Key Data

CMP Rs 268

Sector Auto Ancillary

Face Value Rs.2

BSE Code 500493

52 Week H/L Rs 389/ 245

Market Cap Rs 5977 Cr

Investment Rationale

Bharat Forge Ltd., the flagship company of the US $ 2.1 billion Kalyani Group, is a leading global ‘Full Service Supplier’ of forged and machined - engine & chassis components. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world. With manufacturing facilities spread over 10 locations and 6countries – three in India, three in Germany, one in Sweden, one in Scotland, one in North America and one in China, the company manufacturers a wide range of safety and critical components for passenger cars, commercial vehicles and diesel engines. The company also manufactures specialized components for the railway, construction equipment, oil & gas and other industries. It is capable of producing large volume parts in both steel and aluminum.

The company is currently in a phase of de-risking its current line of business and expanding forging capabilities to new non-automotive sectors such as oil and gas, railways, aerospace, and defense. Margins for BFL are likely to start improving, given the commencement of its higher margin non-auto business, expected bounce back of exports to the US, and better sequential performance of its subsidiaries. The company has also signed an MOU with National Thermal Power Corporation (NTPC) for investing in a new joint venture to set up a unit for manufacturing castings and forgings for power plants with an investment of Rs. 3,000 crore. This is a 51:49 JV, investments and execution timelines for which are yet to be decided. Production at this facility is likely to begin in ~18 months from start of construction. NTPC signed the agreement for joint participation in the engineering, procurement and construction (EPC) space. BFL’s joint venture (JV) in China reported positive growth in revenues on the back of good traction seen in the domestic industry there. China is expected to introduce new emission norms next year and BFL stands to benefit from the same given that it is already supplying components for new generation of engines. The BFL management has indicated that the JV will break even in FY2009, with ramp up in capacity utilisation and profits expected only in FY2009.

The Domestic market after witnessing YOY drop in the first two quarters of FY08 has shown signs of initial recovery in Q3 and industry experts expect it to gain momentum in the coming quarters. Being a development partner for the Domestic OEMs, BFL has good visibility into customer demand and expects to see an increase in revenue & market share once the new programs come online.

The US M&HCV production numbers were expected to be weak on the back of new emission norms which came into effect from Jan 1st 2007 resulting in a significant pre-buy in the Oct- Dec period of 2006. The drop in production in the US CV market due to pre-buy was estimated to be in the range of 24% but the actual drop witnessed was over 40%. This has resulted in lower production and slower ramp-up of BFL’s new HDEP programmes. The recovery of the markets were expected to begin in the last quarter of CY 2007 but has been further delayed by at least 2 more quarters due to the economic slowdown. Based on the feedback received from our customers, we expect the markets to revive in second half of 2008. Going forward, with the expected recovery of the US CV market & new businesses being ramped up in the Non Auto space, BFL is poised for significant growth in the coming quarters.

European automotive industry has been growing at a steady pace and we expect it to grow at similar rate in the coming year also. The Commercial Vehicle space is witnessing positive growth and the same is expected to continue for the year ahead also. BFL is well poised to take advantage of this growth going forward.

At current market price of Rs268.45, Bharat Forge is quoting at a PER of 23.4x. On EV/Sales and on EV/ EBIDTA basis it is quoting at 3.1x and 10.8x of its TTM earnings respectively.

For In-depth Bharat Forge Ltd. research report by KR Choksey, company profile along with stock recommendations,  Bharat Forge Ltd. target price and for making informed investment decisions Click Here.

Kisan Ratilal Choksey Shares and Securities Pvt. Ltd.
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