Professional Documents
Culture Documents
Sector:Automotive
BharatForge
Primedforrecovery
JineshGandhi (Jinesh@MotilalOswal.com)+912239825416
ChiragJain (Chirag.Jain@MotilalOswal.com)+912239825418
BharatForge
BharatForge:Primedforrecovery
PageNo.
Summary ........................................................................................................
34
Stronger,leanerandhealthier......................................................................59
AutobusinessawaitingCVcyclerecovery
............................................
Nonautobusinessplayoninvestmentcyclerecovery
Overseassubsidiariesofstrategicvalue
.......................
...................................................
1017
1824
2527
Multipleleverstosupport/improveprofitability
...................................
Valuationsattractiveforgloballeaderinforgings
........................................
Financialsandvaluation
...........................................................................
2829
30
3132
InvestorsareadvisedtoreferthroughdisclosuresmadeattheendoftheResearchReport.
17June2014
InitiatingCoverage|Sector:Automotive
BharatForge
BSESensex
25,190
S&PCNX
7,534
CMP:INR579
TP:INR710
Buy
Primedforrecovery
Earningsgrowthtoacceleratewith~27%CAGR(FY1417E)
Stockinfo
Bloomberg
BHFCIN
EquityShares(m)
232.8
52WeekRange(INR)
586/186
1,6,12Rel.Per(%)
22/65/127
M.Cap.(INRb)
129.7
M.Cap.(USDb)
2.2
BharatForge(BHFC)hasemergedstronger,leanerandhealthierfromthe
downcycle,drivenbyitsproactivestrategicshifttowardsastable,broadbased
andgreatervalueaddingbusinessmodel.ItisnowoneofIndiaslargest
engineeringexporters.
Itisprimedforrecoveryintheglobalinvestmentcycle.This,coupledwithan
expandedproduct/marketmix,woulddrivestrongrevenueCAGRof16%CAGR
FinancialSnapshot(INRb)
Y/EMarch
2015E2016E2017E
overFY1417.EPSwouldgrowataCAGRof~27%,aidedbyrobustmargin
expansion.
Sales
71.9
85.7
99.3
Whilethestockhasoutperformedoverthelastsixmonths,thereareseveral
EBITDA
12.0
15.3
18.0
triggersforcontinuedoutperformance.Theseinclude:(a)volumerecoveryled
5.2
7.5
9.1
EPS(INR)
22.5
32.3
38.9
deleveraging,and(d)improvementincapitalefficiencies.
EPSGr.(%)
19.4
43.7
20.4
Valuationsat~17.9x/14.9xFY16/FY17EconsolidatedEPSofINR32/INR39are
NP
BV/Sh.(INR)
131.9157.2187.9
P/E(x)
EV/EBITDA(x)
attractiveforagloballeaderinforgingsandatadiscounttothe5/10year
25.7
17.9
14.9
4.4
3.7
3.1
12.8
9.8
8.0
P/BV(x)
EV/Sales(x)
2.1
1.7
1.5
RoE(%)
18.2
22.4
22.6
RoCE(%)
18.5
23.1
25.5
Shareholdingpattern(%)
Ason
Mar14Dec13Mar13
Promoter
46.7
Dom.Inst
Foreign
Others
benefitofoperatingleverage,(b)improvingsegmentmix,(c)balancesheet
46.7
42.1
14.5
17.5
19.0
16.3
13.8
9.7
22.5
21.7
29.3
averageof22x/26x.WeinitiatecoveragewithaBuyrating.Ourtargetpriceof
~INR710(~22xFY16EEPS)suggestsanupsideof~23%.
Stronger,leanerandhealthier
BHFChasbroadeneditsrevenuestreambyenteringnewsegments(nonauto)
andglobalmarkets.Theshareofautobusinesshasdeclinedfrom~80%inFY07
to~60%inFY13andtheshareofIndiahasreducedfrom~60%to~48%in
standaloneoperations.Further,ithasincreasedvalueadditionbyfocusingon
machinedcomponents,thecontributionofwhichhasincreasedto~51%in
FY13,boostingrealizationsandmargins.Lastly,ithasimproveditsbalance
sheetbyfocusingoncontrollingdebtthroughlowercapex,resultinginfallin
netdebtequityto~0.3x/0.2xbyFY15/FY16.
AutobusinessawaitingCVcyclerecovery;focusingonPVs
StockPerformance(1year)
BenefitofUSClass8demandimprovement,drivenbyprebuyingbefore
emissionnormchangesandgradualrecoveryintheEUwouldreflectin
FY15/FY16.BHFCisacleanplayontheexpecteddomesticCVcyclerecovery
from2HFY15,withover60%marketshareinM&HCVcomponents.ThePV
segmentisafocusareaforBHFCandcouldbeanimportantgrowthdriver.This
segmentoffersanopportunitysize4xthatofCVs.
Nonautobusinessplayoninvestmentcyclerecovery
Thenonautosegmentofferssignificantgrowthpotential,asitismuchlarger
thantheautosegment.BHFCistargeting~60%ofitsstandalonerevenuesfrom
thenonautosegment,upfromthecurrent~40%.Itspartnershipswithglobal
players(Alstom,Areva,DavidBrown,etc)beartestimonytoitsgloballycost
17June2014
BharatForge
competitiveengineering/manufacturingcapabilities.BHFCsincreasing
penetrationwithexistingandnewcustomers,coupledwitheconomicstability
intheinternationalmarketandinvestmentcyclerecoveryinIndia,woulddrive
~24%revenueCAGRinthenonautosegment.Increasingcontributionofnon
autotoconsolidatedrevenuesaugurswellforprofitabilityandcapital
efficiencies,giventhesegmentshigherrealizations,marginsandassetturns.
Multipleleverstosupport/improveprofitability
WeexpectconsolidatedrevenuestogrowataCAGRof~16%overFY1417
(adjustedforFAWJVexit),drivenby22%CAGRinIndiarevenuesand12%
CAGRininternationalrevenues.EBITDAmarginshouldexpand~290bpto
18.2%,drivenbyhigherexportsfromIndia,risingcontributionfromnonauto
businessandmachinedcomponents,andoperatingleverage.BHFChas
sufficientcapacitiestodriveover25%revenueCAGRoverthenexttwoyears,
necessitatingmaintenancecapexofINR1.5b1.8bperyear.Weestimate
cumulativeFCFgenerationof~INR21bduringFY1517,enablingreductionof
netdebtto~INR7b(netdebtequityof0.2x)from~INR13.4b(netdebtequityof
0.8x).Improvingassetturnsandprofitabilitywoulddriveimprovementin
consolidatedRoEto~22.6%inFY17from17.9%inFY14thehighestRoEsince
FY07.
Valuationsattractiveforgloballeaderinforgings;Buy
BHFCisprimedforrecoveryintheglobalinvestmentcycle.Whilethestockhas
outperformedoverthelastsixmonths,thereareseveraltriggersforcontinued
outperformance.Theseinclude:(a)volumerecoveryledbenefitofoperating
leverage,(b)improvingsegmentmix,(c)balancesheetdeleveraging,and(d)
improvementincapitalefficiencies.Valuationsat~17.9x/14.9xFY16/FY17E
consolidatedEPSofINR32/INR39areattractiveforagloballeaderinforgings
andatadiscounttothe5/10yearaverageof22x/26x.Weinitiatecoverage
witha Buy rating.Ourtargetpriceof~INR710(~22xFY16EEPS)suggestsan
upsideof~23%.
17June2014
BharatForge
Stronger,leanerandhealthier
DiversifiedrevenuesILowerfixedcostsIDecliningdebtequity
BHFChasbroadeneditsrevenuestreambyenteringnewsegments(nonauto)and
globalmarkets.Theshareofautobusinesshasdeclinedfrom~80%inFY07to~60%in
FY13andtheshareofIndiahasreducedfrom~60%to~48%instandaloneoperations.
Further,ithasincreasedvalueadditionbyfocusingonmachinedcomponents,the
contributionofwhichhasincreasedto~51%inFY13,boostingrealizationsand
margins.
BHFChasworkedonloweringitsbreakevenutilizationinIndia(from35%to30%)as
wellasinitswhollyownedsubsidiaries(from60%to50%).
