Bharat Forge - Export boost; Hold - Anand Rathi

Tonnage to grow on low base. Bharat Forge's production tonnage is expected to grow 14% yoy during 3QFY14 on a lower base of the previous year, where the company witnessed shrunken customer demand in India and Europe. Qoq, the trajectory is expected to be flat. At home, continued slowdown in M&H CVs and lower non-auto offtake have impacted sales, but higher exports, along with better rupee realisation would boost it. We are optimistic about the company's long-term strategy to become a diversified forgings-parts manufacturer as well as strong US demand in FY13, but believe these will not suffice to counter stagnation in domestic revenue.

Standalone profitability benefits from lower base. We expect standalone income to grow 24.4% yoy, to Rs. 8.4bn. We expect a sequential reduction of 40bps in the EBITDA margin, to 26%, and a 52.7% yoy growth in EBITDA. EBITDA per ton is expected to be 34% higher yoy. Our profit expectation is Rs. 934m, a 96.6% yoy growth on a depressed base.

Subsidiaries too expected to do well. As in 2QFY14, Bharat Forge's wholly-owned subsidiary and China revenues are expected to do well, boosted by strong demand from Europe. The key would be to sustain the momentum into CY14, which may prove to be difficult. We also expect PBT losses at the China operations to continue.

Our take. As the company largely depends on M&H CVs, the ongoing slowdown in the segment could weigh on its results. Favourable currency movement, though, is a positive, together with a better product mix. On short-to–medium term concerns, we retain Hold on the stock. It trades at 18x FY15e consolidated EPS, which would be a 20% discount to its past fouryear average). Risks. Downside: Slowdown in execution, drop in US sales.

Upside: Quicker-than-expected CV recovery, improved overseas demand.

Source : Equity Bulls

Keywords