 10,852 14,259
EPS(Rs.) 11.9 19.1 33.4 46.6 61.3
EPS Growth (%) -34.2 61.0 74.9 39.5 31.4 Analysts Contact
RoE (%) 12.3 17.8 25.3 27.9 28.3 Mitul Shah
PER (x) 99.4 61.7 35.3 25.3 19.3 +91 22 6184 4312
EV/ EBITDA 36.9 28.3 18.2 13.9 10.9
mitul.shah@karvy.com
Source: Company, Karvy Stock Broking
Admin
66006600
support@equitec.in
 April 28, 2015

Bharat Forge
Exhibit 1: Key Fundamental Parameters Indicates Rerating on the back of Regaining Historical Business Performance

(Rs.mn) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E
Consolidated Rev Growth (%) - 51.4 38.4 11.3 2.6 -30.3 52.9 23.4 -9.2 18.8 18.5 20

M&HCV Growth (%) 23 4.5 32.8 -0.4 -33.2 33.5 31.9 8.1 -23.1 -25.3 16 20
87.1 38.4 -9.9 -3.4 -34.7 44.3 35.3 11 -6.7
US Revenue Growth (%) - 96 22
Europe Revenue Growth (%) - 75.4 51 13.7 8.9 -45.1 89.8 44.1 -24.3 42.2 5.6 10
Export Growth (%) 53.3 28.4 14.6 27.9 4.2 -29.4 72.4 42.2 -8.5 15.7 48 18
Exchange rate Rs/$ 44.9 44.3 45.2 40.3 45.8 47.4 45.6 47.9 54.4 60.5 62 63
Non Auto Growth (%) - 51.4 38.4 17.9 19.7 -33.6 91.1 30.8 -4 18.1 22 25
EBITDA Margin (%) 21.2 17.3 15.5 15.1 9.5 10 15.4 15.9 13.5 17 19.5 20.8
RoE (%) 36.2 27.4 20.6 18 3.1 0.7 17.2 20 8.8 15.7 25.3 27.9
RoCE (%) 18.5 15.6 12 10.6 2.6 4.1 10 12.1 6.2 10.1 17.5 21.3
No of Positive Fundamental

Parameters out of 9 10 9 10 3 1 1 8 8 2 5 10 10
Source: Company, Karvy Institutional Research, Note: : Colour indicates unfavourable business factor, : Colour indicates favourable business factor

All the Factors favorable in FY16E to Re-establish Historical high Multiples of

FY05-07: As indicated in above table, all the domestic as well as global factors
including forex would be favourable for BFL in Fy16. Domestic MHCV growth,
Incremental volume from new segments in US, high growth in engineering
business, higher machining mix, healthy margins and better return ratio would act
as key trigger for 49% EPS CAGR. These factors are comparable to BFL’s good
period of FY05-07. We believe that, these factors would bring back historical high
multiple for the Company and stock would continue trading at high multiple to
capture 20%+ revenue and 25%+ earning growth over next 3-4 years.

Exhibit 2: Standalone – Key Financials

Y/E March (Rs.mn) FY13 FY14 FY15E FY16E FY17E
Net revenues 31,512 33,993 46,406 56,460 68,019
EBIDTA 7,156 8,637 13,780 17,409 21,380
EBIDTA margin (%) 22.7 25.4 29.7 30.8 31.4
Adjusted Net Profit 2,983 3,916 7,519 10,455 13,599
EPS (Rs.) 12.8 16.8 32.3 44.9 58.4
Source: Company, Karvy Stock Broking

Exhibit 3: US Class 8 Truck Sales – 40% Below Peak Exhibit 4: US Class 8 Truck – Positive Trend Continues

400 ('000 uniit) (%) 40 25 (% 40.0

('000 uniit) Healthy Vol Cont
350 ) 30.0
40% Gap 20 20
300 20.0
250 15
0 10.0
200 10
-20 -
150
5 (10.0)
100
-40
50 - (20.0)
Oct-13

Oct-14
Jun-13
Aug-13

Dec-13

Jun-14
Aug-14

Dec-14
Feb-14

Feb-15
Apr-13

Apr-14

- -60
2005

2011
2004

2006

2007

2008

2009

2010

2012

2013

2014

Class 8 Production YoY (RHS) Class - 8 YoY (RHS)