Lastly,ithasimproveditsbalancesheetbyfocusingoncontrollingdebtthroughlower
capex,resultinginfallinnetdebtequityto~0.3xbyFY15.
Diversification
Efficiency
New
New
Cost
markets
customers
reduction
New
sectors/businesses
Fiscalprudence
Lower
Freezeon
Focuson
breakeven
capacity
cash
Optimization
Reduce
andrightsizing
working
ofoperations
capital
Debtreduction
Source:MOSL
ThebenefitsofthesestrategicchangesarevisibleinBHFCsfinancialsinthecurrent
downturn.WebelieveBHFCisnowwellplacedtoemergemuchstronger,drivenby
recoveryintheinvestmentcycleinIndiaandglobally.Wediscussbelowthe
companyskeyinitiativesthathavehelpedittoemergeleanerandstronger.
1.Broadeningofrevenuebase
Consideringthedeepcyclicalityinthecommercialvehicle(CV)business,BHFC
decidedtodiversifyitsrevenuestreambyincreasingtheshareofpersonal
vehicle(PV)andnonautomotivebusinesses.GeographicaldiversificationtoUS,
EuropeandRoWhashelpedprotectBHFCagainstconcurrentCVcyclesinkey
markets,globally.Itspresenceacrosssegmentsandmarketshashelpedto
largelyinsulateBHFCfromcyclicalityintheautomotivebusiness,resultingin4%
CAGRinconsolidatedrevenueCAGRoverFY0813(frompeaktotrough).
17June2014
BharatForge
BHFCsrevenuemixgettingmorediversified
CVsDom
CVsIntl
PVsDom
PVsIntl
NonAutosDom
NonAutosIntl
12
5
13
5
14
7
11
9
14
17
18
21
19
11
19
21
14
3
10
10
7
3
45
45
49
38
43
51
14
15
17
15
12
FY07
FY08
FY09
FY10
FY11
FY12
29
8
12
3
16
4
41
41
11
FY13
FY14
Source:Company,MOSL
Newnonautosegments
Thenonautomotiveforgingsspace,includingconventionalandnon
conventionalenergy,power,railandmarine,oilandgasexploration,metalsand
mining,andaerospaceoffersamuchlargermarketthantheglobalautomotive
forgingsspace.InFY06,BHFCstartedaggressivelydevelopingitsindustrial
componentsbusinessandinvestedinlargededicatedfacilitiesinBaramati,
SataraandPune.Ittargetedfivekeyverticalsoil&gas,constructionand
miningequipment,railways,marineenginesandcomponents,andaerospace.
Typically,thesenonautocomponentsaremorecomplexandhavehigher
contributionlevelsperunitofsale.Thenonautosegmentscontributed~28%of
consolidatedrevenuesinFY13against18%inFY08.
Nonautorevenuecontributionhasincreasedmeaningfully(%)
Consol
18
FY08
21
FY09
39
36
32
20
Standalone
30
25
27
40
37
41
28
20
FY10
FY11
FY12
FY13
FY14
Source:Company,MOSL
Newmarkets,segmentsandcustomerswithinauto:
Theautoindustryfollowsthecyclesofemissiontechnologychangeseveryfour
yearsorso.Toreducetheimpactofcyclicality,BHFCdecidedtodiversifyinto
thePVsegmentandtohaveapresenceacrossthreecontinentsNorth
America,EuropeandAsia.ItisfocusedoncreatingalargerpresenceinPVs,as
thissegmentismuchlargerthanCVs.
SupplytothePVsegmenthasbegunto
gaintraction,asstricteremissionnormswilldriveashifttohighperformance
partsandfromlargertosmalleryetpowerfulfuelefficientengines,inturn
drivingtheshiftfromcastingstoforgings.Intheautosegment,BHFC
consolidateditspositionbyincreasingitscustomerbaseandpenetratingdeeper
intoglobalmarketsthroughitsIndianandoverseasoperations.
17June2014
BharatForge
Significantincreaseincontributionfrominternational
markets(%ofstandalonerevenues)
TrendinPVcontribution(%ofsales)
India
1
13
26
2
20
22
USA
4
24
4
18
22
20
21
60
56
51
FY07
FY08
FY09
Europe
1
15
Others
4
21
22
3
19
28
Standalone
4
22
23
16
27
62
59
53
50
46
FY10
FY11
FY12
FY13
FY14
Consol
25
22
13
FY08
FY09
20
17
16
FY10
15
10
FY11
FY12
FY13
FY14
Source:Company,MOSL
Source:Company,MOSL
IncreasingshareofexportsfromIndia(%ofsales)
Consol
45
23
42
19
46
22
52
41
22
23
Standalone
44
26
50
52
29
32
57
29
58
56
55
32
32
33
Source:Company,MOSL
Whyforgingsv/scastingsinPVs?
Forgedcomponentsmakepossibledesignsthataccommodatethehighestloads,
operatingtemperaturesandstresses.Economically,forgedproductsareattractive
becauseoftheirinherentsuperiorreliability,improvedtolerancecapabilities,and
thehigherefficiencywithwhichforgingscanbemachinedandfurtherprocessedby
automatedmethods.Thedegreeofstructuralreliabilityachievedinforgingis
unexcelledbyanyothermetalworkingprocess.Therearenointernalgaspocketsor
voidsthatcouldcauseunexpectedfailureunderstressorimpact.Tothedesigner,
thestructuralintegrityofforgingsmeanssafetyfactorsbasedonmaterialthatwill
respondpredictablytoitsenvironmentwithoutcostlyspecialprocessingtocorrect
internaldefects.
2.Focusonvalueaddition
BHFChasevolvedfrom(1)asupplierofforgedcomponentsto(2)asupplierof
finishedcomponentsto(3)adevelopmentpartnerforbothautoandnonauto
industries.Themovementupthevaluechainhasacceleratedoverthepastfew
yearsacrossautomotiveandnonautomotivecomponents.Thishasbeen
achievedasaresultofBHFCsstrongtechnologicalrelationshipandclose
collaborationwithmajorcustomers.Machiningistheprocessofremoving
excessmaterialfromtheforgingtomeetthedimensionsrequiredbycustomers,
convertingaforgedpartintoafullyfinishedandreadytoassemblecomponent.
Focusonhighervalueadditionhasresultedinanincreaseinthecontributionof
machinedcomponentsto~51%ofstandalonerevenuesfrom~40%inFY08.
17June2014
BharatForge
Moreimportantly,machinedcomponentsofferhigherprofitabilityandhave
lowercapitalintensity.
Increasingvalueadditionevidentinhigherrevenuecontributionfrommachined
componentsand
M/CingRevenues(INRb)
%ofS/ARevenues
41
40
40
43
22
25
%ofConsolRevenues
51
47
28
29
19
18
13
18
16
FY08
FY09
FY10
FY11
FY12
FY13
Source:Company,MOSL
reflectinginhigherrealizationsandgrossmargins(%)
Standalone
S/ARealizations(INR/ton)
Consolidated
63
60
56
55
53
52
50
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY08
FY09
56
55
51
FY10
57 57
54
52
FY11
FY12
Source:Company,MOSL
FY13
FY14
Source:Company,MOSL
3.Leanercoststructure
Inthelastfewyears,BHFChasfocusedonreducingitsfixedcostsandbringing
downbreakevenutilizationatitsdomesticaswellasinternationalsubsidiaries.
Ithasachievedthisthroughrestructuringofmanufacturingfacilities,rightsizing
ofmanpowerinEUoperationsandoptimizingfixedcosts.BHFChasclosedits
operationsatScottishStampingsandBFAmerica,andisexitingtheChinaJV.As
aresult,ithasbeenabletoreducebreakevenutilizationinIndiato30%inFY13
(from35%inFY08)andinEuropeto50%(from60%).
17June2014
BharatForge
RestructuringofmanufacturingoperationsledtoclosureofScottishandAmerican
subsidiaries,andexitfromChinaJV
India
135
135
Europe
135
US
China
60
60
60
135
200
200
180
180
0
180
340
365
365
380
380
FY10
FY11
FY12
FY13
FY14
Source:Company,MOSL
Trendinfixedcost
Trendinbreakevenutilization
FixedCost(%ofconsolsales)
FY08
FY13
23.3
21.2
21.2
50
22.0
20.8
19.0
FY07
FY08
60
FY09
FY10
FY11
35
30
18.3
FY12
FY13
India
Source:Company,MOSL
Europe
Source:Company,MOSL
Goalsfornextfiveyears
Forthenextfiveyears,BHFChassetthefollowinggoals:
IncreasepresenceinPVsthroughnewproductdevelopmentandcustomer
penetration.
