Bharat Forge - Slowdown ruins the play - GEPL Capital

Bharat Forge reported 3.3% drop in revenues in Q2FY13 to Rs.8,522 mn vs Rs.8815 mn in Q2FY12. This drop was on the grounds of slower growth in exports (8% y-o-y) in addition to decline in domestic revenue (13% y-o-y). Even volumes for Q2FY13 were lower by 14% y-o-y to 46,350 tons vs 53,740 tons, however surprisingly realization improved by 12% y-o-y to Rs.183,860 per ton. This was attributable to currency impact and better realizations on export front. Even non-auto segment continued to remain sluggish. The non-automotive business recorded a marginal growth of 2.6% to Rs.3,381 mn driven by increase in off take from Oil & Gas sectors. Off take from the export market increased by 30% while the domestic market declined by an almost similar amount due to lack of new investments from capital intensive sectors Foreign subsidiaries continue to disappoint with revenues sliding on y-o-y basis.

Even though revenues declined, BFL has been able to maintain its EBITDA margins at around 20% due to cost rationalization, which will remain management's key focus during this financial year. With interest cost declining by 23% y-o-y to Rs.289 mn and after giving effect of exceptional item of Rs.106 mn the reported net profit stood at Rs.1,028 mn, down by 3.4% y-o-y.

Foreign subsidiaries continue to disappoint due to continued severe downturn in the Heavy Truck market in China and decline in demand in Europe. Revenue for Q2FY13 declined by 13% y-o-y to Rs.6,627 mn with meager EBITDA margin of 0.7% vs 5.9% in Q2FY12.

Management has given clear indications that coming two quarters might see further decline in volumes from both export as well as domestic front as majority of BFL's clientele will take the required necessary corrective measures of clearing off its inventory. This might impact its revenue growth and EBITDA margin. However, the company still operates at 65% utilization on standalone levels which implies that there won't be any requirement of capital expenditure till FY2014 (except maintenance capex). This, we believe will ensure growth in company's free cash flows from operations (FCFO), which is positive for the company.

This overhang is expected to remain in near future due to weakness in the domestic market and Subdued market conditions in China and Europe. We have lowered our revenue estimates and growth for FY13 and FY14, further we have also lowered the utilization rate from 70% to 67% in FY13 and from 76% to 72% in FY14. We reduce the rating of the stock from BUY to ACCUMULATE with a revised target price of Rs.344 per share. However, we do not ascertain significant downside from CMP.

Source : Equity Bulls

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