Euro depreciation impact minimal on auto component companies. We believe the impact of euro depreciation versus INR will not be material for auto component companies as feared by the Street. Exporters such as Bharat Forge are likely to offset the impact of euro depreciation versus INR by expanding revenues in the non-automotive segment, led by new order wins in the aviation space. We maintain our ratings on Bharat Forge (ADD), Mahindra CIE (BUY), Motherson Sumi (REDUCE) and Wabco India (ADD). We make marginal changes to our estimates and roll over to March 2017.

Rating: Buy

Auto component companies to weather the sharp depreciation of euro versus INR: Investors have concerns on the impact of sharp depreciation of euro versus INR on earnings of auto component companies, which have euro-denominated revenues. Four companies in our coverage universe could be affected by euro depreciation–Bharat Forge, Mahindra CIE, Motherson Sumi and Wabco India. Bharat Forge is likely to be the most impacted in the near term, as it is a net exporter to Europe. But the company is likely to weather the impact of euro depreciation by scaling up revenues in the non-automotive business. Mahindra CIE and Motherson Sumi will be insulated from the impact of euro depreciation as the interest cost savings on the euro-denominated debt will partially offset the translation impact on euro profits, in our view. Motherson Sumi will in fact be a net beneficiary as the positive impact of forex translation on euro-denominated debt will boost its consolidated earnings.

Wabco India also exports to Europe (18% of net sales) but the contribution margin on the export business is very low, so the impact on its profits is negligible.

We roll over to March 2017 and make marginal changes to our earning estimates

We have increased our target price for Bharat Forge to R1,300 (from R1,150 earlier) led by 5% increase in our non-auto export revenue estimates for FY2017, which is offsetting the impact of euro depreciation versus INR. We have rolled over to March 2017 (from December 2016) and increased the multiple on standalone to 14X Ebitda (versus 13X earlier) due to stronger-than-expected traction in the non-auto segment. Bharat Forge’s non-automotive revenues are likely to grow by ~70% y-o-y in FY2015 and we expect it to reach 2.4X of FY2014 non-auto revenues. We expect the company to achieve $500m revenue target for non-auto exports by FY2017 itself, led by new order wins in the aviation space.

We have reduced the target price for Mahindra CIE to R270 (from R280 earlier) led by marginal change in earning estimates factoring in a negative impact of Euro depreciation. We have kept our target price for Wabco India unchanged and increased target price for Mahindra Sumi Systems to R465 (from R420 earlier) on roll over to March 2017.

Impact of euro depreciation versus INR on auto component companies’ earnings may be negligible: Euro has depreciated by 12% versus INR since December 2014 and our economist believes that the euro will depreciate further and reach ~63 levels versus INR in FY2016. This poses risks to earnings of auto component exporters from India, namely Bharat Forge and Wabco India and companies that have operations and debts in Europe such as Motherson Sumi and Mahindra CIE.

* Bharat Forge: It exports auto and non-automotive forgings to Europe and has subsidiaries in the continent, which manufacture machined components for the European customers. Exports to Europe form 16% of standalone revenues while subsidiary profits form ~5% of consolidated profit. Euro depreciation versus INR could lead to a 13-17% cut in our standalone European export revenue estimates and a 13-17% cut in our subsidiary profit estimates, but the plans to expand revenues in the non-automotive business. The company has a euro-denominated net debt of only 51 million euros, which is likely to have a minimal impact on earnings.

We have reduced our consolidated EPS (earnings per share) estimates by 8% for FY2016 as we bake in new estimates of EUR-INR of our economist , but kept our estimates unchanged for FY2017 as we increase our revenue assumptions for the non-automotive business led by new order wins from the aerospace segment.

Bharat Forge’s non-automotive revenues to grow by ~70% y-o-y in FY2015 and expect it to reach 2.4X of FY2014 non-auto revenues. We expect the company to achieve $500m revenue target for non-auto exports by FY2017 led by new order wins in the aviation space.
* Mahindra CIE: Mahindra CIE’s earnings will be impacted by euro depreciation as the negative impact of translation of euro-denominated profits would be partially offset by savings on interest cost on euro-denominated debts. We have cut our consolidated earnings estimates by 4-6% over FY2016/17 to reflect our new currency estimates.
* Motherson Sumi: Motherson Sumi’s earnings will not be impacted by euro depreciation as the negative impact of translation of euro-denominated profits would be offset by savings on interest cost on euro-denominated debt and forex benefit on Euro debt which is expensed in the P&L. Motherson Sumi accounts for forex impact on foreign currency-denominated debt above the Ebitda, which is likely to boost its consolidated EPS due to forex benefit on euro-denominated debts.
* Wabco India: Exports form 35% of Wabco India’s revenues, of which European exports contribute 50% to overall exports. The Ebitda margin of exports is very low (~5%), which implies that exports form only 12% of Wabco’s profits. The impact of euro depreciation versus INR will be muted due to low contribution of European exports to Wabco India’s profits.