Enhancemarketshareintheindustrialsectorandcreatepresenceinthe
aerospacesector.
NurturetheJVwithAlstomtobecomeaworldclass,costcompetitivepower
equipmentmanufacturer.
Focusonbecominganetdebtfreecompany,improvingreturnratiosand
generatingcashflows.
17June2014
BharatForge
AutobusinessawaitingCVcyclerecovery
FocusingonPVs,offering4xtheopportunitysizeofCVs
BenefitofUSClass8demandimprovement,drivenbyprebuyingbeforeemission
normchangesandgradualrecoveryintheEUwouldreflectinFY15/FY16.
BHFCisacleanplayontheexpecteddomesticCVcyclerecoveryfrom2HFY15,with
over60%marketshareinM&HCVcomponents.
ThePVsegmentisafocusareaforBHFCandcouldbeanimportantgrowthdriver.This
segmentoffersanopportunitysize4xthatofCVs.
StricteremissionnormswouldnotonlydrivehigherrealizationsforBHFCbutalso
improveitscompetitivepositioning.
HighlyleveredtoglobalandlocalCVcycles
BHFCisaleadingglobalautomotiveforgingsplayer,withmanufacturingpresencein
IndiaandEurope.Thetop5globalOEMsacrossCVandPVsegmentsareBFLs
customers.Ithastransformeditselffromasupplierofcomponentstoapreferred
technologyandengineeringdrivendevelopmentpartnerforallindustriesthatneed
forgedcomponents.WeexpectBHFCsmarketsharetoincreasefurther,drivenby
itsfullservicesupplycapabilities,enablingittobuildstrongandsustainable
customerrelationships.ThereisatrendtowardsdeintegrationofOEMfacilitiesdue
toemphasisonlowercapitalintensity,resultinginincreasedscopeforoutsourcing
components.Onasteadystatebasis,theCVsegmentcontributes~58%of
consolidatedrevenues(~45%frominternationalmarketsand~13%fromdomestic
markets).
CVsegmentcontributes~55%tosteadystateconsolidated
TrendinHCVvolumesandconsolidatedrevenuegrowth
HCVVolGrowth(%)
revenues
ConsolRevenueGrowth(%)
CVsIntl
60.0
40.0
14
15
20.0
CVsDom
12
17
15
11
41
41
FY13
FY14
0.0
20.0
45
45
49
FY07
FY08
FY09
38
43
51
40.0
FY07FY08FY09FY10FY11FY12FY13FY14
*HCVvolumegrowthforIndia,EU&US
Source:Industry,Company,MOSL
17June2014
FY10
FY11
FY12
Source:Company,MOSL
10
BharatForge
BHFCsfullservicecapabilitiesenableittoengagewithOEMsrightfromdevelopmentstage
Source:Company,MOSL
17June2014
11
BharatForge
InternationalCVbusinessoutlookimproving
BHFCisoneofthegloballeadersinforgedcomponentsforCVs,withstrong
relationswithkeyOEMsacrosstheglobe.Throughseveralstrategicacquisitions,it
hasestablishedmanufacturingpresenceinGermanyandSwedenanddeveloped
dualshoremanufacturingcapacities,givingittheabilitytocatertotheneedsof
customersfrommultiplelocations.TheinternationalCVbusinesscontributes~45%
ofitsconsolidatedrevenues.ExportsofCVcomponentsfromIndiaaccountfor~30%
oftotalinternationalCVrevenues(~20%inFY10)andhavebeenincreasingpostthe
closureofAmericanoperationsinNovember2012.
OffshoringfromIndiaforinternationalCVbusinesstoincrease(%ofinternationalCV
businessrevenues)
Fromotheroperations
FromIndiaoperations
20
21
23
20
25
26
31
80
79
77
80
75
74
69
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Source:Company,MOSL
USClass8CVvolumestopickuponprebuysbeforeemissionnormchange
inCY15
BHFCislargelyfocusedonClass8trucks(HCVs)andlighttrucks.Ithasstrong
relationshipsintheUSCVmarketandhassignificantlyincreaseditsautoexportsto
USAonthebackofsuppliestotheM&HCVsegment.Basedonoutlookgivenby
variousOEMs,USClass8trucksareexpectedtogrow612%inCY14,drivenby
replacementdemandandeconomicrecovery.Replacementofagingtrucks
continuestobetheprimarydriverofnewpurchases,withanearrecordaverage
fleetageof9.57years.Trucksboughtinthelastpeakin200406arenow810years
old,supportingsolidreplacementdemand.Repaircostsrampupafter45years,
furtherdrivingreplacementoftrucks.Freightgrowthandregulatorychangesshould
encouragereplacementofolderequipment.Further,Class8truckcancellationsat
5.2%ofgrossorders,isbelowthe10yearaverageof9.1%.Cancellationshavebeen
below10%forthepast14months,apositiveindicatoroffleetsentiment.
US/NAFTA
Volvo
Daimler
PACCAR
CY14Growth(%)
Keycomments
6%
Theconstruction
marketcontinues
torecoverand
replacement
demandremains
high
upto10
Significantmarket
growthofupto
10%duetothe
increasingly
dynamiceconomy
upto12%
8%
Ongoingfleet
replacementand
someexpansionof
industryfleet
capacityreflecting
modestoverall
i
h
Source:Company,MOSL
Cummins
17June2014
12
BharatForge
USClass8volumemomentumpositivesinceAugust2013
Averageageof9.6yearsfor
Class8truckscoupledwith
peakvolumesduring
CY0508augurswellfor
replacementdemand
CY11
25,000
20,000
15,000
10,000
CY12
CY13
CY14
5,000
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
NovDec
Source:Bloomberg,MOSL
NorthAmericaClass8cancellationdataindicatespositive
TrendinClass8truckvolumesandaveragefleetage
fleetsentiment
Source:Bloomberg,MOSL
Source:Bloomberg,MOSL
Source:Bloomberg,MOSL
EUHCVvolumestoremainstableafterprebuyinginCY13
WhileBHFCisfocusedonluxuryPVsintheEU,itisincreasingitsrevenuesfromthe
HCVsegmentintheEUthroughexportsandBFKilsta(Sweden).EUHCVvolumes
hadbenefitedfromprebuyingbeforeemissionnormchangestoEuroVIfrom31
December2013,registering~8%growthCY13(6%degrowthin9MCY13).While
17June2014
13
BharatForge
1HCY14HCVvolumeswouldbesluggishduetotheimpactofprebuying,OEMs
expectupto5%degrowthinCY14,dependingonsustenanceofeconomicstability
andquantumofreplacementdemand.Allleadingindicatorssuggeststabilityinthe
Eurozoneeconomies,auguringwellforrecoveryinHCVvolumesin2HCY14.
