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Primed for recovery
Bharat Forge
Initiating Coverage | 17 June 2014Sector: Automotive
Chirag Jain ([email protected]) + 91 22 3982 5418
Jinesh Gandhi ([email protected]) + 91 22 3982 5416
Bharat Forge
17 June 2014 2
Bharat Forge: Primed for recovery
Page No.
Summary ........................................................................................................ 3-4
Stronger, leaner and healthier ...................................................................... 5-9
Auto business – awaiting CV cycle recovery ............................................ 10-17
Non-auto business – play on investment cycle recovery ....................... 18-24
Overseas subsidiaries of strategic value ................................................... 25-27
Multiple levers to support/improve profitability ................................... 28-29
Valuations attractive for global leader in forgings ........................................ 30
Financials and valuation ........................................................................... 31-32
Investors are advised to refer through disclosures made at the end of the Research Report.
17 June 2014 3
Initiating Coverage | Sector: Automotive
Bharat Forge CMP: INR 579 TP: INR 710 Buy
Primed for recovery Earnings growth to accelerate with ~27% CAGR (FY14-17E) Bharat Forge (BHFC) has emerged stronger, leaner and healthier from the
downcycle, driven by its proactive strategic shift towards a stable, broad-based and greater value-adding business model. It is now one of India’s largest engineering exporters.
It is primed for recovery in the global investment cycle. This, coupled with an expanded product/market mix, would drive strong revenue CAGR of 16% CAGR over FY14-17. EPS would grow at a CAGR of ~27%, aided by robust margin expansion.
While the stock has outperformed over the last six months, there are several triggers for continued outperformance. These include: (a) volume recovery led benefit of operating leverage, (b) improving segment mix, (c) balance sheet deleveraging, and (d) improvement in capital efficiencies.
Valuations at ~17.9x/14.9x FY16/FY17E consolidated EPS of INR32/INR39 are attractive for a global leader in forgings and at a discount to the 5/10 year average of 22x/26x. We initiate coverage with a Buy rating. Our target price of ~INR710 (~22x FY16E EPS) suggests an upside of ~23%.
Stronger, leaner and healthier BHFC has broadened its revenue stream by entering new segments (non-auto) and global markets. The share of auto business has declined from ~80% in FY07 to ~60% in FY13 and the share of India has reduced from ~60% to ~48% in standalone operations. Further, it has increased value-addition by focusing on machined components, the contribution of which has increased to ~51% in FY13, boosting realizations and margins. Lastly, it has improved its balance sheet by focusing on controlling debt through lower capex, resulting in fall in net debt-equity to ~0.3x/0.2x by FY15/FY16. Auto business – awaiting CV cycle recovery; focusing on PVs Benefit of US Class-8 demand improvement, driven by pre-buying before emission norm changes and gradual recovery in the EU would reflect in FY15/FY16. BHFC is a clean play on the expected domestic CV cycle recovery from 2HFY15, with over 60% market share in M&HCV components. The PV segment is a focus area for BHFC and could be an important growth driver. This segment offers an opportunity size 4x that of CVs. Non-auto business – play on investment cycle recovery The non-auto segment offers significant growth potential, as it is much larger than the auto segment. BHFC is targeting ~60% of its standalone revenues from the non-auto segment, up from the current ~40%. Its partnerships with global players (Alstom, Areva, David Brown, etc) bear testimony to its globally cost
BSE Sensex S&P CNX 25,190 7,534
Stock info Bloomberg BHFC IN
Equity Shares (m) 232.8
52-Week Range (INR) 586/186
1, 6, 12 Rel. Per (%) 22/65/127
M.Cap. (INR b) 129.7
M.Cap. (USD b) 2.2
Financial Snapshot (INR b) Y/E March 2015E 2016E 2017E
Sales 71.9 85.7 99.3
EBITDA 12.0 15.3 18.0
NP 5.2 7.5 9.1
EPS (INR) 22.5 32.3 38.9
EPS Gr. (%) 19.4 43.7 20.4
BV/Sh. (INR) 131.9 157.2 187.9
P/E (x) 25.7 17.9 14.9
P/BV (x) 4.4 3.7 3.1
EV/EBITDA (x) 12.8 9.8 8.0
EV/Sales (x) 2.1 1.7 1.5
RoE (%) 18.2 22.4 22.6
RoCE (%) 18.5 23.1 25.5
Shareholding pattern (%)
As on Mar-14 Dec-13 Mar-13
Promoter 46.7 46.7 42.1
Dom. Inst 14.5 17.5 19.0
Foreign 16.3 13.8 9.7 Others 22.5 21.7 29.3
Stock Performance (1-year)
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competitive engineering/manufacturing capabilities. BHFC’s increasing penetration with existing and new customers, coupled with economic stability in the international market and investment cycle recovery in India, would drive ~24% revenue CAGR in the non-auto segment. Increasing contribution of non-auto to consolidated revenues augurs well for profitability and capital efficiencies, given the segment’s higher realizations, margins and asset turns. Multiple levers to support/improve profitability We expect consolidated revenues to grow at a CAGR of ~16% over FY14-17 (adjusted for FAW JV exit), driven by 22% CAGR in India revenues and 12% CAGR in international revenues. EBITDA margin should expand ~290bp to 18.2%, driven by higher exports from India, rising contribution from non-auto business and machined components, and operating leverage. BHFC has sufficient capacities to drive over 25% revenue CAGR over the next two years, necessitating maintenance capex of INR1.5b-1.8b per year. We estimate cumulative FCF generation of ~INR21b during FY15-17, enabling reduction of net debt to ~INR7b (net debt-equity of 0.2x) from ~INR13.4b (net debt-equity of 0.8x). Improving asset turns and profitability would drive improvement in consolidated RoE to ~22.6% in FY17 from 17.9% in FY14 – the highest RoE since FY07. Valuations attractive for global leader in forgings; Buy BHFC is primed for recovery in the global investment cycle. While the stock has outperformed over the last six months, there are several triggers for continued outperformance. These include: (a) volume recovery led benefit of operating leverage, (b) improving segment mix, (c) balance sheet deleveraging, and (d) improvement in capital efficiencies. Valuations at ~17.9x/14.9x FY16/FY17E consolidated EPS of INR32/INR39 are attractive for a global leader in forgings and at a discount to the 5/10 year average of 22x/26x. We initiate coverage with a Buy rating. Our target price of ~INR710 (~22x FY16E EPS) suggests an upside of ~23%.
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Stronger, leaner and healthier Diversified revenues I Lower fixed costs I Declining debt-equity
BHFC has broadened its revenue stream by entering new segments (non-auto) and
global markets. The share of auto business has declined from ~80% in FY07 to ~60% in
FY13 and the share of India has reduced from ~60% to ~48% in standalone operations.
Further, it has increased value-addition by focusing on machined components, the
contribution of which has increased to ~51% in FY13, boosting realizations and
margins.
BHFC has worked on lowering its breakeven utilization in India (from 35% to 30%) as
well as in its wholly owned subsidiaries (from 60% to 50%).
Lastly, it has improved its balance sheet by focusing on controlling debt through lower
capex, resulting in fall in net debt-equity to ~0.3x by FY15.
Strategic changes to lend stability to business model During the global credit crisis, BHFC formulated a revised business strategy to tide over the volatility in the business and elevate itself to the next level.
Strategic changes: The focus areas
Source: MOSL
The benefits of these strategic changes are visible in BHFC’s financials in the current downturn. We believe BHFC is now well placed to emerge much stronger, driven by recovery in the investment cycle in India and globally. We discuss below the company’s key initiatives that have helped it to emerge leaner and stronger. 1. Broadening of revenue base
Considering the deep cyclicality in the commercial vehicle (CV) business, BHFC decided to diversify its revenue stream by increasing the share of personal vehicle (PV) and non-automotive businesses. Geographical diversification to US, Europe and RoW has helped protect BHFC against concurrent CV cycles in key markets, globally. Its presence across segments and markets has helped to largely insulate BHFC from cyclicality in the automotive business, resulting in 4% CAGR in consolidated revenue CAGR over FY08-13 (from peak to trough).
