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Bharat Forge 3QFY2013 performance highlights and results update

Contributed by Angel Broking

Poor performance on the standalone front: Bharat Forge (BHFC) reported a disappointing performance for 3QFY2013 led by severe weakness in the domestic as well as the export markets which resulted in a 32.4% yoy (19.1% qoq) decline in volumes. Consequently, the standalone revenue posted a significant decline of 28.5% yoy (22.5% qoq) to Rs.673cr. The domestic and export revenues registered a decline of 22.1% (9.3% qoq) and 33.2% yoy (33.5% qoq) respectively on account of a sharp decline in commercial vehicle (CV) sales in India and export markets. Further, slowdown in capital spending in the power, mining and oil and gas sectors also impacted the non auto business. On the operating front, margins contracted 424bp yoy (124bp qoq) to 21.2% which was below our estimates of 23.3% primarily due to lower utilization levels (~50% in domestic operations as against ~65% in 2QFY2013). Hence operating profit and net profit registered a sharp decline of 40.5% (26.8% qoq) and 53.9% yoy (48.5% qoq) respectively.

Overseas subsidiaries post loss: BHFC’s overseas subsidiaries continued with their poor performance, driven by declining utilization levels (in the range of 45-50%) due to the severe downturn in the heavy truck market in China and demand slowdown in Europe. While the wholly owned subsidiaries (ex China) registered a net loss of Rs.6cr; China operations registered a loss of Rs.12cr. BHFC has shut down its US operations completely and is planning to shift the capacity to India.

Outlook and valuation: Guiding for the future, the Management has indicated that the near term outlook remains challenging for the company given the weakness in the domestic markets and subdued market conditions in China and Europe. Further, rationalization of production levels and inventory destocking by the OEMs in the domestic and export markets will also impact the performance going ahead. Consequently, we lower our earnings estimates by 28.8%/19.7% for FY2013E/14E. Nevertheless, we believe that the recent underperformance of the stock (down ~20% over the last two months) factors in most of the concerns stated above. At Rs.224, BHFC is trading at 12x FY2014E earnings. We recommend an Accumulate rating on the stock with a target price of Rs.242.