OEMsexpectHCVdemandtobesluggishin1HCY14duetoprebuyingin4QCY13
Europe
CY14Growth(%)
Keycomments
Volvo
Daimler
4
slightlynegative
Demandin
Developmentsduring
Europeis
therestof2014will
expectedtobedependinparticularon
PACCAR
0to10%
Some
customersare
purchasing
Scania
PrebuysinEurope
during2013willimpact
thefirsthalfof2014
slowinthe
theextenttowhichthe
beginning
economicrevivalin
oftheyearandEuropecanoffsetthe
thengraduallynegativeimpactofthe
improve.
purchasesbrought
forward
Euro5vehicles
aheadofthe
introductionof
theEuro6
emission
requirementin
2014
whileScanias
assessmentisthat
economicactivityin
Europehasstabilised
andthatthereisa
replacementneed
Source:Company,MOSL
EUHCVvolumesstillwellbelowpeakofCY0508andnearEUHCVvolumesexpectedtobestable,despite8%growthin
CY02levels
CY13duetoprebuying
CY11
CY12
CY13
CY14
35,000
29,000
23,000
17,000
11,000
5,000
Source:Bloomberg,MOSL
Source:Bloomberg,MOSL
Eurozoneindustrialproductionindicesshowingsustained
EurozonemanufacturingPMIsindicateimprovingconfidencerecoveryoverlastninemonths
60
EUPMI
IndustrialProductionIndices(YoY%)
4
50
2
0
40
2
4
30
Source:Bloomberg,MOSL
Source:Bloomberg,MOSL
17June2014
14
BharatForge
DomesticCVcycletorecoverfrom2HFY15;BHFCbestplayonCVcycle
recovery
Afterdecliningatarateof~25%overFY1214,weexpectdomesticCVvolumesto
recoverfrom2HFY15,drivenbyclarityonthenewgovernmentledkickstartingof
theinvestmentcycle.Weestimate10%/23%/22%growthinCVvolumesin
FY15/FY16/FY17.GivenitsstrongpositioningwithkeyOEMs(includingnew
entrants),webelieveBHFCisthebestplayonCVcyclerecovery.BHFCenjoysover
60%marketshareforforgedandmachinedautomotivechassisandengine
components.Further,shifttowardsmultiaxlevehiclesandnewgenerationtrucks
woulddriveanincreaseinusageofforgedparts,auguringwellforBHFC.The
domesticCVsegmentcontributes~15%ofconsolidatedrevenuesand~25%of
standalonerevenues.WeexpectBHFCsdomesticCVrevenuestogrowataCAGRof
~21%overFY1417E.
DomesticCVrevenues(asa%ofstandaloneandconsolidatedrevenues)
%ofS/Arevenues
%ofConsolrevenues
35
28
21
14
7
0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source:Company,MOSL
TrendindomesticM&HCVvolumes
M&HCV('000units)
33.1
33.3
Growth(%)
31.9
23.022.0
7.5
M&HCV('000units)
6.56.511.73.7
3.5
10.0
0.7
12.614.3
200
184
33.0
245323347268
62
75 16.2
31.632.5
22.7
82
276274
Growth(%)
93
9011171
80
56
30.127.9
60
25.5 220271330
Source:Company,MOSL
45
14.6
64
58
Source:Company,MOSL
PVsegmentafocusarea;couldbeanimportantgrowthdriver
TheglobalPVmarketisfourtimeslargerthantheCVmarket,butcontributesjust
~20%toBHFCsconsolidatedrevenues.WhileinternationalPVscontribute~16%to
consolidatedrevenues,thecontributionofdomesticPVsisjust~4%.Webelievethe
PVsegmentofferssignificantheadroomtogrowthroughincreasedpenetrationby
BHFC,benefitingfromvendorconsolidationininternationalbusinessandemission
normledshiftfromcastingstoforgedcomponents.
IninternationalPVs,BHFCrecentlybaggedlargemultiyearordersforEUR250m
fromaGermanOEM,inadditiontomultiyearsordersfromFordandDaimler
17June2014
15
BharatForge
Chrysler.WhileFordMotorUSAhasinitiateddevelopmentofcrankshaftforgings
withBHFC,DaimlerChryslerhaschosenittosupplycrankshaftsandcamshaft
forgingsforitscarenginesinGermany.BHFChasalsowonanordertosupply
controlarmforgingstoaglobalpassengercarcompanyinAustralia.Inaddition,it
hasbaggedanewmultiyearordertosupplysteeringknuckleforgingstoDana(US).
IthasalsobegunsupplyingtoitssecondChinesecustomer,whileexportstoRenault
arebeingscaled.IthaswonaUSD100morderinEurope,whichwillbeexecuted
overthenextfiveyears.ThemanagementhasindicatedthatBHFCwilltargetto
supply~1mcrankshaftsintheEuropeanpassengercarmarketbyFY18.
Globalluxurycarswitnessingstronggrowth
CY11
600,000
CY12
CY13
InternationalPVcontributionexpectedtoincrease
CY14
PVs
%oftotal
9,046
9,124
9,303
9,265
500,000
21
19
19
400,000
21
7,034
16
4,363
14
300,000
7,028
200,000
FY07
FY08
FY09
FY10
FY11
Source:Company,MOSL
FY12
FY13
Source:Company,MOSL
InIndia,passengercarshavetraditionallyusedcastings.Thecontributionofthe
domesticPVsegmenttoBHFCsconsolidatedrevenuesis,therefore,small.
Progressively,withstricteremissionnormsandadvancedturbochargedengines,
moreforgingsarebeingused.BHFChasbeenworkingwithOEMsontheirplatform
developmentandwillbenefitwhentheylaunchnewproductsusinghigh
performanceforgedcomponents.
DomesticPVrevenuegrowthlinkedtoindustryfortunes
PVVolGr(%)
39
DomesticPVbusinesscontributiontorevenues
Dom.PVrevenuegrowth(%)
26
%ofS/Arevenues
%ofConsolrevenues
33
13
22
11
13
26
0
FY07FY08FY09FY10FY11FY12FY13FY14
Source:Company,MOSL
Source:Company,MOSL
17June2014
16
BharatForge
TrendindomesticPVvolumes
PV('000units)
27.0
19.7
Growth(%)
PV('000units)
22.9
9.2
15.015.0
11.8
10.0
7.0
6.4
13.6
Growth(%)
13.1
7.1
2.4
1.9
0.6
4.8
0.1
9.3
6.05.37.0
724731722948776745817860739763767814687
1.7
Source:Company,MOSL
Source:Company,MOSL
Stricteremissionnormstodrivehigherrealizations,improvecompetitive
positioning
Emissionnormchangeshavemeaningfulimplicationsfortheautoindustry.To
adheretoreducedparticulateemission,enginesrequiresignificantchanges.The
globalintroductionofEuroVIregulationsrequiredadvancedpowertrainsolutions,
drivingtheshifttowardshighperformanceparts.AccordingtoMeritor,trucks
complyingwithEuroVIregulationscommandapricepremiumof~EUR5,000over
truckscomplyingwithEuroVregulations.Suchregulatorychangesprovidean
opportunityforBHFCtoincreaseitspresenceintheglobalPVindustry,drivenby
technologicalshiftfromcastingstoforgings.Suppliersthatemergeaspreferred
partnersforOEMsmaybeabletoleveragetheirglobalscaletofurtherreduce
technologycostsandincreasetheirindustryinfluence.WeexpectBHFCtobenefit
fromthetrendofvendorconsolidation.
Source:CumminsInc,MOSL
Source:CumminsInc,MOSL
17June2014
17
BharatForge
Nonautobusinessplayoninvestmentcycle
recovery
Tobenefitfromincreasingmarket/customerpenetration
Thenonautosegmentofferssignificantgrowthpotential,asitismuchlargerthanthe
autosegment.BHFCistargeting~60%ofitsstandalonerevenuesfromthenonauto
segmentovernextfewyears,upfromthecurrent~40%.
Itspartnershipswithglobalplayers(Alstom,Areva,DavidBrown,etc)beartestimony
toitsgloballycostcompetitiveengineering/manufacturingcapabilities.
BHFCsincreasingpenetrationwithexistingandnewcustomers,coupledwith
economicstabilityintheinternationalmarketandinvestmentcyclerecoveryinIndia
woulddrive~23%revenueCAGRinthenonautosegment.
Increasingcontributionofnonautotoconsolidatedrevenuesaugurswellfor
profitabilityandcapitalefficiencies,giventhesegmentshigherrealizations,margins
andassetturns.BHFCsinternationalnonautobusinessislargelyservicedbyitsmore
efficientIndianoperations.
BHFCplanstoventureinto
56newsectorsinthe
coming57years,andmake
eachofthesenewverticals
USD100mbusinesses.
Nonautosegmentdrivesdiversification,growthandsuperiorprofitability
Nonautomotiveforgings,includingconventionalandnonconventionalenergy,
power,railandmarine,oilandgasexploration,metalsandmining,andaerospace,
offeraglobalmarketmuchlargerthanautomotiveforgings.InFY06,BHFCsetout
onanewgrowthpath,whereitfocusedonaggressivelydevelopingitsindustrial
sectorcomponentsbusinessandchalkedoutalargeinvestmentplantodevelop
dedicatedfacilitiesinBaramati,SataraandPune.Ithasdevelopedandbuiltstrong
relationshipswithcustomersinthenonautomotivespace,withthenumberofnon
automotivecustomersmorethandoublingoverthelast56years.Whileexisting
nonautobusinesscanbebroadlydividedintothreeverticals(1)energy,(2)
transportation,and(3)miningandconstruction,itisalsoexploringareaslike
aerospacethathavelongleadtimes.Itplanstoventureinto56newsectorsinthe
coming57years,andmakeeachofthesenewverticalsUSD100mbusinesses.Non
automotiveforgingsaremorecomplexandhavehighercontributionlevels.