Diversification Efficiency
Cost
reduction Lower
breakeven
Optimization
and rightsizing
of operations
Fiscal prudence
Freeze on
capacity
Focus on
cash
Debt reduction Reduce
working
capital
New
markets New
customers
New
sectors/businesses
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BHFC’s revenue mix getting more diversified
Source: Company, MOSL
New non-auto segments
The non-automotive forgings space, including conventional and non-conventional energy, power, rail and marine, oil and gas exploration, metals and mining, and aerospace offers a much larger market than the global automotive forgings space. In FY06, BHFC started aggressively developing its industrial components business and invested in large dedicated facilities in Baramati, Satara and Pune. It targeted five key verticals – oil & gas, construction and mining equipment, railways, marine engines and components, and aerospace. Typically, these non-auto components are more complex and have higher contribution levels per unit of sale. The non-auto segments contributed ~28% of consolidated revenues in FY13 against 18% in FY08.
Non-auto revenue contribution has increased meaningfully (%)
Source: Company, MOSL
New markets, segments and customers within auto:
The auto industry follows the cycles of emission technology changes every four years or so. To reduce the impact of cyclicality, BHFC decided to diversify into the PV segment and to have a presence across three continents – North America, Europe and Asia. It is focused on creating a larger presence in PVs, as this segment is much larger than CVs. Supply to the PV segment has begun to gain traction, as stricter emission norms will drive a shift to high performance parts and from larger to smaller-yet-powerful fuel-efficient engines, in turn driving the shift from castings to forgings. In the auto segment, BHFC consolidated its position by increasing its customer base and penetrating deeper into global markets through its Indian and overseas operations.
14 15 8 17 15 12 11 7
45 45 49 38 43 5141 41
3 3 2 4 33
4 3
21 19 19 21 14 716
12
5 5 7 9 11 10 108
12 13 14 11 14 17 1829
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
CVs - Dom CVs - Intl PVs - Dom PVs - Intl Non-Autos - Dom Non-Autos - Intl
1821 20
25 27 28
37
20
32 3036
39 40 41
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Consol Standalone
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Significant increase in contribution from international markets (% of standalone revenues)
60 56 51 62 59 53 50 46
2622
2122 20 22 28 27
13 20 2415 18 21 19 23
1 2 4 1 4 4 3 4
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
India USA Europe Others
Source: Company, MOSL
Trend in PV contribution (% of sales)
Source: Company, MOSL
Increasing share of exports from India (% of sales)
Source: Company, MOSL
Why forgings v/s castings in PVs? Forged components make possible designs that accommodate the highest loads, operating temperatures and stresses. Economically, forged products are attractive because of their inherent superior reliability, improved tolerance capabilities, and the higher efficiency with which forgings can be machined and further processed by automated methods. The degree of structural reliability achieved in forging is unexcelled by any other metalworking process. There are no internal gas pockets or voids that could cause unexpected failure under stress or impact. To the designer, the structural integrity of forgings means safety factors based on material that will respond predictably to its environment without costly special processing to correct internal defects. 2. Focus on value addition BHFC has evolved from (1) a supplier of forged components to (2) a supplier of
finished components to (3) a development partner for both auto and non-auto industries. The movement up the value chain has accelerated over the past few years across automotive and non-automotive components. This has been achieved as a result of BHFC’s strong technological relationship and close collaboration with major customers. Machining is the process of removing excess material from the forging to meet the dimensions required by customers, converting a forged part into a fully finished and ready-to-assemble component. Focus on higher value addition has resulted in an increase in the contribution of machined components to ~51% of standalone revenues from ~40% in FY08.
1613
16
8 79
8
22 2225
17
10
20
15
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Standalone Consol
23 19 22 22 23 26 29 32 29 32 32 33
45 42 46
52
41 44 50 52
57 58 56 55
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
Consol Standalone
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17 June 2014 8
More importantly, machined components offer higher profitability and have lower capital intensity.
Increasing value addition evident in higher revenue contribution from machined components and…
9 8 7 13 18 16
40 41 40 4347
51
19 18 22 25 28 29
FY08 FY09 FY10 FY11 FY12 FY13
M/Cing Revenues (INR b) % of S/A Revenues % of Consol Revenues
Source: Company, MOSL
…reflecting in higher realizations and gross margins (%)
116,
874
153,
908
145,
556
156,
617
168,
038
183,
179
194,
457
FY08 FY09 FY10 FY11 FY12 FY13 FY14
S/A Realizations (INR/ton)
Source: Company, MOSL
55
52
56 55 5657
60
53
5051
5254
57
63
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Standalone Consolidated
Source: Company, MOSL
3. Leaner cost structure
In the last few years, BHFC has focused on reducing its fixed costs and bringing down breakeven utilization at its domestic as well as international subsidiaries. It has achieved this through restructuring of manufacturing facilities, rightsizing of manpower in EU operations and optimizing fixed costs. BHFC has closed its operations at Scottish Stampings and BF America, and is exiting the China JV. As a result, it has been able to reduce breakeven utilization in India to 30% in FY13 (from 35% in FY08) and in Europe to 50% (from 60%).
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Restructuring of manufacturing operations led to closure of Scottish and American subsidiaries, and exit from China JV
340 365 365 380 380
200 200 180 180 180
60 60 60 0
135 135 135135
0
FY10 FY11 FY12 FY13 FY14
India Europe US China
Source: Company, MOSL
Trend in fixed cost
21.2 21.222.0
23.3
19.018.3
20.8
FY07 FY08 FY09 FY10 FY11 FY12 FY13
Fixed Cost (% of consol sales)
Source: Company, MOSL
Trend in breakeven utilization
Source: Company, MOSL
Goals for next five years For the next five years, BHFC has set the following goals: Increase presence in PVs through new product development and customer
penetration. Enhance market share in the industrial sector and create presence in the
aerospace sector. Nurture the JV with Alstom to become a world class, cost competitive power
equipment manufacturer. Focus on becoming a net debt-free company, improving return ratios and
generating cash flows.
35
60
30
50
India Europe
FY08 FY13
Bharat Forge
17 June 2014 10
Auto business – awaiting CV cycle recovery Focusing on PVs, offering 4x the opportunity size of CVs
Benefit of US Class-8 demand improvement, driven by pre-buying before emission
norm changes and gradual recovery in the EU would reflect in FY15/FY16.
BHFC is a clean play on the expected domestic CV cycle recovery from 2HFY15, with
over 60% market share in M&HCV components.
The PV segment is a focus area for BHFC and could be an important growth driver. This
segment offers an opportunity size 4x that of CVs.
Stricter emission norms would not only drive higher realizations for BHFC but also
improve its competitive positioning.
Highly levered to global and local CV cycles BHFC is a leading global automotive forgings player, with manufacturing presence in India and Europe. The top-5 global OEMs across CV and PV segments are BFL’s customers. It has transformed itself from a supplier of components to a preferred technology and engineering driven development partner for all industries that need forged components. We expect BHFC’s market share to increase further, driven by its full service supply capabilities, enabling it to build strong and sustainable customer relationships. There is a trend towards de-integration of OEM facilities due to emphasis on lower capital intensity, resulting in increased scope for outsourcing components. On a steady state basis, the CV segment contributes ~58% of consolidated revenues (~45% from international markets and ~13% from domestic markets).
