Strong execution: Bharat Forge’s standalone net profit (R1.96 bn, up 109% year-on-year) was 19% above our estimates, led by higher domestic and US export revenues. It has continuously beaten our estimates for the past eight quarters with better product mix and new business wins in exports. It has added one new client in the US CV (commercial vehicle) market and two new OEMs in passenger-car forging. We upgrade the stock to Add (from Sell), acknowledging that it can grow at a significant pace due to new-business wins in exports and new products for Indian Railways. We increase our target price to R1,150 (from R630 earlier) to capture the sharp increase in our earnings estimates.
A positive surprise: Standalone net sales (R12 bn, up 44% y-o-y) were 9% higher than our estimates. Export revenues grew 53% y-o-y while domestic business (including operating income) grew 32%. US export revenues grew 113% y-o-y. Tonnage sold grew by 25% y-o-y and average realisation per tonne grew by 15%. The share of export revenues increased to 61.2% vs 57.7% y-o-y.
The non-auto business contributed to 48% of standalone revenues and is likely to have grown by 69% y-o-y. The rise in standalone Ebitda (R3.6 bn, up 69% y-o-y) was led by a 440 basis point y-o-y rise in Ebitda margin. Gross margin improved by 110 bps y-o-y while operating leverage benefit played out in staff cost and other expenses. Interest expenses declined 38% y-o-y as the company repaid high-cost debt (R3.6 bn in 9MFY15).
Revenues should rise 18% CAGR in FY15-17: Bharat Forge is likely to grow at a significant pace over the next few years led by (i) a recovery in CV volumes in India, (ii) onset of commercial production (of its component business) for the aviation industry (can become a $100m business in a few years), (iii) addition of two new clients in passenger cars and one in US CVs, and (iv), component business for railways (for which it is adding new capacity over the next two years). By themselves, new business wins could potentially add R10 bn to revenues over the next couple of years.
Conference call highlights
* Bharat Forge indicated that it is setting up a 50,000 tonne forging capacity for a new business win abroad in passenger-car forging. Phase-1 of this capacity would come on stream by Q4FY16.
* Setting up additional capacity for making railway components, for which it already has orders worth R1 bn. It is expecting more orders from railways, going ahead.
* Import content for the industries is $8 bn annually; even if a fraction of this comes to Bharat Forge, revenue growth will ensue.
* Will start commercial production of aviation components in a few months.
* In Q3, US exports were very strong, European exports remained flat y-o-y and Asia-Pacific revenues declined y-o-y. European revenues would remain weak in the coming quarters, led by weak CV sales and weak Euro vs INR.
* Gross margin rose 110 bps y-o-y due to improvement in product mix (domestic and export), which is reflected in strong growth in average realisation per tonne.
* Plans to spend R10 bn in capex over three years to raise capacities as utilisation levels for new non-auto facilities have reached 87%. Machining capacities have lower utilisation levels. The company needs to increase its forging capacities to tap future opportunities.
* Subsidiaries reported a steady quarter with revenues of R5.8 bn and Ebitda of R343m. Year-on-year comparison is not applicable as Bharat Forge divested its stake in its China subsidiary.
* Consolidated free-cash generation is strong over the next few years and the company could to become debt free by end FY16.
—Kotak Institutional Equities