BroadoverviewofBHFCsnonautobusiness
Source:Company,MOSL
17June2014
18
BharatForge
Nonautosegmentcapacityinplaceforfurtherscaleup
Facilities
Location
Capacity
Products
Industry
CentreforAdvancedManufacturing
80mtrTonHammer
Baramati
40,000TPA
LargeclosedDie
forgingsupto2.5T
and4.5mlong
Energysector,Hydrocarbonexplorationsector,
transportationincludingAerospace,Railwaysand
Marinesector
MachiningShop
Baramati
12,000nos
Locomotives,Marineandpowergeneration
Baramati
25,000TPA
Machined
componentssupply
Largerings,Gear
blanks,connectors,
bearings,Valves
Ringrollingfacility
Heavyforgedivision
4,000Tpress
Pune
60,000TPA
Forgeingotsupto70T
Windturbinecomponents,Hydro,Gasandsteam
turbinecomponentsandcomponentsforMining,
MetalIndustryandGeneralengineeringapplications
MachiningfacilityforHeavy
forgedivision
Satara
1,400nos
Machined
componentssupply
Windsector
Windsector,Oilandgassector
Source:Company,MOSL
JVswithglobalcapitalgoodsplayerstestimonyofitscapabilities
BHFChasenteredintoJVswithglobalplayerslikeAlstom(forturbinesinsuper
criticalthermalpowerplants),Areva(heavyforgingsfornuclearpowerplants),
DavidBrown(forindustrialgearboxes)andNTPC(BOPequipmentforpower
sector).TheseJVsareatestimonytoBHFCsmanufacturing/engineeringcapabilities
andinspireconfidenceinitsabilitytosignificantlyscaleupthenonautobusiness
globally.
Tobenefitfromeventualinvestmentcyclerecoveryinbothlocalandglobal
markets
Thenonautobusinessislinkedtotheinvestmentcycle,sinceitcatersto
infrastructuredevelopmentenergy,transportation,andconstructionandmining.
BHFCsnonautobusinessrevenueswereimpactedinFY13duetomacroheadwinds
inbothIndiaandglobalmarkets,resultingin5%degrowthinnonautosegment
revenuesdespiteincreasingtractionwithnewcustomers/newsegments.Whilethe
economicoutlookfortheUSandEUisstabilizing,theIndianeconomyseemsto
havebottomedoutwithrecoveryexpectedfrom2HFY15.Internationalnonauto
revenuescontribute~19%ofconsolidatedrevenues,whereasdomesticnonauto
revenuescontribute~9%.
Trendinnonautobusinessmarketmix
Domestic
Nonautomarketmix
International
International
India
100%
19,454
10,478
5,1956,319
6,735
7,354
3,603
2,0752,202
3,5253,0955,450
FY07
FY09
FY08
FY10
50%
9,638
25%
6,6615,1025,606
FY11
75%
FY12
FY13
0%
FY14
FY07FY08FY09FY10FY11FY12FY13FY14
Source:Company,MOSL
Source:Company,MOSL
17June2014
19
BharatForge
Internationalmarketoutlookstabilizing
Modestlyimprovingeconomicgrowthinmostdevelopedmarketsshouldhelp
improvebusinessprospects.Demandforcapitalgoodsissensitivetochangesin
businessconfidenceandiscorrelatedwitheconomicswings.Keyindustryindicators
suchasindustrialproductionandnonresidentialconstructionpointtoamodest
uptickingrowthfortheglobalcapitalgoodsbusiness.Revenuesofglobalindustrial
playersalsosuggestthatthepaceofrevenuedeclinehasmoderated.TheCY14
outlookreflectscautiousoptimism,suggestingpossibilityofagradualrecoveryin
theglobalinvestmentcycle.Basedontheoutlookgivenbyitskeycustomers,theoil
andgassegmentisexpectedtogrow810%,whilepowerandminingand
constructionareexpectedtoremainstable.Currencymovementshaveincreased
thecompetitivenessofIndianmanufacturingandcreatedopportunitiesforexport
ledbusinessmodels.
Internationalnonautorevenues
FromIndia
FromEurope
%ofConsolrevenues
22
17
3,880
21
15
14
4,493
4,245
18
3,949
8
1,315
1,826
2,490
1,522
2,081
FY07
FY08
FY09
FY10
4,768
3,034
4,320
FY11
6,529
6,353
FY12
FY13
Source:Company,MOSL
ManufacturingPMIspointtomodestuptick
EUPMI
60
60
50
50
40
40
30
30
Source:Bloomberg,MOSL
USPMI
Source:Bloomberg,MOSL
17June2014
20
BharatForge
Snapshotofcommentsbyglobalcapitalgoodscompanies
Segment
Company
Commentary
Power
Alstom
Energy&Marine
Wartsila
Demandinanumberofmarketsisweakandshouldremainsointheshorttermandthelevelof
turnkeyandequipmentcontractsbookedissubstantiallylowerthanexpectedinThermalPower.
Ourmarketoutlookfor2014remainscautious,althoughaslightimprovementmaybeseenin
certainareas.Basedonourcurrentorderbookandprojectpipelineweexpectsomegrowthin
netsalesduring2014andprofitabilitytoremainatasimilarleveltothatof2013.
Thereareencouragingsignsintheworldeconomyandwe'reseeingsomeinourownbusiness,
andthatgivesusoptimismforsalesinourConstructionandPowerSystemssegmentsandwe
thinkthey'lleachbeupabout5%in2014.
Theunderlyingglobaleconomicoutlookwillsupportastrongmarket,withspendingonoffshore
explorationandproductiongrowing8percentto10percentannuallythrough2017.Aker
Solutionsexpectsseveraloffshoredrillingrigsandfloatingproductionfacilitiestobeorderedover
thenext12to18months.
Wedonotanticipateanysignificantrecoveryintheglobaleconomyin2014andthusexpect
practicallyunchangedinvestmentandprojectactivitycomparedto2013inthemarketsservedby
ANDRITZ,withsomemajorprojectslikelytobeawardedinthehydroandpulpsectors.
Intheshortterm,therearesomepositiveearlycyclemacroeconomicsigns,suchasstrengthening
growthintheUSandthemoreencouraginggrowthinmanypartsofEurope.However,thereare
alsosomeuncertaintiesrelatedtotheimpactsofquantitativeeasingandthespeedandstrength
ofeconomicdevelopmentintheemergingmarkets,especiallyChina.
InNorthAmerica,weexpectourtruckbusinesstogrowin2014.Weareforecastingthatthe2014
marketsizeforheavydutytruckstoincrease8%YoY.WhileGDPisexpectedtogrowinthe
eurozonein2014forthefirsttimeinthreeyears,weexpectourrevenuestoberelativelyflat.
Mining,ConstructionCaterpillar
&Power
Oil&Gas
AkerSolutions
Diversified
Industrials
Andritz
Power&
Automation
ABB
Power&Engines
CumminsInc
Diversified
Industrials
SiemensAG
DiversifiedIndustrialsHoneywell
DemandfromourEuropeanbasedPowerGenerationcustomerswillremainweakin2014,given
thatmostoftheseproductsareshippedtodevelopingmarkets.
Despitethegenerallypositiveforecastsfortheglobaleconomy,wecontinuetoassumethat
noticeableimpulseswillfirstbefelttowardtheendoftheyear.Well,ourestimatesandwe're
conservativeandifbusinesspicksupasitalreadyhasbeenindicatedandhasbeenforecasted,we
arepreparedfortakingbenefitfromthisandsowecanmeetexpectations.
Whilewethinkit'sprudenttoremaincautiousontheglobaleconomyatthistime,we're
increasinglyconfidentinour2014outlookbasedonthemomentumfromthefourthquarter.