Trend in HCV volumes and consolidated revenue growth
-40.0
-20.0
0.0
20.0
40.0
60.0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
HCV Vol Growth (%) Consol Revenue Growth (%)
* HCV volume growth for India, EU & US Source: Industry, Company, MOSL
CV segment contributes ~55% to steady-state consolidated revenues
Source: Company, MOSL
45 45 4938 43
5141 41
14 15 817
1512
11 7
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
CVs - Intl CVs - Dom
Bharat Forge
17 June 2014 11
BHFC’s full service capabilities enable it to engage with OEMs right from development stage
Source: Company, MOSL
Bharat Forge
17 June 2014 12
International CV business outlook improving BHFC is one of the global leaders in forged components for CVs, with strong relations with key OEMs across the globe. Through several strategic acquisitions, it has established manufacturing presence in Germany and Sweden and developed dual-shore manufacturing capacities, giving it the ability to cater to the needs of customers from multiple locations. The international CV business contributes ~45% of its consolidated revenues. Exports of CV components from India account for ~30% of total international CV revenues (~20% in FY10) and have been increasing post the closure of American operations in November 2012. Offshoring from India for international CV business to increase (% of international CV business revenues)
80 79 77 80 75 74 69
20 21 23 20 25 26 31
FY07 FY08 FY09 FY10 FY11 FY12 FY13
From other operations From India operations
Source: Company, MOSL
US Class-8 CV volumes to pick up on pre-buys before emission norm change in CY15 BHFC is largely focused on Class-8 trucks (HCVs) and light trucks. It has strong relationships in the US CV market and has significantly increased its auto exports to USA on the back of supplies to the M&HCV segment. Based on outlook given by various OEMs, US Class-8 trucks are expected to grow 6-12% in CY14, driven by replacement demand and economic recovery. Replacement of aging trucks continues to be the primary driver of new purchases, with a near-record average fleet age of 9.57 years. Trucks bought in the last peak in 2004-06 are now 8-10 years old, supporting solid replacement demand. Repair costs ramp up after 4-5 years, further driving replacement of trucks. Freight growth and regulatory changes should encourage replacement of older equipment. Further, Class-8 truck cancellations at 5.2% of gross orders, is below the 10-year average of 9.1%. Cancellations have been below 10% for the past 14 months, a positive indicator of fleet sentiment. US/NAFTA Volvo Daimler PACCAR Cummins CY14 Growth (%) 6% upto 10 upto 12% 8% Key comments The construction
market continues to recover and replacement demand remains high
Significant market growth of up to 10% due to the increasingly dynamic economy
Ongoing fleet replacement and some expansion of industry fleet capacity reflecting modest overall
i h
Source: Company, MOSL
Bharat Forge
17 June 2014 13
US Class-8 volume momentum positive since August 2013
5,000
10,000
15,000
20,000
25,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
CY11 CY12 CY13 CY14
Source: Bloomberg, MOSL
North America Class-8 cancellation data indicates positive
fleet sentiment
Source: Bloomberg, MOSL
Trend in Class-8 truck volumes and average fleet age
Source: Bloomberg, MOSL
Source: Bloomberg, MOSL
EU HCV volumes to remain stable after pre-buying in CY13 While BHFC is focused on luxury PVs in the EU, it is increasing its revenues from the HCV segment in the EU through exports and BF Kilsta (Sweden). EU HCV volumes had benefited from pre-buying before emission norm changes to Euro VI from 31 December 2013, registering ~8% growth CY13 (6% de-growth in 9MCY13). While
Average age of 9.6 years for Class-8 trucks coupled with
peak volumes during CY05-08 augurs well for
replacement demand
Bharat Forge
17 June 2014 14
1HCY14 HCV volumes would be sluggish due to the impact of pre-buying, OEMs expect up to 5% de-growth in CY14, depending on sustenance of economic stability and quantum of replacement demand. All leading indicators suggest stability in the Euro zone economies, auguring well for recovery in HCV volumes in 2HCY14. OEMs expect HCV demand to be sluggish in 1HCY14 due to pre-buying in 4QCY13 Europe Volvo Daimler PACCAR Scania CY14 Growth (%) -4 slightly negative 0 to -10% Key comments Demand in
Europe is expected to be slow in the beginning of the year and then gradually improve.
Developments during the rest of 2014 will depend in particular on the extent to which the economic revival in Europe can offset the negative impact of the purchases brought forward
Some customers are purchasing Euro 5 vehicles ahead of the introduction of the Euro 6 emission requirement in 2014
Pre-buys in Europe during 2013 will impact the first half of 2014 while Scania’s assessment is that economic activity in Europe has stabilised and that there is a replacement need
Source: Company, MOSL
EU HCV volumes still well below peak of CY05-08 and near
CY02 levels
233,
840
214,
854
233,
779
250,
892
261,
443
267,
888
263,
748
162,
642
178,
053 24
2,80
9
221,
688
239,
271
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
Source: Bloomberg, MOSL
EU HCV volumes expected to be stable, despite 8% growth in
CY13 due to pre-buying
5,000
11,000
17,000
23,000
29,000
35,000
Jan
Feb
Mar
Apr
May Ju
n
Jul
Aug
Sep
Oct
Nov De
c
CY11 CY12 CY13 CY14
Source: Bloomberg, MOSL
Euro zone manufacturing PMIs indicate improving confidence
30
40
50
60
Apr-
08Au
g-08
Dec-
08Ap
r-09
Aug-
09De
c-09
Apr-
10Au
g-10
Dec-
10Ap
r-11
Aug-
11De
c-11
Apr-
12Au
g-12
Dec-
12Ap
r-13
Aug-
13De
c-13
Apr-
14
EU PMI
Source: Bloomberg, MOSL
Euro zone industrial production indices showing sustained recovery over last nine months
-4
-2
0
2
4
6
1QCY
11
2QCY
11
3QCY
11
4QCY
11
1QCY
12
2QCY
12
3QCY
12
4QCY
12
1QCY
13
2QCY
13
3QCY
13
4QCY
13
1QCY
14
Industrial Production Indices (YoY %)
Source: Bloomberg, MOSL
Bharat Forge
17 June 2014 15
Domestic CV cycle to recover from 2HFY15; BHFC best play on CV cycle recovery After declining at a rate of ~25% over FY12-14, we expect domestic CV volumes to recover from 2HFY15, driven by clarity on the new government-led kick-starting of the investment cycle. We estimate 10%/23%/22% growth in CV volumes in FY15/FY16/FY17. Given its strong positioning with key OEMs (including new entrants), we believe BHFC is the best play on CV cycle recovery. BHFC enjoys over 60% market share for forged and machined automotive chassis and engine components. Further, shift towards multi-axle vehicles and new generation trucks would drive an increase in usage of forged parts, auguring well for BHFC. The domestic CV segment contributes ~15% of consolidated revenues and ~25% of standalone revenues. We expect BHFC’s domestic CV revenues to grow at a CAGR of ~21% over FY14-17E. Domestic CV revenues (as a % of standalone and consolidated revenues)
Source: Company, MOSL
Trend in domestic M&HCV volumes
Source: Company, MOSL
82 93 90 111 71 80
62 75
60
56
45 64 58
6.5 6.5 11.73.7
-12.6-14.3
-31.6-32.5
-16.2
-30.1-27.9
-14.6
-3.5
1QFY
12
2QFY
12
3QFY
12
4QFY
12
1QFY
13
2QFY
13
3QFY
13
4QFY
13
1QFY
14
2QFY
14
3QFY
14
4QFY
14
1QFY
15E
M&HCV ('000 units) Growth (%)
Source: Company, MOSL
PV segment a focus area; could be an important growth driver The global PV market is four times larger than the CV market, but contributes just ~20% to BHFC’s consolidated revenues. While international PVs contribute ~16% to consolidated revenues, the contribution of domestic PVs is just ~4%. We believe the PV segment offers significant headroom to grow through increased penetration by BHFC, benefiting from vendor consolidation in international business and emission norm-led shift from castings to forged components. In international PVs, BHFC recently bagged large multi-year orders for EUR250m from a German OEM, in addition to multi-years orders from Ford and Daimler
0
7
14
21
28
35
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
% of S/A revenues % of Consol revenues
276 274
184
245 323 347 268
200
220 271 330
33.1
-0.7
-33.0
33.3 31.9
7.5
-22.7
-25.5
10.0
23.022.0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
M&HCV ('000 units) Growth (%)
Bharat Forge
17 June 2014 16
Chrysler. While Ford Motor USA has initiated development of crankshaft forgings with BHFC, Daimler Chrysler has chosen it to supply crankshafts and camshaft forgings for its car engines in Germany. BHFC has also won an order to supply control arm forgings to a global passenger car company in Australia. In addition, it has bagged a new multi-year order to supply steering knuckle forgings to Dana (US). It has also begun supplying to its second Chinese customer, while exports to Renault are being scaled. It has won a USD100m order in Europe, which will be executed over the next five years. The management has indicated that BHFC will target to supply ~1m crankshafts in the European passenger car market by FY18.
