'Overweight' rating on Bharat Forge Ltd shares, target price Rs 373: Barclays

Jan 08 2014, 10:05 IST
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Bharat Forge export revenues contributed 55% of revenues in 2Q FY14 (AP) Bharat Forge export revenues contributed 55% of revenues in 2Q FY14 (AP)
SummaryBharat Forge has been able to deliver strong earnings in recent quarters.

The Bharat Forge Ltd has been able to deliver strong earnings in recent quarters despite the domestic M&HCV weakness, due to a rising share of exports, an improved product mix with a higher share of non-auto and machined components and favourable exchange rates.

We expect these trends to continue in FY15, with a recovery of domestic M&HCV demand providing room for upside. Additionally, BFL’s overseas subsidiaries have been delivering consistent profits and we expect them to be EPS accretive. We now ascribe a 10x FY15 value to the subsidiaries (vs nil earlier). Our FY14 estimates are largely unchanged, but we increase our FY15/16E EPS by 3%/14%, respectively. We maintain our ‘overweight’ rating and raise our target price to Rs 373 from R316, as we roll forward our valuation to FY15 and incorporate value of subsidiaries (R23/share).

Export revenues contributed 55% of revenues in 2Q FY14 (vs 46% in 3Q FY13). The improvement in export contribution can be attributed to an overall improvement in CV demand in the US (class-8) and Europe.

Additionally, BFL is gaining orders in the non-auto vertical, which we expect to ramp up further in FY15 (eg, supplies of machined locomotive crankshafts expected). Within both the auto and non-auto verticals, we expect a higher share of machining in FY15 (FY13 at 52%).

Current capacity utilisation stands at 63% across the auto and non-auto verticals. We expect BFL’s wholly owned subsidiaries to be EPS accretive due to loss-making entities (BF-America) have been shut down. Consolidation of European assets and cost-reduction measures allowing lower break-even levels (current utilisation at 62%).

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