Source:Company,MOSL
Oil&Gasspendingisexpectedtogrowat11%CAGR
OrderbacklogforGEatalltimehighlevels(USDb)
Services
175
46
129
Equipment
Total
244
245
61
64
64
168
180
181
200
204
203
210
216
223
229
53
52
50
53
56
57
147
152
153
157
160
166
Source:GE,MOSL
Source:WoodMackenzie,MOSL
Domesticnonautosegmentplayoninvestmentcyclerecovery
AstrongdecisivemandateintherecentElectionshasrekindledtheexpectationsof
anuptickinIndia'sinvestmentcycle.Inouropinion,India'scapexJCurvewillbe
kickstartedby(1)reorientationoffiscalexpenditurewhichcouldaccelerate
spendingonflagshipprojects,and(2)government'sattempttoaddressthe
17June2014
21
BharatForge
contentiousissuesinseveralsectors,leadingtoincreasedcapexbyCPSUs.This
phasewillbefollowedwithrevivalinindustrialcycleculminatingwithtractionin
greenfieldprojects.
Projectscompleted(asa%ofprojectsunderimplementation)havetouched
abysmallylowlevelsof3.4%,andimpactedthevirtuouscycleofcashflow
generationinthesystem.Theinitialroundofdemandimprovementwillbecatered
tobyfasttrackingtheseprojects.CabinetCommitteeonInvestmentshasalready
clearedprojectsworth~INR20t(~25%oftheprojectsunderimplementationinthe
economy)andwithmorelastmilepush,attemptshouldbetoexpedite
implementation.OrderfinalizationduringMay2014(ttmbasis)standsatINR1.9t,
andisup29%YoY.Orderawardsonattmbasishavegraduallyinchedupfromlows
ofINR1.4tinJune2013toINR1.9tcurrently.
Domesticnonautorevenuesimpactedbyeconomicslowdown
DomesticNonAutos
%ofS/Arevenues
%ofConsolrevenues
29
23
16
18
13
16
8
15
2,202
3,525
3,095
FY08
FY09
FY10
12
2,075
FY07
13
14
8
11
5,450
6,661
5,102
5,606
FY11
FY12
FY13
FY14
Source:Company,MOSL
OutstandingProjectInvestments(%YoY):Phasesof
Investmentcycleslowdown
Projectscompletedatlowlevelsaseconomicviabilitypoor,
impactingcashgenerationcycle
60
12.5%
50
ProjectsCompletedttm,as%ofPrjunderImpl
Executionimpacted
given
regulatory,financing
andviabilityconstraints
10.5%
40
8.5%
30
6.5%
20
10
4.5%
2.5%
Projectscompletedhadconsistently
remainedat7%+ofprojectsunder
implementation
10
Source:CMIE,MOSL
Source:CMIE,MOSL
17June2014
22
BharatForge
Fewpocketsofhope:Geographicdiversification,costoptimization,newproducts,etc
Company
ManagementComments
Voltas
BusinessprospectsaresomewhatbrighterincertainMiddleEastgeographies,withaclearcut
investmentthrust,especiallyininfrastructureandconstruction.ThisismorepronouncedinQatar,KSA
andmostrecentlyDubai.
ElgiEquipments
Thecompanyexpectstoendthefinancialyearwithamarginalorganicgrowthlargelycontributedby
internationalmarketsasthedomesticmarketcontinuestoremainsluggish.
ABBIndia
Baseordersfromawiderspectrumofcustomershelpedoffsetdearthoflargeprojectsinthemarket.
Exportsgrewannullingtheeffectofacontractioninthedomesticmarketopportunities.
PrajIndustries
We'vetakenadequatestepstoincreaseourfocusfurtheronexportmarkets,notonlyforEthanoland
Brewerybutalsoforemergingbusiness.
GreavesCotton
Thoughoursaleshavebeenaffectedbytheoveralldismalbusinessenvironment;wehavebeen
constantlyfocusingonourproduct?marketgrowthstrategy.Thecompanyhassteppedupits
investmentinR&Dactivitiestodevelopnewproducts.Internationalbusinesshasalsobeenableto
widenitsglobalfootprintinSouthEastAsia,EastAfricaandMiddleEastmarketsandhassetupa
distributionandaftermarketnetwork.
Thermax
Thereareverylimitedopportunitiesinthemarketwhichhavebeenavailableinthelastninemonths
andinthenext,atleasttwoorthreequarters,butwehaveintroducednewproductsinthemarketand
wehavebeenabletocurtailourexpensesandcosts,wherebywehavebeenabletobecompetitive,
eventhoughthemarketmarginsarelower.
ActionConstructionEquipments
Whilethereissomeimprovementinthemacroenvironment,thechangesaregradual.Weareseeing
growthinneworderenquireswhichweareoptimisticwilltranslateinthenextyear.Agriequipment
continuestobeakeygrowthdriverandwehavecommencedworkonourinhouseengine
EleconEngineering
manufacturingfacilityandexpecttohavethisoperationalbyendofyear.
Wehaveareasontobelievethattheworstisoveraslongasgearsareconcernedandwebelievethatif
theelectionshowspositivesigns,gearisoneofthebarometersoftheeconomybecauseourindustrial
gearboxesgointoallkindsofindustries.Sowebelievethatassoonastheeconomystartsimproving,
thedemandforthiswillkeeponincreasing.
PowerFinanceCorporation
ThecashlossesofthediscomsoftheUP,Rajasthan,Haryana,TamilNaduhavereducedintherangeof
42to54%,andallthesefourstatesarenowpayingsubsidyupfrontonamonthlybasis.Thesearethe
advantagesandthesearetheturnaroundwhichweareseeingaftertheimplementationofFRPpackage
inallthesefourstate.
BlueStar
Therehasbeensomeimprovementindemandfromthehotel,hospital,commercialcomplexand
industrialsegment.
Source:Company,MOSL
Orderfinalizationsimprove(12mmabasis,INRB)
TTMOrders(INRb)
%YoY
45
25
5
15
35
Source:Company,MOSL
17June2014
23
BharatForge
Inall,weareaimingto
bagordersworthatleast
USD100mfromthe
Railwaysandthisisthe
minimumwearetargeting.
Butsellingcrankshafts
alonewontdoenough,and
hence,wearealsoworking
onothernewproducts,but
itistooearlytosaywhat
theymightbe.
withscopeofmarketsharegainandnewsegmentdrivingfastergrowth
Inthenonautosegment,BHFChasbeenfocusedon(a)newcustomeradditions,(b)
highervalueadditionofcriticalcomponents,and(c)expansionofproductportfolio
withexistingcustomers.Goingforward,weexpectthenonautobusinesstowitness
strongerperformanceonthebackofnewcontracts,improvementineconomic
conditionsandstartofcommercialsuppliesafterthecompletionofproduct
validationprocessesforseveralongoingprograms.Ithasdevelopedandbuiltstrong
relationshipswithcustomersinthenonautomotivespace,withthenumberofnon
automotivecustomersmorethandoublingoverthelast56years.
BHFCplanstoventureinto56newsectorsinthecoming57years,andmakeeach
ofthesenewverticalsUSD100mbusinesses.Typically,theseproductsaremore
complex,havelongerleadtimesforvalidationandhavehighercontributionlevels.It
hasrecentlybaggeditsfirstorderfromtheIndianRailwaysforlocomotive
crankshafts.ThismakesBHFCtheonlyindigenouscomponentssupplierforthe
IndianRailways.Thecompanyisalsoexecuting,forthefirsttimeinIndia,a
technologyintensiveprojectinvolvingmechanizedlayingoftrackswithinIndia's
upcomingheavyaxleloadfreightcorridor.Ithasdevelopeddemonstratorparts
fortheaerospacesectorforglobalplayers.
"Tenyearsfromtoday,we
areveryconfidentthatIndia
Defencenextbigopportunity
isgoingtoemergeasa
largeexporterofdefence
products.Today,wearethe
largestimporterofdefence
products.Andwearegoing
tobeafairlyimportant
playerinthis." MrBaba
Kalyani,CMD,BharatForge
Withstressonindigenousdevelopment,potentialdefenceopportunityof~INR400b
(defenceimportsin2013)isbeingopenedup.BHFChasbuildingblocksinplacein
thedefencesector,withJVwithIsraelicompanyElbitSystemsfocusesonland
systemsartilleryandinfantryequipmentandtanks.ThisJVisdevelopinga155mm
artillerygun.Further,BHFCalsohasastrategicalliancewithSwedishdefenceand
securitycompanySaab,andhasaJVwithDavidBrowncateringtodefencegearing
solutions.