Global luxury cars witnessing strong growth
200,000
300,000
400,000
500,000
600,000
Jan
Feb
Mar Apr
May Jun Jul
Aug Se
p
Oct
Nov
Dec
CY11 CY12 CY13 CY14
Source: Company, MOSL
International PV contribution expected to increase
Source: Company, MOSL
In India, passenger cars have traditionally used castings. The contribution of the domestic PV segment to BHFC’s consolidated revenues is, therefore, small. Progressively, with stricter emission norms and advanced turbocharged engines, more forgings are being used. BHFC has been working with OEMs on their platform development and will benefit when they launch new products using high performance forged components.
Domestic PV revenue growth linked to industry fortunes
Source: Company, MOSL
Domestic PV business contribution to revenues
Source: Company, MOSL
9,046 9,124 9,303
7,028
7,034
4,363
9,265
2119 19
21
14
7
16
FY07 FY08 FY09 FY10 FY11 FY12 FY13
PVs % of total
-26
-13
0
13
26
39
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
PV Vol Gr (%) Dom. PV revenue growth (%)
0
11
22
33
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
% of S/A revenues % of Consol revenues
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17 June 2014 17
Trend in domestic PV volumes
Source: Company, MOSL
724 731 722 948 776 745 817 860 739 763 767 814 687
9.2
0.6
-0.1
13.67.1
1.9
13.1
-9.3-4.8
2.4
-6.0 -5.3 -7.0
1QFY
12
2QFY
12
3QFY
12
4QFY
12
1QFY
13
2QFY
13
3QFY
13
4QFY
13
1QFY
14
2QFY
14
3QFY
14
4QFY
14
1QFY
15E
PV ('000 units) Growth (%)
Source: Company, MOSL
Stricter emission norms to drive higher realizations, improve competitive positioning Emission norm changes have meaningful implications for the auto industry. To adhere to reduced particulate emission, engines require significant changes. The global introduction of Euro VI regulations required advanced powertrain solutions, driving the shift towards high performance parts. According to Meritor, trucks complying with Euro VI regulations command a price premium of ~EUR5,000 over trucks complying with Euro V regulations. Such regulatory changes provide an opportunity for BHFC to increase its presence in the global PV industry, driven by technological shift from castings to forgings. Suppliers that emerge as preferred partners for OEMs may be able to leverage their global scale to further reduce technology costs and increase their industry influence. We expect BHFC to benefit from the trend of vendor consolidation.
Source: Cummins Inc, MOSL
Source: Cummins Inc, MOSL
1,57
8
1,76
5
1,88
8
2,39
7
2,94
6
3,13
5
3,18
7
3,08
3
3,39
2
3,90
1
4,48
6
19.7
11.87.0
27.022.9
6.41.7
10.0
15.0 15.0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
PV ('000 units) Growth (%)
Bharat Forge
17 June 2014 18
Non-auto business – play on investment cycle recovery To benefit from increasing market/customer penetration
The non-auto segment offers significant growth potential, as it is much larger than the
auto segment. BHFC is targeting ~60% of its standalone revenues from the non-auto
segment over next few years, up from the current ~40%.
Its partnerships with global players (Alstom, Areva, David Brown, etc) bear testimony
to its globally cost competitive engineering/manufacturing capabilities.
BHFC’s increasing penetration with existing and new customers, coupled with
economic stability in the international market and investment cycle recovery in India
would drive ~23% revenue CAGR in the non-auto segment.
Increasing contribution of non-auto to consolidated revenues augurs well for
profitability and capital efficiencies, given the segment’s higher realizations, margins
and asset turns. BHFC’s international non-auto business is largely serviced by its more
efficient Indian operations.
Non-auto segment drives diversification, growth and superior profitability Non-automotive forgings, including conventional and non-conventional energy, power, rail and marine, oil and gas exploration, metals and mining, and aerospace, offer a global market much larger than automotive forgings. In FY06, BHFC set out on a new growth path, where it focused on aggressively developing its industrial sector components business and chalked out a large investment plan to develop dedicated facilities in Baramati, Satara and Pune. It has developed and built strong relationships with customers in the non-automotive space, with the number of non-automotive customers more than doubling over the last 5-6 years. While existing non-auto business can be broadly divided into three verticals – (1) energy, (2) transportation, and (3) mining and construction, it is also exploring areas like aerospace that have long lead times. It plans to venture into 5-6 new sectors in the coming 5-7 years, and make each of these new verticals USD100m businesses. Non-automotive forgings are more complex and have higher contribution levels.
Broad overview of BHFC’s non-auto business
Source: Company, MOSL
BHFC plans to venture into 5-6 new sectors in the
coming 5-7 years, and make each of these new verticals
USD100m businesses.
Bharat Forge
17 June 2014 19
Non-auto segment capacity in place for further scale-up
Facilities Location Capacity Products Industry
Centre for Advanced Manufacturing 80mtr Ton Hammer Baramati 40,000 TPA Large closed Die
forgings upto 2.5T and 4.5m long
Energy sector, Hydro carbon exploration sector, transportation including Aerospace, Railways and Marine sector
Machining Shop Baramati 12,000 nos Machined components supply
Locomotives, Marine and power generation
Ring rolling facility Baramati 25,000 TPA Large rings, Gear blanks, connectors, bearings, Valves
Wind sector, Oil and gas sector
Heavy forge division 4,000T press
Pune 60,000 TPA Forge ingots upto 70T Wind turbine components, Hydro, Gas and steam turbine components and components for Mining, Metal Industry and General engineering applications
Machining facility for Heavy forge division
Satara 1,400 nos Machined components supply
Wind sector
Source: Company, MOSL
JVs with global capital goods players testimony of its capabilities BHFC has entered into JVs with global players like Alstom (for turbines in super critical thermal power plants), Areva (heavy forgings for nuclear power plants), David Brown (for industrial gear boxes) and NTPC (BOP equipment for power sector). These JVs are a testimony to BHFC’s manufacturing/engineering capabilities and inspire confidence in its ability to significantly scale-up the non-auto business globally. To benefit from eventual investment cycle recovery in both local and global markets The non-auto business is linked to the investment cycle, since it caters to infrastructure development – energy, transportation, and construction and mining. BHFC’s non-auto business revenues were impacted in FY13 due to macro headwinds in both India and global markets, resulting in 5% de-growth in non-auto segment revenues despite increasing traction with new customers/new segments. While the economic outlook for the US and EU is stabilizing, the Indian economy seems to have bottomed out with recovery expected from 2HFY15. International non-auto revenues contribute ~19% of consolidated revenues, whereas domestic non-auto revenues contribute ~9%.
