>BHARAT FORGE (PRABHUDAS LILLADHER)

Industry slowdown hurts performance

■ Sharp decline in topline: Bharat Forge (BFL) reported a sharp 49.7% YoY degrowth in topline to Rs2.9bn, on account of a 48.3% YoY decline in the domestic revenues at Rs1.7bn. The company also witnessed a slowdown in their exports; exports declined by a whopping 51.6% YoY at Rs1.2bn. The general economic slowdown across the globe as well as production cuts, especially in the commercial vehicle (CV) segment, led to a severe decline in the revenues on a standalone basis. Operating profits declined by 70% YoY at Rs427m, whereas operating margins declined by 10% YoY to stand at 14.6%. The company reported a forex gain of Rs987m on account of adoption of the revised AS 11 accounting norms. As a result, the decline in PAT was restricted at 26.2% YoY (Rs611m). However, excluding the forex gain, BFL reported a loss of Rs377m.

■ Consolidated performance: On a consolidated basis, BFL reported a decline of 46.8% YoY in net sales at Rs6.1bn, while reported PAT was down 68% at Rs203m. EBITDA for the quarter stood at Rs176m, a decline of 90.5% YoY. 􀂄 Increasing focus on the non–auto business: The facilities at the Baramati plant and the open die forge facility in Pune have commenced operations. These plants have an annual forging capacity of 125,000 tpa and are expected to generate a revenue of Rs10bn-11bn at their full capacity utilization. However, in the medium term, the utilization of the new capacity might be impacted due to a slowdown in the user industries (construction, mining and marine).

■ Outlook & Valuation: With the auto industry in US and India facing tough times, we expect the non–auto business to be the key growth driver for BFL in the long term. However, we believe that the non-auto business will start contributing significantly to the revenues post FY10E. The stock is currently trading at 19.0x and 12.4x our FY10E and FY11E earnings. Given the uncertain economic environment in the US as well as European markets (which account for ~65% of BFL’s consolidated sales) for atleast the next two quarters, we rate the stock as ‘Reduce’.

To see full report: BHARAT FORGE