17June2014
24
BharatForge
Overseassubsidiariesofstrategicvalue
Butyettocontributemeaningfullytofinancialperformance
BHFCsoverseasacquisitionsweredrivenbyitsneedforenhancedaccessto
customers,marketsandtechnology,andtodevelopadualshoremanufacturing
model.
Thoughitsoverseassubsidiariesareyettocontributemeaningfullytofinancial
performance,theyaddstrategicvalue.Thesesubsidiariescontributed~40%/8%/1%to
FY13consolidatedrevenue/EBITDA/PAT.
BHFCsexportsfromIndiahavegrownataCAGRof~25%overFY1014,benefiting
fromtheenhancedaccesstocustomersandmarketsprovidedbythesesubsidiaries.
Acquisitionsaddstrategicvalue,butmeaningfulfinancialcontributionyet
tocome
OnrealizingtheneedtobeclosertointernationalOEMcustomersandtowidenits
reachwithglobalautomotivecompanies,BHFCembarkedonaseriesofacquisitions
acrossgeographies.Thishelpedittoestablishaninternationalfootprintand
strengthenlongtermrelationshipswithawidercustomerbaseinnewermarkets
whileofferinggreateraccesstotechnology.BHFCnowhascomplementary
manufacturingcapabilities,adiversifiedproductrange,strongfocusonkeymarkets
likeIndia,USandEU.Ithasdevelopedstrongdesignandengineeringcapabilities
andrelationshipswithmorethan35globalOEMsandtierIautomotivecustomers.
GlobalacquisitionsbroadenBHFCshorizon
BHFC
NA
Yearof
acquisition
CDPBF
Nov03
BFAluTech
Dec04
BFAmerica
Jun05
BFKilsta
Sep05
FAWBFJV
Dec05
Equipment
capability
1,600Tonto16,0004,000to8,000TonsAluminumforging
Tonpresslines
presslines
presses
4,000to6,000ton
presslines
2,500to16,000
Tonspresslines
1,600tonto12,500
tonpresslines
Products
Fullspectrum
Strongfocuson
Manufacturerof
productcapabilitypassengercarchassisnichealuminum
withmajorfocusoncomponents
chassiscomponents
CVengineandchasis
componentsand
passengercarengine
component
PassengerCar,CVPassengercar
Aluminum
andNonautomotiverailways,
componentsfor
business
construction
passengercar
equipment
industry
India,USA,Europe&Europe,USA
Europe&USA
China
NA
Profitable
Breakeven
StrongfocusonUS
lighttruckmarket
Significantfocuson
heavydutyengine
componentsand
heavycomponents
Verywide
manufacturing
capabilitywith
completerangeof
forgingequipment
Lighttrucks
Heavycommercial
vehicles
Passengercar,CV,
buses
USA
Europe
China
Closed
Profitable
Exited
Enduser
industry
Regional
focus
Current
Status
Source:Company,MOSL
BHFChasbeenfocusingoneffectivelyintegratingitsglobaloperationsandrealizing
synergiesbetweenitsglobaloperationsthrough(a)sharingof"bestpractices"
acrossitsfacilities,(b)leveragingdifferentcustomerrelationshipsandofferinga
widerportfolioofproducts,(c)integratingR&Dactivitiestoenhancethescopeof
productdevelopmentandreduceproductdevelopmenttime,and(d)cross
fertilizingdifferentplantswithenhancedproductioncapabilities.However,its
acquisitionsareyettocontributemeaningfullytofinancialperformance,with
~40%/8%/1%contributiontoFY13consolidatedrevenues/EBITDA/PAT.
17June2014
25
BharatForge
Snapshotoffinancialsofkeysubsidiaries
CDPBF
INRm
CY08
NetRevenues
10,711
CY13
BFAluTech
CY14E
9,79411,320
BFKilsta
CY15E
CY08
CY13
CY14E
CY15E
CY08
CY13
CY14E
CY15E
13,365
2,810
2,532
2,915
5,176
6,902
5,508
6,358
6,874
669
EBITDA
617
935
1,215
1,538
290
124
176
650
319
378
588
EBITDAMargins(%)
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
30
257
328
20
162
235
Source:Company,MOSL
Trendincontributionofsubsidiariestorevenues,EBITDAandPAT
Revenues
23,139
24,558
27,165
20,153
14,712
14,410
FY07
25,931
21,399
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source:Company,MOSL
1,7871,822
EBIDTA
PAT
1,327
1,114
811
697
760
432
535
946
44
(154)
(523)
(1,122)
(985)
FY07
FY08
FY09
FY10
FY11
(381)
FY12
FY13
FY07
FY14
FY08
FY09
FY10
FY11
FY12
Source:Company,MOSL
FY13
FY14
Source:Company,MOSL
ExportsfromIndiahavebenefitedfromaccesstomarketsandcustomers
BHFCsacquisitionshavegivenitsIndiaoperationsaccesstocustomers,marketsand
technologies,translatingintorobustexportbusinessfromIndia.Itsexportsfrom
IndiahavegrownataCAGRof~25%overFY1014andcontribute~57%/30%of
standalone/consolidatedrevenues.
BHFCisabletocatertocustomersthroughadualshoremodel.Itsacquisitionsare
playingacriticalroleinacceleratingthepaceofrelationshipbuildingandbusiness
initiation.Acrossbusinesses,ithasbeenputtingincontinuouseffortsfor
upgradationandvalueaddition.Itisleveragingglobalsynergiestogrowthe
businessinaderiskedmannerandmoveupthevaluechainwiththeglobal
customersbyprogressivelydevelopingthesupplypartnershiptothenextlevelof
developmentpartnership.
17June2014
26
BharatForge
BHFCisoneofIndiaslargestengineeringexportersfromIndia,witharelativelydiversified
segmentmix
58
13
13
10
10
Source:CapitalLine,Company,MOSL
ExportsfromIndiahavegrownaCAGRof~26%over
FY1014
ExportsfromIndia(INRm)
66
35
37
59
%ofS/A
59
43
34
25
reflectedinexpansionofstandalonegrossmargins
36
65
33
15
7,10912,19517,34615,83718,48321,99826,24831,344
%ofConsol
66
64
37
37
FY10
FY11
FY12
FY13
FY14
FY15EFY16EFY17E
Source:Company,MOSL
Source:Company,MOSL
17June2014
27
BharatForge
Multipleleverstosupport/improveprofitability
OperatingleverageILimitedcapexIDebtreduction
WeexpectconsolidatedrevenuestogrowataCAGRof~16%overFY1417(adjusted
forFAWJVexit),drivenby22%CAGRinIndiarevenuesand12%CAGRininternational
revenues.
EBITDAmarginshouldexpand~270bpto18%,drivenbyhigherexportsfromIndia,
risingcontributionfromnonautobusinessandmachinedcomponents,andoperating
leverage.
BHFChassufficientcapacitiestodriveover25%revenueCAGRoverthenexttwo
years,necessitatingmaintenancecapexofINR1.5b1.8bperyear.
WeestimatecumulativeFCFgenerationof~INR20bduringFY1517,enabling
reductionofnetdebtto~INR7.7b(netdebtequityof0.2x)from~INR13.4b(netdebt
equityof0.5x)inFY14.
ImprovingassetturnsandprofitabilitywoulddriveimprovementinconsolidatedRoE
to~22%inFY17from17.7%inFY14thehighestRoEsinceFY07.
Significantheadroomtogrowfromcurrentcapacities
Revenuestogrowat~16.6%CAGRoverFY1416
NetRevenues
FixedAssetTurnover(x)
1.6
1.5
1.5
1.2
1.1
0.8
Growth(%)
53
38
23
1.3
1.3
1.1
1.1
11
16
30
0.9
18
30
19
7
Source:Company,MOSL
EBITDAmarginstoimprovetonewhighs(%)
S/A
Source:Company,MOSL
ConsolidatedEPStogrowat30%CAGRoverFY1416
Consol
EPS
Growth(%)RHS
70
40
27
18
21
15
44
20
19
11
67
37
72
Source:Company,MOSL
Source:Company,MOSL
17June2014
28
BharatForge
CapitalefficienciestoimprovetohighestlevelsinceFY07
RoE(%)
27
ImprovingCFO,minimalcapexresultinginstrongFCF(INRb)..