Source: Company, HT USA, Karvy Institutional Research Source: HT USAKarvy Institutional Research

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Bharat Forge

In US, Sales of Class 8 truck rose 25.4% YoY in March 2015 and grew 25.3% YoY in
Jan-Mar 2015 quarter. Though, it dropped sequentially in the quarter, while
healthy double digit YoY growth continues in the quarter. For the full year 2014,
Class 8 truck production stood at 220K units, up 19.2% YoY, though it is well
below its peak level of 2006 (40% gap).
Exhibit 5: NA - Fright Index –Rising in Mar’15 Exhibit 6: US – Cass Truckload Index Hits Record High

Source: HT USA, Karvy Institutional Research Source: HDT USA, Karvy Institutional Research

North America’s Spot Freight Rate index also shows uptick in Mar’15, after
witnessing marginal dip in the month of Feb’15. On the other hand, Cass truckload
Index hits all time record high in Mar’15, up 5.1% YoY. The Cass Truckload
Linehaul Index rose to 126.5, a 2.3% increase from the month before, following a
1.3% drop in February and a 0.9% decline in January. These parameters indicate
that with demand increasing and capacity remaining tight, the contract rate
increases will continue in coming quarters as well. Although spot market pricing
has decelerated somewhat in Feb’15, it remains strong and it is expected to post
mid-to-high single digit gains.
Thus majority of the indicators remains positive for the US trucking industry and
indicates double digit volume growth for CY2015, while CY2016 may see some
deceleration but it would remain positive with high single digit growth to low
double digit growth territory.
We believe that BFL has ample opportunity in terms of growing/entering into
number of new non auto segments with competency and capability to produce
large size high tech forging products. Moreover, company has added advantage of
having in house machining unit aided by automation and CAD/CAM facilities. To
our mind, BFL’s key growth driver would be high revenues from engineering
segment in domestic as well as overseas market going forward. We believe that
company’s lower volume from M&HCV and Oil & Gas segment would be
compensated by incremental volumes from PV segment and other non auto
segment in America. Similarly in Europe company is expected to outperform with
higher business from Aluminum forging and PV segment. For its India business,
we are positive on M&HCV segment as well as non auto engineering segment.
Thus we believe that majority of the growth parameters remains strong for
company over next 3-4 years, though near term hiccups persist. In view of higher
earnings growth, better return ratios and ample opportunity arising out of
economic revival for industrial business, We reiterate our “BUY” recommendation
on Bharat Forge and maintain our price target of Rs 1470, valuing the stock at 24x
FY17E EPS. Any fall in price is a buying opportunity to own such quality stock.

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Bharat Forge
Financials (Consolidated)
Exhibit 7: Profit & Loss Statement
Y/E March (Rs.mn) FY13 FY14 FY15E FY16E FY17E
Net revenues 51,665 67,161 79,599 95,507 116,828
Operating expenses 43,750 56,890 64,095 75,595 92,052
EBIDTA 7,915 10,271 15,504 19,911 24,776
EBIDTA margin (%) 15.3 15.3 19.5 20.8 21.2
Other income 1,121 1,249 1,302 1,440 1,643
Interest 1,672 1,692 1,607 1,107 929
Depreciation 3,195 3,579 3,755 4,094 4,365
Profit Before Tax 4,537 7,287 11,444 16,149 21,124
Tax 1,529 2,100 3,662 5,297 6,865
Minority Interest (453) (160) 0 0 0
Reported Net Profit 2,476 4,985 7,782 10,852 14,259
Net Margin (%) 4.8 7.4 9.8 11.4 12.2
Extraord. Income 368 1,037 0 0 0
Adjusted Net Profit 2,764 4,449 7,782 10,852 14,259
Adj. Net Margin (%) 5.3 6.6 9.8 11.4 12.2
Source: Company, Karvy Stock Broking