Trend in non-auto business market mix
Source: Company, MOSL
Non-auto market mix
Source: Company, MOSL
2,075 2,202 3,525 3,095 5,450 6,661 5,102 5,6065,195 6,319
6,7353,603
7,35410,478
9,638
19,454
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Domestic International
0%
25%
50%
75%
100%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
International India
Bharat Forge
17 June 2014 20
International market outlook stabilizing Modestly improving economic growth in most developed markets should help improve business prospects. Demand for capital goods is sensitive to changes in business confidence and is correlated with economic swings. Key industry indicators such as industrial production and non-residential construction point to a modest uptick in growth for the global capital goods business. Revenues of global industrial players also suggest that the pace of revenue decline has moderated. The CY14 outlook reflects cautious optimism, suggesting possibility of a gradual recovery in the global investment cycle. Based on the outlook given by its key customers, the oil and gas segment is expected to grow 8-10%, while power and mining and construction are expected to remain stable. Currency movements have increased the competitiveness of Indian manufacturing and created opportunities for export-led business models. International non-auto revenues
1,315 1,826 2,490 2,0814,320
6,529 6,3533,8804,493 4,245
1,522
3,034
3,949
4,768
17 15 14
8
22 21
18
FY07 FY08 FY09 FY10 FY11 FY12 FY13
From India From Europe % of Consol revenues
Source: Company, MOSL
Manufacturing PMIs point to modest uptick
30
40
50
60
Apr
-08
Aug
-08
Dec
-08
Apr
-09
Aug
-09
Dec
-09
Apr
-10
Aug
-10
Dec
-10
Apr
-11
Aug
-11
Dec
-11
Apr
-12
Aug
-12
Dec
-12
Apr
-13
Aug
-13
Dec
-13
Apr
-14
EU PMI
Source: Bloomberg, MOSL
Source: Bloomberg, MOSL
30
40
50
60
Apr-
08A
ug-0
8D
ec-0
8Ap
r-09
Aug-
09D
ec-0
9A
pr-1
0Au
g-10
Dec
-10
Apr-
11A
ug-1
1D
ec-1
1Ap
r-12
Aug-
12D
ec-1
2Ap
r-13
Aug-
13D
ec-1
3Ap
r-14
US PMI
Bharat Forge
17 June 2014 21
Snapshot of comments by global capital goods companies Segment Company Commentary Power Alstom Demand in a number of markets is weak and should remain so in the short term and the level of
turnkey and equipment contracts booked is substantially lower than expected in Thermal Power. Energy & Marine Wartsila Our market outlook for 2014 remains cautious, although a slight improvement may be seen in
certain areas. Based on our current order book and project pipeline we expect some growth in net sales during 2014 and profitability to remain at a similar level to that of 2013.
Mining, Construction & Power
Caterpillar There are encouraging signs in the world economy and we're seeing some in our own business, and that gives us optimism for sales in our Construction and Power Systems segments and we think they'll each be up about 5% in 2014.
Oil & Gas Aker Solutions The underlying global economic outlook will support a strong market, with spending on offshore exploration and production growing 8 percent to 10 percent annually through 2017. Aker Solutions expects several offshore drilling rigs and floating production facilities to be ordered over the next 12 to 18 months.
Diversified Industrials
Andritz We do not anticipate any significant recovery in the global economy in 2014 and thus expect practically unchanged investment and project activity compared to 2013 in the markets served by ANDRITZ, with some major projects likely to be awarded in the hydro and pulp sectors.
Power & Automation
ABB In the short term, there are some positive early-cycle macroeconomic signs, such as strengthening growth in the US and the more encouraging growth in many parts of Europe. However, there are also some uncertainties related to the impacts of quantitative easing and the speed and strength of economic development in the emerging markets, especially China.
Power & Engines Cummins Inc In North America, we expect our truck business to grow in 2014. We are forecasting that the 2014 market size for heavy-duty trucks to increase 8% YoY. While GDP is expected to grow in the eurozone in 2014 for the first time in three years, we expect our revenues to be relatively flat. Demand from our European-based Power Generation customers will remain weak in 2014, given that most of these products are shipped to developing markets.
Diversified Industrials
Siemens AG Despite the generally positive forecasts for the global economy, we continue to assume that noticeable impulses will first be felt toward the end of the year. Well, our estimates and we're conservative and if business picks up as it already has been indicated and has been forecasted, we are prepared for taking benefit from this and so we can meet expectations.
Diversified Industrials Honeywell While we think it's prudent to remain cautious on the global economy at this time, we're increasingly confident in our 2014 outlook based on the momentum from the fourth quarter.
Source: Company, MOSL
Oil & Gas spending is expected to grow at 11% CAGR
Source: Wood Mackenzie, MOSL
Order backlog for GE at all-timehigh levels (USD b)
129 147 152 153 157 160 166 168 180 181
4653 52 50 53 56 57 61 64 64175
200 204 203 210 216 223 229 244 245
CY10
CY11
1HCY
12
3QCY
12
4QCY
12
1QCY
13
2QCY
13
3QCY
13
4QCY
13
1QCY
14
Services Equipment Total
Source: GE, MOSL
Domestic non-auto segment play on investment cycle recovery A strong decisive mandate in the recent Elections has re-kindled the expectations of an uptick in India's investment cycle. In our opinion, India's capex J-Curve will be kick-started by (1) reorientation of fiscal expenditure which could accelerate spending on flagship projects, and (2) government's attempt to address the
Bharat Forge
17 June 2014 22
contentious issues in several sectors, leading to increased capex by CPSUs. This phase will be followed with revival in industrial cycle culminating with traction in greenfield projects. Projects completed (as a % of projects under implementation) have touched abysmally low levels of 3.4%, and impacted the virtuous cycle of cash flow generation in the system. The initial round of demand improvement will be catered to by fast tracking these projects. Cabinet Committee on Investments has already cleared projects worth ~INR20t (~25% of the projects under implementation in the economy) and with more last-mile push, attempt should be to expedite implementation. Order finalization during May 2014 (ttm basis) stands at INR1.9t, and is up 29% YoY. Order awards on a ttm basis have gradually inched up from lows of INR1.4t in June 2013 to INR1.9t currently. Domestic non-auto revenues impacted by economic slowdown
Source: Company, MOSL
Outstanding Project Investments (% YoY): Phases of Investment cycle slowdown
Source: CMIE, MOSL
Projects completed at low levels as economic viability poor, impacting cash generation cycle
Source: CMIE, MOSL
2,075 2,202 3,525 3,095 5,450 6,661 5,102 5,606
13 12 16 15
29
23
14 18
7 5 8 6
16 13
8 11
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Domestic Non-Autos % of S/A revenues % of Consol revenues
-10
0
10
20
30
40
50
60Sep-96
Dec-97
Mar-99
Jun-00
Sep-01
Dec-02
Mar-04
Jun-05
Sep-06
Dec-07
Mar-09
Jun-10
Sep-11
Dec-12
Mar-14
2.5%
4.5%
6.5%
8.5%
10.5%
12.5%
Jun-
00
May
-01
Apr-
02
Mar
-03
Feb-
04
Jan-
05
Dec
-05
Nov
-06
Oct
-07
Sep-
08
Aug-
09
Jul-1
0
Jun-
11
May
-12
Apr-
13
Mar
-14
Projects Completed ttm, as % of Prj under ImplExecution impacted given regulatory, financing and viability constraints
Projects completed had consistently remained at 7%+ of projects under implementation
Bharat Forge
17 June 2014 23
Few pockets of hope: Geographic diversification, cost optimization, new products, etc Company Management Comments
Voltas Business prospects are somewhat brighter in certain Middle East geographies, with a clear-cut
investment thrust, especially in infrastructure and construction. This is more pronounced in Qatar, KSA
and most recently Dubai.