RoCE(%)
CFO
Capex
FCF
6.8
8
18
3.5
4
0
4
0
6.78.7
5.8
3.1
0.5
1.1
0.3
2.2
2.6
Source:Company,MOSL
drivingmeaningfulreductioninnetdebt
NetDebt(INRb)
1.01.0
0.4
0.6
Dividendpersharetoincreasesteadily
NetDebt:Equity(x)
0.8
0.6
Source:Company,MOSL
Dividend(INR/Sh)
91
Payout(%)
0.8
0.5
31
0.4
0.2
2824
32
26
36
28
26
22
21
0.0
Source:Company,MOSL
Source:Company,MOSL
17June2014
29
BharatForge
Valuationsattractiveforgloballeaderinforgings
InitiatecoveragewithBuyratingandtargetpriceof~INR710
BHFCisprimedforrecoveryintheglobalinvestmentcycle.Whilethestockhas
BHFCistradingata
discounttohistorical
outperformedoverthelastsixmonths,thereareseveraltriggersforcontinued
valuations,despite
significanttransformation
initsbusinessmodel
outperformance.
Theseinclude:(a)volumerecoveryledbenefitofoperatingleverage,(b)improving
segmentmix,(c)balancesheetdeleveraging,and(d)improvementincapital
efficiencies.
Valuationsat~17.9x/14.9xFY16/FY17EconsolidatedEPSofINR29/INR37are
attractiveforagloballeaderinforgingsandatadiscounttothe5/10yearaverageof
22x/26x.
WeinitiatecoveragewithaBuyrating.Ourtargetpriceof~INR710(~22xFY16EEPS)
suggestsanupsideof~23%.
FY16performancesensitivitytorevenuegrowth
BHFC:TenyearPEband
Rev.
Growth
(%)
EBITDA
Margins
(%)
EPS
(INR)
PE(x)
TP@22x
PE
90
15.6
22.5
24.8
495
60
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
30
P/E(x)
5YrsAvg(x)
10YrsAvg(x)
25.7
21.6
19.4
Source:Bloomberg,MOSL
BHFC:FiveyearEV/EBITDAchart
EV/EBDITA
BHFC:FiveyearP/Bchart
10YrAvg
5YrAvg
8.0
P/B(x)
14
11
10YrsAvg(x)
6.0
10.7
9.8
5YrsAvg(x)
3.8
4.0
9.4
3.8
2.9
2.0
5
0.0
Source:Company,MOSL
Source:Company,MOSL
17June2014
30
BharatForge
Financialsandvaluations
Incomestatement
Y/EMarch
NetSales
Change(%)
TotalExpenditure
%ofSales
EBITDA
(INRMillion)
FY12
FY13
FY14
FY15E
FY16E
FY17E
62,791
51,666
67,161
71,871
85,701
99,280
23.4
17.7
30.0
7.0
19.2
15.8
52,826
43,750
56,890
59,876
70,431
81,231
84.1
84.7
84.7
83.3
82.2
81.8
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.andFinanceCharges
1,860
1,672
1,692
1,615
1,460
1,434
915
1,121
1,249
1,498
1,556
1,697
5,998
4,169
6,250
8,283
11,565
14,095
OtherIncomeRec.
PBTbef.EOExp.
EOExpense/(Income)
205
807
PBTafterEOExp.
5,998
3,964
7,057
8,283
11,565
14,095
CurrentTax
1,796
1,529
2,100
3,041
4,035
5,033
TaxRate(%)
29.9
38.6
29.8
36.7
34.9
35.7
ReportedPAT
4,202
2,435
4,957
5,242
7,530
9,062
PATAdjforEOitems
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
Balancesheet
Y/EMarch
(INRMillion)
FY12
FY13
FY14
FY15E
FY16E
466
466
466
466
466
466
TotalReserves
21,373
22,098
26,367
30,246
36,141
43,296
NetWorth
21,839
22,564
26,832
30,712
36,607
43,762
EquityShareCapital
FY17E
MinorityInterest
1,957
1,643
170
170
170
170
886
1,345
1,645
1,645
1,645
1,645
TotalLoans
27,835
28,249
25,612
23,612
21,612
19,612
CapitalEmployed
52,517
53,800
54,259
56,139
60,034
65,189
GrossBlock
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
NetFixedAssets
26,527
29,645
29,668
29,203
27,151
24,684
CapitalWIP
5,168
6,324
1,500
1,750
1,750
1,750
TotalInvestments
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
DeferredLiabilities
10,961
11,320
10,386
11,814
14,088
16,320
AccountReceivables
8,134
6,114
8,660
8,861
10,566
12,240
CashandBankBalance
6,337
5,554
4,227
5,049
6,636
9,977
LoansandAdvances
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
OtherCurrentLiabilities
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
NetCurrentAssets
16,372
13,672
15,079
17,174
23,121
30,743
Appl.ofFunds
52,517
53,800
54,259
56,139
60,034
65,189
E:MOSLEstimates
17June2014
31
BharatForge
Financialsandvaluations
Ratios
Y/EMarch
FY12
FY13
FY14
FY15E
FY16E
FY17E
EPS
18.0
11.0
18.9
22.5
32.3
38.9
CashEPS
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
Basic(INR)*
DPS
4.0
3.4
4.5
5.0
6.0
7.0
25.8
38.0
24.7
26.0
21.7
21.0
P/E
30.7
25.7
17.9
14.9
CashP/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
15.2
12.8
9.8
8.0
0.8
0.9
1.0
1.2
Payout(%)
Valuation(x)*
EV/EBITDA
DividendYield(%)
ReturnRatios(%)
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
FixedAssetTurnover(x)
1.3
0.9
1.1
1.1
1.3
1.5
AssetTurnover(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
WorkingCapitalTurnover(Days)
58
57
59
62
70
76
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
CurrentRatio
1.8
1.7
1.7
1.8
1.9
2.1
Debt/Equity
*Adjustedfortreasurystocks
1.3
1.3
1.0
0.8
0.6
0.4
WorkingCapitalRatios
Growth(%)
LeverageRatio(x)
Cashflowstatement
Y/EMarch
NP/(Loss)bfeTax&EOItems
(INRMillion))
FY12
5,995
FY13
3,919
FY14
6,693
FY15E
8,400
FY16E
11,469
FY17E
13,833
Depreciation
3,022
3,360
3,579
3,596
3,802
4,217
DirectTaxesPaid
1,710
1,193
1,801
3,041
4,035
5,033
(Inc)/DecinWC
2,307
385
2,733
1,274
4,360
4,281
CFfromOperations
5,000
5,701
5,737
7,681
6,876
8,735
EOExpense
2,373
2,456
588
1,498
1,556
1,697
CFfromOperatinginclEO
7,372
8,157
6,325
9,179
8,432
10,433
CFfromInvestments
10,843
2,896
2,606
3,380
1,750
1,750
Inc/(Dec)inDebt
7,902
454
2,637
2,000
2,000
2,000
InterestPaid
1,940
2,111
1,692
1,615
1,460
1,434
DividendPaid
1,343
949
1,226
1,362
1,635
1,907
CFfromFin.Activity
4,619
3,513
5,045
4,977
5,095
5,341
Inc/DecofCash
1,148
1,748
1,326
821
1,587
3,341
Add:BeginningBalance
1,197
2,345
4,093
2,767
3,588
5,175
ClosingBalance
2,345
4,093
2,767
3,588
5,175
8,517
E:MOSLEstimates
17June2014
32
BharatForge
NOTES
17June2014
33
Disclosures
BharatForge
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DisclosureofInterestStatement
BHARATFORGE
1.Analystownershipofthestock
No
2.Group/Directorsownershipofthestock
3.Brokingrelationshipwithcompanycovered
No
No
4.InvestmentBankingrelationshipwithcompanycovered
No
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17June2014
34