Exhibit 8: Balance Sheet

Y/E March (Rs.mn) FY13 FY14 FY15E FY16E FY17E
Equity capital 466 466 466 466 466
Reserves & surplus 22,098 26,367 33,058 42,820 55,989
Shareholders funds 22,564 26,832 33,524 43,286 56,455
Minority Int. 1,642 170 170 170 170
Total Loans 23,326 20,074 16,074 11,074 6,074
Deferred tax liability 1,345 1,645 1,645 1,645 1,645
Total Liabilities and Equity 48,878 48,721 51,413 56,175 64,343
Gross block 56,440 53,888 56,888 60,388 64,388
Depreciation 27,374 28,604 32,359 36,453 40,819
Net block 29,066 25,283 24,529 23,935 23,569
Capital WIP 6,324 5,827 6,002 6,182 6,367
Intangible Assets 407 319 319 319 319
Investments 4,160 8,012 10,015 12,519 15,648
Inventory 11,320 10,386 11,765 13,876 16,897
Debtors 7,967 8,660 7,633 9,158 11,203
Cash & Bank Bal 5,553 4,227 8,759 9,416 11,571
Loans & Advances 11,150 12,631 14,912 17,357 20,505
Current Assets 35,990 35,904 43,069 49,807 60,175
Sundry Creditors 7,977 7,702 11,414 13,462 16,393
Other Current Liability 19,092 18,922 21,106 23,124 25,343
Current Liability& Provisions 27,069 26,624 32,520 36,586 41,736
Net current assets 8,922 9,280 10,549 13,221 18,440
Total Assets 48,878 48,721 51,413 56,175 64,343
Source: Company, Karvy Stock Broking

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Bharat Forge
Exhibit 9: Cash Flow
Y/E March (Rs. in mn) FY13 FY14 FY15E FY16E FY17E
EBIT 4,720 6,693 11,749 15,817 20,410
Other Income 1,121 1,249 1,302 1,440 1,643
Depreciation & Amortisation 3,195 3,579 3,755 4,094 4,365
Interest paid(-) (1,672) (1,692) (1,607) (1,107) (929)
Dividends paid(-) (654) (681) (1,090) (1,090) (1,090)
Tax paid(-) (1,529) (2,100) (3,662) (5,297) (6,865)
Extra Ord Income 368 1,037 0 0 0
Operating Cash Flow 5,549 8,085 10,446 13,856 17,534
Change in Working Capital 2,514 (1,685) 3,263 (2,016) (3,064)
Cash flow from Operations 8,063 6,400 13,709 11,840 14,470
Capex (6,791) 790 (3,175) (3,680) (4,185)
Non Strategic Investment 291 (3,852) (2,003) (2,504) (3,130)
Cash flow from Investing (6,500) (3,063) (5,178) (6,184) (7,315)
Change in borrowing (863) (3,253) (4,000) (5,000) (5,000)
Others (1,484) (1,411) 0 0 0
Cashflow from Financial Activities (2,347) (4,663) (4,000) (5,000) (5,000)
Change in Cash (784) (1,326) 4,532 657 2,155
Opening cash 6,337 5,553 4,227 8,759 9,416
Closing cash 5,553 4,227 8,759 9,416 11,571
Source: Company, Karvy Stock Broking

Exhibit 10: Key Ratios

Y/E March (Rs. in mn) FY13 FY14 FY15E FY16E FY17E
Revenue Growth -17.7 30.0 18.5 20.0 22.3
EBITDA Margin 15.3 15.3 19.5 20.8 21.2
Net Profit Margin 5.3 6.6 9.8 11.4 12.2
ROCE (%) 7.9 11.5 17.5 21.3 24.5
ROE (%) 12.3 17.8 25.3 27.9 28.3
Source: Company, Karvy Stock Broking

Exhibit 11: Valuation Parameter

Y/E March (Rs. in mn) FY13 FY14 FY15E FY16E FY17E
EPS( Rs) 11.9 19.1 33.4 46.6 61.3
P/E (x) 99.4 61.7 35.3 25.3 19.3
P/ BV (x) 12.2 10.2 8.2 6.3 4.9
EV/ EBITDA (x) 36.9 28.3 18.2 13.9 10.9
Fixed Assets Turnover Ratio (x) 1.4 2.1 2.6 3.1 3.9
Debt / Equity (x) 1.0 0.7 0.5 0.3 0.1
EV/ Sales (x) 5.7 4.3 3.5 2.9 2.3
Source: Company, Karvy Stock Broking

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Bharat Forge

Stock Ratings Absolute Returns

Buy : > 15%
Hold : 5-15%
Sell : < 5%

For further enquiries please contact:

research@karvy.com
Tel: +91-22-6184 4300

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 April 28, 2015

Bharat Forge

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