Elgi Equipments The company expects to end the financial year with a marginal organic growth largely contributed by
international markets as the domestic market continues to remain sluggish.
ABB India Base orders from a wider spectrum of customers helped offset dearth of large projects in the market.
Exports grew annulling the effect of a contraction in the domestic market opportunities.
Praj Industries We've taken adequate steps to increase our focus further on export markets, not only for Ethanol and
Brewery but also for emerging business.
Greaves Cotton Though our sales have been affected by the overall dismal business environment; we have been
constantly focusing on our product? market growth strategy. The company has stepped up its
investment in R&D activities to develop new products. International business has also been able to
widen its global footprint in South East Asia, East Africa and Middle East markets and has set up a
distribution and aftermarket network.
Thermax There are very limited opportunities in the market which have been available in the last nine months
and in the next, at least two or three quarters, but we have introduced new products in the market and
we have been able to curtail our expenses and costs, whereby we have been able to be competitive,
even though the market margins are lower.
Action Construction Equipments While there is some improvement in the macro environment, the changes are gradual. We are seeing
growth in new order enquires which we are optimistic will translate in the next year. Agri equipment
continues to be a key growth driver and we have commenced work on our in house engine
manufacturing facility and expect to have this operational by end of year.
Elecon Engineering We have a reason to believe that the worst is over as long as gears are concerned and we believe that if
the election shows positive signs, gear is one of the barometers of the economy because our industrial
gearboxes go into all kinds of industries. So we believe that as soon as the economy starts improving,
the demand for this will keep on increasing.
Power Finance Corporation The cash losses of the discoms of the UP, Rajasthan, Haryana, Tamil Nadu have reduced in the range of
42 to 54%, and all these four states are now paying subsidy upfront on a monthly basis. These are the
advantages and these are the turnaround which we are seeing after the implementation of FRP package
in all these four state.
Blue Star There has been some improvement in demand from the hotel, hospital, commercial complex and
industrial segment.
Source: Company, MOSL
Order finalizations improve (12mma basis, INR B)
Source: Company, MOSL
2,20
5
2,26
4
2,05
2
1,95
5
1,87
5
1,81
8
1,76
2
1,58
5
1,49
6
1,51
0
1,47
4
1,43
5
1,49
6
1,52
7
1,56
0
1,62
0
1,66
1
1,62
3
1,64
9 1,87
3 1,98
9
1,91
8
-35
-15
5
25
45
Aug-
12
Sep-
12
Oct
-12
Nov
-12
Dec
-12
Jan-
13
Feb-
13
Mar
-13
Apr
-13
May
-13
Jun-
13
Jul-1
3
Aug-
13
Sep-
13
Oct
-13
Nov
-13
Dec
-13
Jan-
14
Feb-
14
Mar
-14
Apr-
14
May
-14
TTM Orders (INR b) % YoY
Bharat Forge
17 June 2014 24
…with scope of market share gain and new segment driving faster growth In the non-auto segment, BHFC has been focused on (a) new customer additions, (b) higher value addition of critical components, and (c) expansion of product portfolio with existing customers. Going forward, we expect the non-auto business to witness stronger performance on the back of new contracts, improvement in economic conditions and start of commercial supplies after the completion of product validation processes for several ongoing programs. It has developed and built strong relationships with customers in the non-automotive space, with the number of non-automotive customers more than doubling over the last 5-6 years. BHFC plans to venture into 5-6 new sectors in the coming 5-7 years, and make each of these new verticals USD100m businesses. Typically, these products are more complex, have longer lead times for validation and have higher contribution levels. It has recently bagged its first order from the Indian Railways for locomotive crankshafts. This makes BHFC the only indigenous components supplier for the Indian Railways. The company is also executing, for the first time in India, a technology-intensive project involving mechanized laying of tracks within India's upcoming heavy axle load freight corridor. It has developed “demonstrator parts” for the aerospace sector for global players. Defence – next big opportunity With stress on indigenous development, potential defence opportunity of ~INR400b (defence imports in 2013) is being opened up. BHFC has building blocks in place in the defence sector, with JV with Israeli company Elbit Systems focuses on land systems—artillery and infantry equipment and tanks. This JV is developing a 155 mm artillery gun. Further, BHFC also has a strategic alliance with Swedish defence and security company Saab, and has a JV with David Brown catering to defence gearing solutions.
“In all, we are aiming to bag orders worth at least
USD100m from the Railways and this is the
minimum we are targeting. But selling crankshafts
alone won’t do enough, and hence, we are also working on other new products, but
it is too early to say what they might be.”
"Ten years from today, we are very confident that India
is going to emerge as a large exporter of defence
products. Today, we are the largest importer of defence products. And we are going
to be a fairly important player in this." Mr Baba
Kalyani, CMD, Bharat Forge
Bharat Forge
17 June 2014 25
Overseas subsidiaries of strategic value But yet to contribute meaningfully to financial performance
BHFC’s overseas acquisitions were driven by its need for enhanced access to
customers, markets and technology, and to develop a dual-shore manufacturing
model.
Though its overseas subsidiaries are yet to contribute meaningfully to financial
performance, they add strategic value. These subsidiaries contributed ~40%/8%/1% to
FY13 consolidated revenue/EBITDA/PAT.
BHFC’s exports from India have grown at a CAGR of ~25% over FY10-14, benefiting
from the enhanced access to customers and markets provided by these subsidiaries.
Acquisitions add strategic value, but meaningful financial contribution yet to come On realizing the need to be closer to international OEM customers and to widen its reach with global automotive companies, BHFC embarked on a series of acquisitions across geographies. This helped it to establish an international footprint and strengthen long-term relationships with a wider customer base in newer markets while offering greater access to technology. BHFC now has complementary manufacturing capabilities, a diversified product range, strong focus on key markets like India, US and EU. It has developed strong design and engineering capabilities and relationships with more than 35 global OEMs and tier-I automotive customers.
Global acquisitions broaden BHFC’s horizon BHFC CDP BF BF AluTech BF America BF Kilsta FAW BF JV
Year of acquisition
NA Nov-03 Dec-04 Jun-05 Sep-05 Dec-05
Equipment capability
1,600 Ton to 16,000 Ton press lines
4,000 to 8,000 Tons press lines
Aluminum forging presses
4,000 to 6,000 ton press lines
2,500 to 16,000 Tons press lines
1,600 ton to 12,500 ton press lines
Products Full spectrum product capability with major focus on CV engine and chasis components and passenger car engine component
Strong focus on passenger car chassis components
Manufacturer of niche aluminum chassis components
Strong focus on US light truck market
Significant focus on heavy duty engine components and heavy components
Very wide manufacturing capability with complete range of forging equipment
End user industry
Passenger Car, CV and Non automotive business
Passenger car railways, construction equipment
Aluminum components for passenger car industry
Light trucks Heavy commercial vehicles
Passenger car, CV, buses
Regional focus
India, USA, Europe & China
Europe, USA Europe & USA USA Europe China
Current Status
NA Profitable Break-even Closed Profitable Exited
Source: Company, MOSL
BHFC has been focusing on effectively integrating its global operations and realizing synergies between its global operations through (a) sharing of "best practices" across its facilities, (b) leveraging different customer relationships and offering a wider portfolio of products, (c) integrating R&D activities to enhance the scope of product development and reduce product development time, and (d) cross-fertilizing different plants with enhanced production capabilities. However, its acquisitions are yet to contribute meaningfully to financial performance, with ~40%/8%/1% contribution to FY13 consolidated revenues/EBITDA/PAT.
