Bharat Forge - Demand pressures to continue; maintain Reduce - BRICS

Bharat Forge's (BF) Q4FY13 numbers (standalone) surpassed our expectations, with revenue and PAT coming in 4% and 26% ahead of estimates. Total shipment tonnage declined 35% yoy to 37,119MT and realisation grew 7% yoy, while overall revenue fell 31% yoy Rs6.7bn. EBIDTA margin came in at 21% and PAT stood at Rs501mn, down 60% yoy. BF's subsidiaries reported net PBT of Rs144mn, as its Chinese subsidiary incurred a loss before tax of Rs53mn.

Demand pressures in domestic and overseas markets will continue, though BF's performance is unlikely to deteriorate further, given its cost rationalisation and productivity improvement measures. We lower FY14E and FY15E EPS estimates by 4% and 3%, due to persistent weakness in overseas markets, especially Europe and China. We expect domestic demand to revive in H2FY14 and raise target multiple to 12x from 11x. Maintain Reduce with TP of Rs200 (earlier Rs193).

Inventory de-stocking and low volume impact revenue: Global decline in CV demand and industrial investments in construction and, mining and oil and gas verticals led to a fall of 35% yoy and 1% qoq in total shipment tonnage to 37,119MT. Realisation increased 7% yoy to Rs181,761 per tonne, resulting in decline of 31% yoy in overall revenue (flat qoq) to Rs6.7bn. Geographically, India contributed 54% of revenue, US 24%, Europe 20% and the rest of the world 2%. Europe's revenue contribution grew 290bps qoq due to seasonality.

EBIDTA margin down 456bps yoy to 21%: Cost of raw materials consumed as percentage of net sales fell 136bps yoy, though employee expenses and other expenses as percentage of net sales were up yoy by 258bps and 334bps due to low volume. EBITDA was down 43% yoy, but flat qoq at Rs1.4bn, resulting in EBIDTA margin of 21%.

PAT down 60% yoy: Other income increased 32% yoy to Rs205mn. The company made a provision of Rs243mn for tax, resulting in a tax rate of 33% (up from 29% in Q4FY12). PAT came in at Rs501mn–down 60% yoy on adjusted basis, but up 5% qoq.

Overseas performance improves at PBT level in Q4FY13

BF's overseas subsidiaries reported a decline of 6% yoy in revenue to Rs6,648mn, mainly due to a fall of 15% yoy in revenue from China. The company's steps to improve productivity and contains costs led to EBIDTA of its overseas subsidiaries increasing by 24% yoy to Rs522mn, with China reporting an EBITDA of Rs33mn (vs. negative EBIDTA of Rs94mn in Q3FY13). BF's subsidiaries reported positive PBIT of Rs144mn. BF has completed the restructuring of its American operations with sale of its assets (excluding order book) for US$11.25mn. PBT improved to Rs144mn vs. Rs67mn in Q4FY12 and a loss of Rs277mn in Q3FY13.

BF reported a decline of 9% in revenue to Rs57bn, due to continued weakness in the domestic and overseas markets, while the impact on EBITDA was higher, down 23% yoy due to lower sales volume. Adjusted PAT declined 67% yoy in FY13 to Rs2,476mn. For FY13, BF paid taxes at the rate of 48.7%, due to write-back of deferred tax assets, which also impacted its PAT. We expect the company to report a normal tax rate of 30% in FY14 and FY15.

Recovery to take time; FY15 to be a better year

Considering the current scenario, we believe the recovery in the domestic market for CVs, cars and the non-auto segment (which is heavily dependent on the economy and investment cycle) will witness a revival in H2FY14. Europe, which is also a key market for BF, is still facing demand issues, with sales of the European passenger car and CV markets declining 10% and 11% respectively for the first five months of the year (Jan-May). Hence, we expect the recovery in BF's overall revenue to take time and the company is likely to report an impressive growth in FY15.

Outlook and valuation

The stock trades at 15.8x FY14E and 11.7x FY15E earnings respectively. We expect domestic demand to revive in H2FY14 and hence, raise target multiple to 12x from 11x earlier. We value its JVs at Rs23 per share and assign a PE multiple of 12x (vs. historic average of 20x) to our FY14EPS estimate to arrive at our SOTP target price of Rs200. We maintain Reduce rating on the stock.

We expect the company's domestic business to exhibit an improvement in H2FY14 and believe the impact of the slowdown will be less severe this time around, as it has already taken initiatives to cut costs and lower the break-even point of its European operations.

Source : Equity Bulls

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