Bharat Forge - Weak domestic & key export markets acting as a drag; maintain Add - BRICS

- Declining yoy trend in domestic and international CV demand to impact revenue. Growth in domestic & international passenger cars slowing down despite festive season and discount offers

- Lowering FY14 estimate by 6% in view of continued slowdown in European and domestic markets. Reduce target price to Rs266 and maintain Add rating.

Domestic CV and car markets remain weak: Bharat Forge (BFL) generates 60% of its standalone revenue and 36% of consolidated revenue from domestic CVs and cars (as on FY12).The market for CVs and cars has remained dull due to weak economic conditions and high inflation & interest rates, and is expected to pick up only in FY14.

Domestic CV OEMs plan shutdown due to weak demand for trucks: Production for CVs by domestic OEMs was down 1.1% yoy in Oct-Nov 2012 and down 28% yoy for M&HCVs (YTDFY13 down 17% yoy).

Domestic passenger vehicles OEMs reported a growth of 11% yoy in Oct-Nov 2012 (YTD FY13 up only 1.4%). In spite of the growing contribution of the non-auto segment to BFL's revenue, we believe it will be insufficient to support the company's overall volume. The non-auto segment is also likely to remain weak for BFL due to low investments in the infra and power segments.

European truck sales continue to decline: European truck sales for Nov 2012 declined 19% yoy and YTDCY12 truck sales fell 11%. European car sales for Nov 2012 were down 10% and YTDCY12 sales fell 7.2%. Europe contributes 15% to BFL's consolidated revenue (as on Q2FY13, vs. 23% in Q2FY12) and we expect the volume decline to impact its sales. We maintain our estimates for FY13, but lower our FY14 estimates, due to a more prolonged slowdown than expected earlier.

Lowering FY14 estimates by 6%: In view of the prolonged slowdown in Europe and its impact on truck sales, we lower our FY14 earnings estimate by 6% from Rs21.6 to Rs20.3.

We expect an economic improvement in the European regions in H2FY14, which will drive the growth in BFL's revenue and profitability. The stock trades at 15.6x and 12.4x FY13E and FY14E earnings respectively. We also lower our target multiple assigned to the stock, due to the growing risks to the company's earnings. We expect BFL to trade at a low multiple of 12x (40% discount) in comparison to its historical average of 20x. We value BFL's core business at 12x FY14E (13x FY14E earlier) at Rs243 and maintain the value of its JV businesses at Rs23, which gives us an SOTP value of Rs266 per share. We maintain our Add rating on the stock.

Source : Equity Bulls

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