Bharat Forge
17 June 2014 26
Snapshot of financials of key subsidiaries
CDP BF BF AluTech BF Kilsta
INR m CY08 CY13 CY14E CY15E CY08 CY13 CY14E CY15E CY08 CY13 CY14E CY15E
Net Revenues 10,711 9,794 11,320 13,365 2,810 2,532 2,915 5,176 6,902 5,508 6,358 6,874
EBITDA 617 935 1,215 1,538 290 124 176 650 319 378 588 669
EBITDA Margins (%) 5.8 9.5 10.7 11.5 10.3 4.9 6.0 12.6 4.6 6.9 9.3 9.7
PAT 97 410 589 784 153 -7 30 257 -328 20 162 235
Source: Company, MOSL
Trend in contribution of subsidiaries to revenues, EBITDA and PAT
Source: Company, MOSL
Source: Company, MOSL
Source: Company, MOSL
Exports from India have benefited from access to markets and customers BHFC’s acquisitions have given its India operations access to customers, markets and technologies, translating into robust export business from India. Its exports from India have grown at a CAGR of ~25% over FY10-14 and contribute ~57%/30% of standalone/consolidated revenues. BHFC is able to cater to customers through a dual-shore model. Its acquisitions are playing a critical role in accelerating the pace of relationship building and business initiation. Across businesses, it has been putting in continuous efforts for upgradation and value addition. It is leveraging global synergies to grow the business in a de-risked manner and move-up the value chain with the global customers by progressively developing the supply partnership to the next level of development partnership.
14,410
23,139 24,558 27,165
14,712
21,399
25,931
20,153
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Revenues
1,327 1,787 1,822
1,114
(985)
697 811 760
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
EBIDTA
432 535 946
(523)
(1,122)
(154)
44
(381)
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
PAT
Bharat Forge
17 June 2014 27
BHFC is one of India’s largest engineering exporters from India, with a relatively diversified
segment mix
58
13 13 10 10 9 9 7 7 6
Baj
aj A
uto
Bha
rat F
orge
Bal
kris
hna
M &
M
Tata
Mot
ors
ISG
EC H
eavy
AIA
Eng
g.
HEG
Ash
ok L
eyla
nd
Cum
min
s In
dia
Source: CapitalLine, Company, MOSL
Exports from India have grown a CAGR of ~26% over FY10-14…
Source: Company, MOSL
…reflected in expansion of standalone gross margins
Source: Company, MOSL
7,109 12,195 17,346 15,837 18,483 21,998 26,248 31,344
35
66 59
43
59 65 66 64
15
37 34 25
36 33 37 37
FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Exports from India (INR m) % of S/A % of Consol
54.9
54.9
52.4 55
.7
54.9
55.7 56
.9 59.6
59.5
59.0
58.8
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
Bharat Forge
17 June 2014 28
Multiple levers to support/improve profitability Operating leverage I Limited capex I Debt reduction
We expect consolidated revenues to grow at a CAGR of ~16% over FY14-17 (adjusted for FAW JV exit), driven by 22% CAGR in India revenues and 12% CAGR in international revenues.
EBITDA margin should expand ~270bp to 18%, driven by higher exports from India, rising contribution from non-auto business and machined components, and operating leverage.
BHFC has sufficient capacities to drive over 25% revenue CAGR over the next two years, necessitating maintenance capex of INR1.5b-1.8b per year.
We estimate cumulative FCF generation of ~INR20b during FY15-17, enabling reduction of net debt to ~INR7.7b (net debt-equity of 0.2x) from ~INR13.4b (net debt-equity of 0.5x) in FY14.
Improving asset turns and profitability would drive improvement in consolidated RoE to ~22% in FY17 from 17.7% in FY14 – the highest RoE since FY07.
Significant headroom to grow from current capacities
1.6 1.5
1.2
0.8
1.11.3
0.9
1.1 1.1
1.31.5
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
Fixed Asset Turnover (x)
Source: Company, MOSL
Revenues to grow at ~16.6% CAGR over FY14-16
Source: Company, MOSL
EBITDA margins to improve to new highs (%)
9
15
21
27
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
S/A Consol
Source: Company, MOSL
Consolidated EPS to grow at 30% CAGR over FY14-16
Source: Company, MOSL
41,7
83
46,5
23
47,7
51
33,2
76
50,8
69
62,7
91
51,6
66
67,1
61
71,8
71
99,2
80
38
113
-30
5323
-18
30
719
16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
Net Revenues Growth (%)
13.3
14.8
4.8
1.3
12.7
17.7
11.2
19.0
22.5
32.3
38.9
18 11
-67 -72
40
-37
70
19
4420
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
EEPS Growth (%) - RHS
Bharat Forge
17 June 2014 29
Capital efficiencies to improve to highest level since FY07
Source: Company, MOSL
Improving CFO, minimal capex resulting in strong FCF (INR b)..
Source: Company, MOSL
…driving meaningful reduction in net debt
Source: Company, MOSL
Dividend per share to increase steadily
Source: Company, MOSL
0
9
18
27
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
RoE (%) RoCE (%)
-1.1
-2.2 -2.6
3.5
-0.3
0.5
3.1
6.8 5.8 6.7 8.7
-8
-4
0
4
8
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
CFO Capex FCF
6 10 17 14 12 17 19 14 11 7 2
0.4
0.6
1.0 1.0
0.60.8 0.8
0.50.4
0.20.0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
ENet Debt (INR b) Net Debt:Equity (x)
3.5
3.5
1.0
1.0
3.5
4.0
3.4
4.5
5.0
6.0
7.0
31 28 24
91
32 2636
28 26 22 21
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
Dividend (INR/Sh) Payout (%)
Bharat Forge
17 June 2014 30
Valuations attractive for global leader in forgings Initiate coverage with Buy rating and target price of ~INR710 BHFC is primed for recovery in the global investment cycle. While the stock has
outperformed over the last six months, there are several triggers for continued
outperformance.
These include: (a) volume recovery led benefit of operating leverage, (b) improving
segment mix, (c) balance sheet deleveraging, and (d) improvement in capital
efficiencies.
Valuations at ~17.9x/14.9x FY16/FY17E consolidated EPS of INR29/INR37 are
attractive for a global leader in forgings and at a discount to the 5/10 year average of
22x/26x.
We initiate coverage with a Buy rating. Our target price of ~INR710 (~22x FY16E EPS)
suggests an upside of ~23%.
