Bharat Forge - 2QFY2013 Result Update - Angel Broking

Weak standalone performance: Bharat Forge (BHFC) posted lower-than-expected results for 2QFY2013 led by weakness in the domestic as well as export markets which resulted in a volume decline of 13.8% yoy (9.3% qoq). As a result, the standalone revenue posted a decline of 4.7% yoy (7.3% qoq) to Rs.868cr. The net average realization however, registered a strong growth of 12.1% yoy (2.9% qoq) benefiting from higher share of machining component and better realization on exports on account of weak INR. The weak demand sentiment in the export markets primarily, Europe, led to a sluggish growth in exports revenue (up 8.1% yoy) during the quarter. The non-auto segment too posted a marginal growth of 2.6% yoy led by weakness in the domestic markets. On the operating front, margins declined 162bp yoy (271bp qoq) to 22.4% which was lower than estimated owing to a sharp increase in manufacturing and other expenses. Hence the operating profit and net profit registered a decline of 11.1% (17.3% qoq) and 13.3% yoy (12.4% qoq) respectively.

China and Europe operations continue to drag down consolidated results: BHFC registered poor results at the consolidated level, with top-line and operating profit registering a decline of 8.3% and 22.6% yoy respectively. The poor performance was on account of continued severe downturn in the heavy truck market in China and lower demand in Europe. While the wholly owned subsidiaries (ex. China) registered a net loss of Rs.9.2cr; China operations registered a loss of Rs.12.4cr.

Outlook and valuation: Guiding for the future, the management has indicated that the coming two quarters will be challenging for the company due to weakness in the domestic markets and subdued market conditions in China and Europe. Consequently, we lower our earnings estimates by 7.8%/7.6% for FY2013E/14E. At Rs.270, BHFC is attractively valued at 11.7x FY2014E earnings. We maintain our Buy rating on the stock with a revised target price of Rs.324, valuing it at 14x FY2014E earnings.

Source : Equity Bulls

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