Q1CY19 consolidated revenue beat expectations on strong growth (against industry production) at both India and Europe operations. Margin at 13% missed estimates by 150 bps on subdued margin at European operations. Management remains hopeful of demand recovery in India in H2, while Europe operations remain on a strong footing. Management continues to guide for outperformance vis-a-vis industry growth and improvement in profitability on higher productivity. We incorporate acquisition of Aurangabad Electricals (AEL) in our numbers, which leads to 5%/7% increase in our CY19/20 estimate. We have ‘BUY’ rating on the stock with TP of Rs 283 (8x CY20E EV/EBITDA). Introduction of new technologies (aluminum, plastic from CIE stable) and inorganic opportunity remain upside triggers.
Company reported revenue growth of 2% year-on-year in Q1 despite 9% decline in production for key customers. EBITDA margin (ex. other income) declined 40 bps y-o-y at 13.5%, but expanded 80 bps sequentially. Management highlighted that increase in insurance cost and political uncertainty has led to weak consumer sentiment especially in two wheelers (2Ws). If monsoon turns out to be normal, auto industry’s growth can revive to 8-10% in H2. Bill Forge’s (BFL) performance was largely flat and below expectations. BFL’s India operations have been impacted by 2W slowdown. Margin remains robust and management expects improvement going ahead on recovery in growth. Mexico operations have been affected due to operational issues.
The company is working actively on resolving them and has involved its Spanish and Indian engineers’ teams. Mexico plant’s supplies have also started for a second customer which should drive growth going forward. Bill Forge Mexico has USD 35 mn worth of orders from GKN and the company is operating at a rate of USD 10-12 mn a year which is expected to double by the year end. The ramp-up has been slower than expected due to some operational issues and customer delays. Margin is also expected to improve to India levels (18-19%).
The company has focused on actions around profitability improvement such as (1) Shutting down plants with lower profitability (Stokes), (2) Strategic acquisitions to fill gaps – Bill Forge and AEL. While Bill Forge brought in 2Ws and forgings business, AEL has brought castings business (GDC) which has helped further diversify its customers. Going forward, additional gaps can be filled through inorganic acquisitions. Company is making inroads with different technologies across existing customer base. It has won some business with PSA in India (already supplying to them in Europe). Company has closed Stokes plant in the UK and the business will be transferred to Bill Forge. This will add customers such as JLR, Volvo and Honda to the Bill Forge portfolio.