FY16 performance sensitivity to revenue growth
Rev. Growth
(%)
EBITDA Margins
(%)
EPS (INR)
PE (x) TP@22x
PE
5 15.6 22.5 24.8 495
10 16.4 26.0 21.5 571
19 17.8 32.3 17.2 711
20 17.9 32.9 17.0 723
25 18.6 36.3 15.3 799
30 19.2 39.8 14.0 875
Source: Company, MOSL
BHFC: Ten-year PE band
19.421.6
0
30
60
90A
pr-0
4
Nov
-04
Jun-
05
Jan-
06
Aug
-06
Apr
-07
Nov
-07
Jun-
08
Jan-
09
Sep -
09
Apr
-10
Nov
-10
Jun-
11
Jan-
12
Sep -
12
Apr
-13
Nov
-13
Jun-
14
P/E (x) 5 Yrs Avg (x) 10 Yrs Avg(x)
25.7
Source: Bloomberg, MOSL
BHFC: Five-year EV/EBITDA chart
9.8
10.7
9.4
5
8
11
14
Apr
-09
Aug
-09
Nov
-09
Feb-
10M
ay-1
0Se
p-10
Dec
-10
Mar
-11
Jun-
11Se
p-11
Jan-
12A
pr-1
2Ju
l-12
Oct
-12
Jan-
13M
ay-1
3A
ug-1
3N
ov-1
3Fe
b-14
Jun-
14
EV/EBDITA 10 Yr Avg 5 Yr Avg
Source: Company, MOSL
BHFC: Five-year P/B chart
3.8
2.9
3.8
0.0
2.0
4.0
6.0
8.0
Apr
-04
Nov
-04
Jun-
05Ja
n-06
Aug
-06
Apr
-07
Nov
-07
Jun-
08Ja
n-09
Sep-
09A
pr-1
0N
ov-1
0Ju
n-11
Jan-
12Se
p-12
Apr
-13
Nov
-13
Jun-
14
P/B (x) 5 Yrs Avg (x) 10 Yrs Avg(x)
Source: Company, MOSL
BHFC is trading at a discount to historical
valuations, despite significant transformation
in its business model
Bharat Forge
17 June 2014 31
Financials and valuations
Income statement (INR Million) Y/E March FY12 FY13 FY14 FY15E FY16E FY17E
Net Sales 62,791 51,666 67,161 71,871 85,701 99,280
Change (%) 23.4 -17.7 30.0 7.0 19.2 15.8
Total Expenditure 52,826 43,750 56,890 59,876 70,431 81,231
% of Sales 84.1 84.7 84.7 83.3 82.2 81.8
EBITDA 9,964 7,915 10,271 11,995 15,271 18,049
Margin (%) 15.9 15.3 15.3 16.7 17.8 18.2
Depreciation 3,022 3,195 3,579 3,596 3,802 4,217
EBIT 6,943 4,720 6,693 8,400 11,469 13,833
Int. and Finance Charges 1,860 1,672 1,692 1,615 1,460 1,434
Other Income - Rec. 915 1,121 1,249 1,498 1,556 1,697
PBT bef. EO Exp. 5,998 4,169 6,250 8,283 11,565 14,095
EO Expense/(Income) 0 205 -807 0 0 0
PBT after EO Exp. 5,998 3,964 7,057 8,283 11,565 14,095
Current Tax 1,796 1,529 2,100 3,041 4,035 5,033
Tax Rate (%) 29.9 38.6 29.8 36.7 34.9 35.7
Reported PAT 4,202 2,435 4,957 5,242 7,530 9,062
PAT Adj for EO items 4,202 2,561 4,390 5,242 7,530 9,062
Change (%) 39.1 -39.1 71.4 19.4 43.7 20.4
Margin (%) 6.7 5.0 6.5 7.3 8.8 9.1
Balance sheet (INR Million) Y/E March FY12 FY13 FY14 FY15E FY16E FY17E
Equity Share Capital 466 466 466 466 466 466
Total Reserves 21,373 22,098 26,367 30,246 36,141 43,296
Net Worth 21,839 22,564 26,832 30,712 36,607 43,762
Minority Interest 1,957 1,643 170 170 170 170
Deferred Liabilities 886 1,345 1,645 1,645 1,645 1,645
Total Loans 27,835 28,249 25,612 23,612 21,612 19,612
Capital Employed 52,517 53,800 54,259 56,139 60,034 65,189
Gross Block 49,798 56,452 60,054 63,184 64,934 66,684
Less: Accum. Deprn. 23,270 26,807 30,386 33,982 37,784 42,000
Net Fixed Assets 26,527 29,645 29,668 29,203 27,151 24,684
Capital WIP 5,168 6,324 1,500 1,750 1,750 1,750
Total Investments 4,450 4,160 8,012 8,012 8,012 8,012
Curr. Assets, Loans&Adv. 37,197 34,266 36,165 39,520 47,741 57,595
Inventory 10,961 11,320 10,386 11,814 14,088 16,320
Account Receivables 8,134 6,114 8,660 8,861 10,566 12,240
Cash and Bank Balance 6,337 5,554 4,227 5,049 6,636 9,977
Loans and Advances 11,765 11,278 12,892 13,796 16,451 19,057
Curr. Liability & Prov. 20,825 20,594 21,086 22,346 24,620 26,852
Creditors 11,789 9,511 10,554 11,814 14,088 16,320
Other Current Liabilities 6,462 8,950 7,526 7,526 7,526 7,526
Provisions 2,575 2,133 3,006 3,006 3,006 3,006
Net Current Assets 16,372 13,672 15,079 17,174 23,121 30,743
Appl. of Funds 52,517 53,800 54,259 56,139 60,034 65,189 E: MOSL Estimates
Bharat Forge
17 June 2014 32
Financials and valuations
Ratios Y/E March FY12 FY13 FY14 FY15E FY16E FY17E
Basic (INR) *
EPS 18.0 11.0 18.9 22.5 32.3 38.9
Cash EPS 31.0 24.7 34.2 38.0 48.7 57.0
BV/Share 93.8 96.9 115.2 131.9 157.2 187.9
DPS 4.0 3.4 4.5 5.0 6.0 7.0
Payout (%) 25.8 38.0 24.7 26.0 21.7 21.0
Valuation (x) *
P/E
30.7 25.7 17.9 14.9
Cash P/E
16.9 15.3 11.9 10.2
P/BV
5.0 4.4 3.7 3.1
EV/Sales
2.3 2.1 1.7 1.5
EV/EBITDA
15.2 12.8 9.8 8.0
Dividend Yield (%)
0.8 0.9 1.0 1.2
Return Ratios (%)
RoE 20.0 11.7 17.9 18.2 22.4 22.6
RoCE 17.8 11.6 15.4 18.5 23.1 25.5
Working Capital Ratios
Fixed Asset Turnover (x) 1.3 0.9 1.1 1.1 1.3 1.5
Asset Turnover (x) 1.2 1.0 1.2 1.3 1.4 1.5
Inventory (Days) 64 80 56 60 60 60
Debtor (Days) 47 43 47 45 45 45
Creditor (Days) 69 67 57 60 60 60 Working Capital Turnover (Days) 58 57 59 62 70 76
Growth (%)
Sales 23.4 -17.7 30.0 7.0 19.2 15.8
EBITDA 26.9 -20.6 29.8 16.8 27.3 18.2
PAT 39.8 -37.0 69.8 18.6 43.7 20.4
Leverage Ratio (x)
Current Ratio 1.8 1.7 1.7 1.8 1.9 2.1
Debt/Equity 1.3 1.3 1.0 0.8 0.6 0.4 * Adjusted for treasury stocks
Cash flow statement (INR Million)) Y/E March FY12 FY13 FY14 FY15E FY16E FY17E N P/ (Loss) bfe Tax & EO Items 5,995 3,919 6,693 8,400 11,469 13,833
Depreciation 3,022 3,360 3,579 3,596 3,802 4,217
Direct Taxes Paid -1,710 -1,193 -1,801 -3,041 -4,035 -5,033
(Inc)/Dec in WC -2,307 -385 -2,733 -1,274 -4,360 -4,281
CF from Operations 5,000 5,701 5,737 7,681 6,876 8,735
EO Expense 2,373 2,456 588 1,498 1,556 1,697
CF from Operating incl EO 7,372 8,157 6,325 9,179 8,432 10,433
CF from Investments -10,843 -2,896 -2,606 -3,380 -1,750 -1,750
Inc/(Dec) in Debt 7,902 -454 -2,637 -2,000 -2,000 -2,000
Interest Paid -1,940 -2,111 -1,692 -1,615 -1,460 -1,434
Dividend Paid -1,343 -949 -1,226 -1,362 -1,635 -1,907
CF from Fin. Activity 4,619 -3,513 -5,045 -4,977 -5,095 -5,341
Inc/Dec of Cash 1,148 1,748 -1,326 821 1,587 3,341
Add: Beginning Balance 1,197 2,345 4,093 2,767 3,588 5,175
Closing Balance 2,345 4,093 2,767 3,588 5,175 8,517 E: MOSL Estimates
Bharat Forge
17 June 2014 33
N O T E S
Bharat Forge
17 June 2014 34
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