>BHARAT FORGE (ICICI DIRECT)

Poor show...

Bharat Forge (BFL) surprised us by reporting a substantial 44.8% degrowth in standalone net sales to Rs 351.6 crore. It was badly hit by a 41.2% fall in domestic sales and 52% fall in export revenues. Margins further slumped by 70 bps from Q4FY09 to 20.9% (24.5%in Q1FY08). This
was mainly on account of a 400 bps rise in the staff costs to sales ratio. Higher finance costs further arrested the bottomline. It plunged by 96.3% to Rs 96 lakh as against profit of Rs 26.6 crore (Rs 61.1 crore in Q4FY09). On a consolidated basis, net sales slipped 53.6% to Rs 1,311.3 crore while at the net level, the company went into the red with a loss of Rs 46.1 crore as against profit of Rs 40.9 crore in the corresponding period. As the company’s standalone profit has been eaten by its subsidiaries and the trend continued in Q1FY10, we are revising our sales estimates and profit estimates downward for FY10E on a consolidated basis. However, improving sales from a changing product mix would support higher sales and profit for FY11E. Revised consolidated EPS for FY10E would be at Rs 4.4 (down 18.4%) while for FY11E it would be at Rs 9 (up 17.2%).

Valuations
Poor exports and a lingering domestic market provide a bleak outlook for the current year. However, we expect the same to improve next year. Furthermore, multi-year order intake of $25 million from General Motors (reviving out of bankruptcy) and proposed venture with Alstom for power equipment with revenue guidance of Rs 1,600 per annum post FY12 provides a silver lining to the dark cloud. The proposed revenue inflow and expected recovery in domestic and export demand in FY11 emphasises comparatively higher multiples for the company. Accordingly, we value the stock at 20x its consolidated FY11E EPS of Rs 9, to arrive at our target price of Rs 180. Since the stock has run up in the last few days, at the CMP of Rs 241 we reiterate our UNDERPERFORMER rating.

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